1 00:00:00,180 --> 00:00:06,330 If companies are not made accountable for the full cost of the carbon that they emit, 2 00:00:07,080 --> 00:00:14,340 then they will carry on generating carbon at a level which is optimal for their own shareholders, but not optimal for society. 3 00:00:15,030 --> 00:00:24,000 So reporting accounting on reporting on carbon emissions has the effect of raising awareness of this as an issue. 4 00:00:47,760 --> 00:00:52,170 Professor Richard Barker is not only one of the most popular professors on the MBA program, 5 00:00:52,470 --> 00:00:58,200 he's also a member of the International Accounting Standards Board and a leader of the Natural Capital Accounting Movement. 6 00:00:58,860 --> 00:01:04,140 Following my conversation with Korsak in part one of this two part episode on The Future of the Planet, 7 00:01:04,380 --> 00:01:09,420 I spoke to Richard to learn whether the solution to the carbon bubble might come from an unlikely source. 8 00:01:09,750 --> 00:01:21,260 The financial accounts. We're going to kick off by starting off with this concept of the carbon bubble, which, as I've explained, 9 00:01:21,260 --> 00:01:27,469 we had previous conversation with the cost class cause Paris has done a lot of work 10 00:01:27,470 --> 00:01:33,470 on this area and he was explaining to us that there is this idea that it would be 11 00:01:33,470 --> 00:01:39,379 impossible for all of the natural resources which are currently on oil and gas 12 00:01:39,380 --> 00:01:45,200 companies books to be extracted and burned and still remain below two degree warming. 13 00:01:46,070 --> 00:01:52,700 And it's something like only 20% of those that are currently on their accounts could, in fact be extracted. 14 00:01:52,700 --> 00:02:00,210 And so there's this idea that perhaps they are sort of shockingly overvalued by by that account. 15 00:02:00,260 --> 00:02:04,790 And I the reason we must talk to you is obviously you've really become such 16 00:02:04,790 --> 00:02:08,239 an expert in natural capital accounting and obviously accounting in general. 17 00:02:08,240 --> 00:02:12,820 And so to understand from your perspective, does this carbon bubble exist? 18 00:02:12,830 --> 00:02:17,030 Is it real? And what do companies do to kind of response rates? 19 00:02:17,550 --> 00:02:22,040 There's a lot of questions in that, but we can take a look. Okay. So I think it is real. 20 00:02:22,290 --> 00:02:27,019 I think it's very disturbing and there's lots of elements to it. 21 00:02:27,020 --> 00:02:31,520 And I think the past tends to be taken as a guide to the future. 22 00:02:31,850 --> 00:02:38,450 So what's worked well in the past tends to be assumed to be a good guide to what will work in the future. 23 00:02:38,450 --> 00:02:47,690 And oil and gas companies have been very, very successful in the past, extracting and selling for for burning fossil fuel. 24 00:02:48,260 --> 00:02:53,420 And that's what they do. That's what they're good at, and that's what they're set up to do. 25 00:02:53,840 --> 00:02:59,650 That's the culture of the firm. And they are currently making a lot of money out of doing it. 26 00:02:59,660 --> 00:03:04,010 It is a hugely profitable industry with no obvious current substitute, 27 00:03:04,220 --> 00:03:09,500 and so the incentive to carry on doing what we're doing and the absence of an 28 00:03:09,500 --> 00:03:14,450 alternative is deeply troubling at a time when business as usual is not sustainable. 29 00:03:14,780 --> 00:03:18,620 So from your perspective, what if you were in that position? 30 00:03:19,070 --> 00:03:20,660 What would you be trying to do now? 31 00:03:21,230 --> 00:03:31,850 Well, I think in principle, what they ought to be doing is recognising themselves to be an energy business, because we will always need energy. 32 00:03:32,210 --> 00:03:36,380 But to understand the energy business will need to change dramatically. 33 00:03:36,380 --> 00:03:38,930 So if we if we ultimately come to that, as you describe, 34 00:03:39,230 --> 00:03:46,310 we can't carry on burning fossil fuel and we can't carry on looking for more to find because we've already found more than we can safely burn. 35 00:03:46,760 --> 00:03:51,680 But that's what they're doing. I mean, that's silly. That's just sort of inherent in the in the nature of the business. 36 00:03:51,680 --> 00:03:56,030 And I guess it's a very difficult thing to do to shift from something you do very 37 00:03:56,030 --> 00:04:00,409 well and very profitably to something where you're not sure you have the technology, 38 00:04:00,410 --> 00:04:03,560 you're not sure you're going to be the fund or dominate the market and so on and so forth. 39 00:04:03,650 --> 00:04:08,590 And so it's it's a transition you'd rather not have to make if you couldn't avoid doing so. 40 00:04:08,600 --> 00:04:14,000 And the longer you can avoid doing so, the more you will. And so that's kind of what we're seeing, I think a sort of protracted denial. 41 00:04:14,060 --> 00:04:25,220 And if I'm if I'm an analyst and I'm sitting looking at that at an all company, at what point do I go, you know, how many years towards 2050 or 2030? 42 00:04:25,370 --> 00:04:31,520 Do I wait before I say, actually, this is all shockingly overvalued and none of this is real? 43 00:04:31,760 --> 00:04:33,590 Do you see what I mean? Yeah, I do. So. 44 00:04:35,000 --> 00:04:41,660 So I think it's really important to understand the nature of the incentives of participants in financial markets. 45 00:04:41,810 --> 00:04:44,690 So if you're an analyst or you're a fund manager, 46 00:04:44,900 --> 00:04:52,040 what matters is that you have an understanding of the price as it is now and how it will change in the foreseeable future, 47 00:04:52,100 --> 00:04:56,790 because that's the time horizon over which you will be judged based upon relative performance. 48 00:04:57,200 --> 00:05:01,730 So if everyone in the market is making the same dumb decision, that's okay. 49 00:05:02,600 --> 00:05:06,260 And if you're the sort of the brave person who says, you know what, 50 00:05:06,410 --> 00:05:11,610 we should all be getting out of the oil and gas and nobody else does, you will lose out. 51 00:05:11,680 --> 00:05:11,930 Right. 52 00:05:12,350 --> 00:05:22,910 So it's it's not the case that investors have some sort of inherent personal vested interest in the long run payoff of the stock they're invested in. 53 00:05:23,000 --> 00:05:28,130 Even though someone someone will end up paying the consequence, it doesn't necessarily mean it's the people who are currently holding stock. 54 00:05:28,460 --> 00:05:30,350 So it's a little bit more subtle, I think, 55 00:05:30,350 --> 00:05:37,970 than than trying to get the price right about trying to outperform in your pricing decisions in relation to other investors. 56 00:05:38,630 --> 00:05:44,420 So is there anything that I'm. Well, I guess I'm sure there is because I've had a lecture on this before. 57 00:05:44,420 --> 00:05:50,990 But but what could something like natural capital accounting do to try and change these dynamics? 58 00:05:51,350 --> 00:05:54,590 Maybe should start with what is natural capital accounting for those who don't. 59 00:05:55,160 --> 00:05:58,160 So I always ask people to explain it as if they were just maybe a ten year old. 60 00:05:58,160 --> 00:05:59,640 Yeah, maybe like an MBA. 61 00:06:02,770 --> 00:06:12,800 So if you think about the carbon problem, you can identify, as it were, the source of the problem being one of market failure that. 62 00:06:13,610 --> 00:06:18,170 Carbon emissions historically have not been anybody's private economic problem. 63 00:06:18,740 --> 00:06:27,390 Now, at some level, as long as from a corporate point of view, you can think of the problem as being one of pricing of carbon. 64 00:06:27,440 --> 00:06:34,400 So if companies are not made accountable for the full cost of the carbon that they emit, 65 00:06:35,150 --> 00:06:42,380 then they will carry on generating carbon at a level which is optimal for their own shareholders, but not optimal for society. 66 00:06:43,130 --> 00:06:52,100 So reporting accounting on reporting on carbon emissions has the effect of raising awareness of this as an issue. 67 00:06:52,430 --> 00:06:59,870 So the more you're able to say we the whatever company, the following amount of carbon, if you were to put a price on this, 68 00:06:59,990 --> 00:07:07,969 this is the sort of consequence in society of that one level that's not relevant to that company and reporting to its own shareholders, 69 00:07:07,970 --> 00:07:14,010 because not paying the price of that at another level is incredibly relevant for social policy. 70 00:07:14,120 --> 00:07:21,110 It becomes a social issue if people become more aware of the extent to which this problem exists and of where 71 00:07:21,320 --> 00:07:26,210 the problem resides and what public policy and some would need to happen to be able to resolve the problem, 72 00:07:26,870 --> 00:07:31,130 then you are likely to see direct economic consequences for the company. 73 00:07:31,360 --> 00:07:37,850 You see what I mean? So the fact that carbon is not adequately priced now doesn't mean that that will always be the case. 74 00:07:38,360 --> 00:07:44,120 And the first step in getting towards a satisfactory kind of economic regime in this respect 75 00:07:44,720 --> 00:07:51,980 is to disclose and to report and to quantify actually the price on the nature of the problem. 76 00:07:52,010 --> 00:07:59,809 Does that make sense? Yeah. And how far away is this from being something which because I know you are involved 77 00:07:59,810 --> 00:08:03,470 in some of the policy making around this sort of policy advocacy around this. 78 00:08:03,740 --> 00:08:10,040 How far away is it from being something which when I'm running a business in five years time, I will be doing or thinking? 79 00:08:10,070 --> 00:08:18,970 So the answer to that question varies quite a bit according to the type of natural resource that we're talking about. 80 00:08:18,980 --> 00:08:21,530 So in terms of carbon, we've made a low. 81 00:08:21,530 --> 00:08:27,410 We've not personally, but we've made a lot of progress in terms of a lot of coverage of greenhouse gas emissions in general, 82 00:08:27,740 --> 00:08:30,200 of understanding, quantifying, 83 00:08:30,200 --> 00:08:40,070 reporting, requiring reporting of that of carbon, or indeed that being voluntary mechanisms whereby companies report on a standardised basis. 84 00:08:40,460 --> 00:08:45,740 So we actually have quite a lot of information concerning the nature of the problem for carbon. 85 00:08:46,220 --> 00:08:55,520 We have far less and far less standardisation for other areas like impact on soil or water or deforestation. 86 00:08:55,820 --> 00:09:00,050 So the sort of really impact on ecosystems, oceans and so on, 87 00:09:00,470 --> 00:09:08,420 other really important areas where there is serious and unprecedented rates of degradation of natural resource, 88 00:09:09,020 --> 00:09:13,370 we have fallen well developed standards. So carbon is a sort of leading the way. 89 00:09:14,210 --> 00:09:19,880 Is there a distinction to be made between kind of the sort of voluntary reporting that I've seen on your reporters? 90 00:09:19,880 --> 00:09:24,020 As we use we're carbon neutral now, but we want to be carbon zero. 91 00:09:24,020 --> 00:09:31,009 Yes. Each have the sort of bringing into the financial accounts, which is slightly different. 92 00:09:31,010 --> 00:09:33,620 And then I guess this distinction between management accounting and then. 93 00:09:33,860 --> 00:09:40,879 Yes, what, what goes in the report so that there are various distinctions that are important here, the predominance of practices, 94 00:09:40,880 --> 00:09:47,090 voluntary, voluntary reporting, even this is going to sound paradoxical, but even when it's mandatory. 95 00:09:47,120 --> 00:09:51,410 Right. So if you if you have because if you have a mandatory requirement. 96 00:09:51,650 --> 00:09:55,300 Yeah. To report on something inherently vague. Yeah. 97 00:09:55,310 --> 00:10:02,270 Where there are no standards on and there are no conventions, then in effect you have a standard that requires something voluntary. 98 00:10:02,510 --> 00:10:09,330 Right. So most reporting, whether mandatory or not, is in substance subjectivity currently. 99 00:10:09,830 --> 00:10:14,989 And what we're gradually saying and carbon is the leading example of this or gradually 100 00:10:14,990 --> 00:10:20,440 saying is greater reporting that looks like normal financial accounting works. 101 00:10:20,450 --> 00:10:27,739 Right? If you look at the data on on carbon emissions of greenhouse gas emissions, that's in substance accounting data. 102 00:10:27,740 --> 00:10:31,190 It's quantified, it's standardised, it's historical, it's comparable, it's consistent. 103 00:10:31,400 --> 00:10:36,410 So you tend not to have that in other areas of corporate reporting. 104 00:10:36,740 --> 00:10:39,830 So I think the direction of travel is towards, 105 00:10:39,830 --> 00:10:45,080 I think where non-financial reporting looking more and more like financial report and looking like accounting. 106 00:10:45,440 --> 00:10:51,589 There's another level which is which is if you are able to quantify greenhouse gas emissions, 107 00:10:51,590 --> 00:10:54,290 that's not the same thing as integrating with your financial accounts, 108 00:10:54,440 --> 00:11:00,980 where you also put a number on them, which expresses them in the same unit as the financial accountability for the whole thing together. 109 00:11:01,910 --> 00:11:04,460 When one does that, when you put it all together. 110 00:11:05,150 --> 00:11:12,890 Are there any examples that you can tell us about which they have done this and then have seen a reaction from. 111 00:11:13,400 --> 00:11:18,150 A marketplace where you can pass. There's almost no examples where the end game is being reached. 112 00:11:18,240 --> 00:11:24,650 Right. That's really quite striking. So there's a dramatic increase in what you would call sustainability reports, 113 00:11:25,040 --> 00:11:27,890 integrated reporting or non-financial reporting, whatever you want to call it, 114 00:11:28,190 --> 00:11:37,760 a really dramatic increase, but very little actually in the way of formally linking financial accounting, financial performance to this other domain. 115 00:11:38,390 --> 00:11:42,140 And what do you think it would take to kind of tip that over the edge? 116 00:11:42,290 --> 00:11:45,590 I think investor pressure actually is very important. 117 00:11:45,740 --> 00:11:50,450 So to come back to your earlier question about carbon bubbles and so on. 118 00:11:50,930 --> 00:11:56,659 The more you have corporate financial performance being disclosed and all kinds of 119 00:11:56,660 --> 00:12:00,500 other metrics that look like you ought to be able to line up with the financials, but you can't yet. 120 00:12:01,250 --> 00:12:08,510 And a kind of overhanging sense of we've got a problem here and the stock price correctly, we probably ought to do something about it. 121 00:12:09,470 --> 00:12:16,000 Eventually you get a more sort of market driven pressure, I think, which we're starting to see. 122 00:12:16,010 --> 00:12:19,280 So I think I'd say we're in the early days of that process. 123 00:12:19,490 --> 00:12:23,780 You could argue, you know, if I was going to be so devil's advocate and we've had this discussion. 124 00:12:23,780 --> 00:12:29,809 I mean, that's right. And what where is the what's the limits of the financial statements and what should they include? 125 00:12:29,810 --> 00:12:36,380 What should they not and do? Yeah. Where do you then start and maybe do you see any other frontiers? 126 00:12:36,410 --> 00:12:42,559 So, so again, there's quite a subtle distinction. So the financial statements that the, you know, the shareholders report, as it were, 127 00:12:42,560 --> 00:12:48,590 is a report to shareholders on financial performance that affects shareholders. 128 00:12:48,590 --> 00:12:54,950 Yes, it unambiguously a report to investors is not some sort of wider stakeholder report. 129 00:12:55,610 --> 00:13:06,200 However, if you're an oil and gas company and collectively in your industry, you have more reserves that it's safe to burn at some point or another. 130 00:13:06,200 --> 00:13:08,470 Your investors are going to be worried about that. Right. 131 00:13:09,080 --> 00:13:17,989 And so actually reporting on the future of the industry in a way that isn't directly related to the financial accounts, 132 00:13:17,990 --> 00:13:23,060 is relevant to shareholders with respect to their understanding of your future financial performance. 133 00:13:23,600 --> 00:13:30,829 So now whether you call that financial reporting or not is slightly, by the way, and even, for example, 134 00:13:30,830 --> 00:13:37,550 even if you don't have a tight carbon tax regime currently, you might have in the future. 135 00:13:38,060 --> 00:13:40,760 And the more you are exposed to the risk of that, 136 00:13:41,540 --> 00:13:47,510 the more relevant it becomes to report to your shareholders things that don't currently affect them but might. 137 00:13:47,780 --> 00:13:53,450 Right. So it's quite there's quite a subtle I think the broader sustainability reporting 138 00:13:53,450 --> 00:13:57,710 actually is much more relevant to shareholders than most shareholders currently realise. 139 00:13:57,980 --> 00:14:06,100 So if I, you know, I finished my MBA and I am I'm not quite there yet, but you know, fingers crossed, touch wood. 140 00:14:06,110 --> 00:14:13,640 I finish my MBA and or hypothetically I go into one of these businesses and they say, right, we've had about a single natural couple accounting. 141 00:14:13,940 --> 00:14:18,310 Can you go and do it for me, please? Is that is that feasible right now? 142 00:14:18,320 --> 00:14:21,709 Is there a kind of a resource bank of a place where you can go? 143 00:14:21,710 --> 00:14:25,100 And I mean, yes, I mean, in many ways, yes. 144 00:14:25,100 --> 00:14:28,639 There are standards out there. There are frameworks out there. 145 00:14:28,640 --> 00:14:36,950 There is guidance on that. There's no shortage of material. What there isn't is a single source that has a regulatory authority. 146 00:14:37,370 --> 00:14:41,930 So you can't go somewhere and say this is how it's done and this is what you'll be audited on. 147 00:14:42,590 --> 00:14:45,590 So there's a ton of information, but it's emergent, right? 148 00:14:45,940 --> 00:14:48,769 Right. And so that I think that's one of the things we're involved in, 149 00:14:48,770 --> 00:15:00,320 is trying to bring that into the one standard which hopefully will be coming down the line soon, one hopes, because we don't have time. 150 00:15:00,680 --> 00:15:06,290 So, you know, the development of financial reporting standards really sort of kicked off with the Wall Street 151 00:15:06,290 --> 00:15:10,760 crash and because that's when investors started to realise they needed the sort of information. 152 00:15:11,150 --> 00:15:16,640 And over a long period of time, financial reporting has evolved and it's really in a very mature state now. 153 00:15:17,390 --> 00:15:20,440 We don't have that same length of time to develop, not when interest. 154 00:15:20,750 --> 00:15:25,100 Yeah. And sort of we should all hope that they get developed quite quickly. 155 00:15:25,670 --> 00:15:39,600 Absolutely. Thank you for listening to this episode of the Feature Business Podcast. 156 00:15:40,050 --> 00:15:44,160 Next time I speak to an MBA student and an entrepreneur about the future of banks. 157 00:15:44,610 --> 00:15:47,880 Can they survive the incoming onslaught of fintech innovations? 158 00:15:48,150 --> 00:15:52,320 The Future Business Podcast is brought to you by Patrick, Michael, Tom Brady, Paris and Emily. 159 00:15:52,740 --> 00:16:03,890 Please subscribe in iTunes or wherever you get your podcasts. Thank you for listening and goodbye all your.