Accounting for Circular Economy: Towards a Revolution?
I am not a lover of acronyms in the first place but if there is one that makes me feel particularly uneasy it is the dreaded “KPI”. I cannot recount the number of hours of my life lost in meetings and email exchanges in an attempt to make sense of my own performance or that of my team or project only to come up with key performance indicators that felt limp or that didn’t really measure what we were trying to achieve.
The reason I find KPIs so dreadful is that they are an abstraction of reality – one that is messy, unpredictable, and non-linear. That is not to say that metrics don’t have their place or aren’t useful. A single figure such as temperature or GDP gives us a whole lot of information about the environment and society and makes it much easier to make comparisons across space and time. However, by choosing to measure only a handful of things in this mess, we are choosing to ignore many others.
For example, in the domain of sustainability Ian Thomson, Director of Lloyds Banking Group Centre for Responsible Business at the University of Birmingham points out “when a company puts all its emphasis on what it does that is sustainable, it overlooks all that it does that is unsustainable.”
Indeed, the area of sustainability is especially messy for two reasons. The first is that sustainability is a topic of interdependencies that may require trade-offs. The fossil fuel dilemma offers many illustrations. In the Nigerian context investment in local gas supply has the potential to lead to lower emissions globally because a high proportion of households rely on much dirtier forms of energy. However, anyone organization that makes an investment in a gas project may need to report higher emissions and so faces more barriers to invest.
The second complexity lies in the origins of sustainability as a political project. Western outrage in the 1990s at footloose corporate behaviour led to a generation of monitoring and reporting tools that mimicked traditional accounting tools. Annual corporate sustainability reports that integrate the criteria of organizations such as the Global Reporting Initiative are now a regular fixture for upwards of 80% of blue-chip companies globally. Regardless, it is important to recognize that early sustainability accounting tools were designed as a way for sustainability ideas and principles to enter and claim a meaningful space on the corporate agenda. While this approach was successful, there was and continues to be no consensus as to what a sustainable company could look like through an accounting lens.
These two challenges; of the interdependencies between organizations and discord about what constitutes a sustainable metric is what has led Professor Thomson to examine how accounting tools can be developed to make these messy realities more explicit and to help us make decisions that are most consistent with the overarching goal of any sustainability project. Nowhere, he argues is this more important than in the emerging area of Circular Economy because it is an approach that creates new interdependencies and is transformative in terms of concepts of business organization and liability.
Professor Thomson and his team use the Sustainable Development Goals as the basis for a three-step framework. The first step in this framework is to reverse the Sustainable Development Goals into the “Unsustainable Development Goals” as a way to recognize where a project may have a negative impact on sustainable outcomes. This approach forces us to examine indicators we may ignore if we focused only on positive outcomes and helps us to recognize and plan for the trade-offs we face in prioritizing different goals. For example, the reverse of SDG 3 “good health and well-being” is “poor health.” A start-up, which may have a great product that can save the world but may not have the resources to offer its staff health insurance or market-rate pay would be able to recognize and identify resources to address these types of challenges at step one.
The second step of this framework is to map project activities beyond the domain of a single organization. This step is especially important for circularity because it recognizes that activities are embedded within a wider system. This means that the negative or positive impact of any one activity is assessed in relation to all components within the system. Electric Vehicles are one example, with Thomson and his team arguing that mining, component manufacturing, vehicle manufacture, logistics, vehicle use, recycling and disposal should be evaluated in conjunction with one another. Using a more joined-up approach like this means that accountability for the lifetime social or environmental impact of a product or service is shared. With no single organization able to make a claim about their green credentials without recognizing their responsibility for social and environmental “bads” can help to motivate organizations to improve the overall function of a system.
Finally, Thomson’s model allows for KPIs to be multi-dimensional so that they can capture some of the messier aspects of measurement including lack of data, which is an issue that is continually raised in the African context. In fact, Thomson favours a “logic of consequences” approach where the strategic priorities and activities of an organization are mapped out against sustainability criteria in terms of their relationships to one another. Instead of asking questions like “what are our carbon emissions,” Thomson invites organizations to ask how the behaviours and actions of organizations have an impact in meeting their goals through a tool called the “Impact Algorithm Matrix”. While it is a fancy name, this is a simple and accessible system that allows organizations to list their activities and make decisions as to whether these activities are consistent with the SDGs and determine the direction of their impact.
While it is radical to think of accounting as an activity that transcends beyond numbers and one that forces us to think of organizations and their relationships to reporting in new ways, radical change is precisely what we need to mobilize circular economy practices. I will personally have no qualms about saying goodbye to the KPI….