The wealth of billionaires and corporates are currently measured by the valuation of their portfolios or the size of their market cap. The issue with this form of measurement is that they are based on the short-term valuation of the financial markets, which suffers from a disconnect with the long-term nature of sustainable investing.
Unless this disconnect is addressed, there is the risk that sustainable investing will be unable to achieve its ultimate objective, which is financing solutions to reverse climate change, social injustice, natural calamities, etc.
But the question is whether it is realistic to use sustainable investing criteria for measuring the wealth of billionaires and corporations. Experts, speaking at the Project Syndicate Green Recovery event on September 17, believe so.
It may not be long before there will be a new accounting system that will measure wealth not just in terms of financial valuation but also in terms of natural and social capital.
According to renown economist Rebecca Henderson, who is currently the John and Natty McArthur University Professor at Harvard Business School, her colleague George Serafeim at the school has recently initiated research called the “impact accounts initiative”, which involves putting into company accounts the effects that environmental, social and governance (ESG) issues are having on natural and social capital, as well as on financial capital.
“The early results were incredibly promising,” Henderson says. “They show, for example, that for nearly 25% of listed companies, just the environmental harm they're causing is as much as 25% of their profits. And for some companies, it’s more than their entire profit stream. And they’re finding that these measures – we can have discussions on how precise are they – but they are pretty good, and they are startling.
“I’m very optimistic that we’ll be able to develop a set of accounts that measures not just financial valuation but natural and social valuation as well.”
According to Eila Kreivi, head of capital markets at the European Investment Bank, the future of measuring the wealth of businesses may lie in putting a price on items like natural capital, the price of carbon used, etc.
“Yes, I think something like this is where the future may lie. It all becomes numerical,” Kreivi says. “You can see the current ideas that one should use ESG ratings, I’m not a great believer in that at the moment because they are so diverse that you can find for any company a good rating, a bad rating, and everything in between. This is a different kind of accounting which takes into account the cost that you have to nature, to the society as a whole. That’s a very interesting perspective.”
Marianna Mazzucatto, economist, writer and director of the UCL Institute for Innovation and Public Purpose, cautions that the business community first has to understand what “value” means in order to be able to measure wealth in terms of natural, social and financial capital.
“I think we need to first begin with understanding or asking what is value,” Mazzucatto says. "And there’s this assumption in economics that value is created inside business and then we just have to worry about policy, fixing any market failures that might come about from that. But I do think that the word stakeholder value is really appealing to a different kind of concept where value is co-created by different types of actors, especially if you look at the health sector and the green sector.
“You have private actors, public actors, non-corporate actors co-investing, taking risk and then sharing the rewards. But how do we actually measure the collective value creation is also something that we need to be thinking about. So again, it goes beyond just within the business, but between economic actors if they get that the value is co-created.”