A lot of work is happening globally around changing accounting standards to internalize environmental and social costs. This is important work, but implementation is almost always too comprehensive to fathom. The complexity alone prohibits many companies from supporting these changes. However, for these companies daunted by the up-front cost of green infrastructure, a simple accounting change using accelerated depreciation could make a world of difference.
Many businesses struggle with the question of how to invest in large fixed assets. These are painstaking decisions, because they always demand long-term thinking and guessing about markets, future technologies and risk factors. How much revenue will a new factory generate? How much savings will a new technology produce? What unintended consequences might occur because of a purchase?
As companies attempt to answer these questions, they also have to deal with long-term trends that further complicate the question of fixed-asset purchases. Factors as diverse as fiscal and monetary policy, environmental degradation and climate change, and consumer and investor perceptions can affect commodity prices. Even developments like the growing use of renewable energy can lead to instability, as coal producing areas will need new economic lifeblood and green tech creates demand, and sometimes shortages, for commodities like cobalt, lithium, and rare earth minerals. For governments hoping to deal with these trends by incentivizing green investment, one simple accounting change – accelerated depreciation for green infrastructure – could make a considerable difference.
For example, several years ago, PepsiCo built a state-of-the-art facility for its Frito-Lay division in Arizona. The installation had near net-zero waste, water, and energy systems. It isn’t hard to see how these advanced systems not only helped PepsiCo, but also the surrounding community: approaching net-zero water use would seem pretty valuable, actually imperative, in a water-constrained area like the American Southwest and net zero energy is one of the keys to diverting climate change catastrophe. Unfortunately, PepsiCo was unable to deploy these breakthrough technologies globally because the upfront costs would look bad to financial investors.
Accelerated depreciation allows greater accounting and tax deductions in the earlier years of the life of an asset. In doing so, it enables a company to depreciate its fixed assets faster, so its earnings, balance sheets and tax bills would be calculated according to a truer value of these investments and be more appealing to the financial industry.
Global accounting and business consortia like GRI, the Financial Accounting Standards Board and the B Team are all exploring the viability of new rules, but looking at the whole of our economic and environmental conundrum, we can become paralyzed by the enormity of the task. However, accelerated depreciation doesn’t require a team to spend a year calculating Life Cycle Analysis measured differently between industries, sectors, and countries – and occasionally, measured differently within industries, sectors and countries. Accelerated depreciation can, effectively, level the playing field for emerging green tech investments.
Accelerated depreciation should incentivize those wishing to deploy breakthrough technology to spend more today in order to save money, energy, waste and water in five years’ time. It should also serve as incentive for the typical business on every continent. We cannot depend on goodwill, entrepreneurs/founders, or pioneer companies to make these investments. Accounting rules are the basic guidelines for investment strategy. They should be aligned with the constraints of the natural world, as well as the bottom line.
Because of its effect on tax revenue, accelerated depreciation may seem like a costly solution for governments. However, any loss of short-term tax revenue would be offset by the billions of dollars governments would save from the preservation of healthy ecosystems and the lowering of climate change’s catastrophic risk profile. China, for example, has estimated that environmental degradation cost 3.5% of its GDP in 2010, and KPMG estimated that the 3,000 largest publicly traded corporations caused $2.15tn in environmental damage in 2008.
Accelerated depreciation is a simple, uncomplicated solution that the G20 can implement. It can be a pragmatic stabilizer in the context of growing global climate risk.
A few partners have already expressed interest in participation. Leaders at the B Team and the World Economic Forum, both global business leadership organizations recognize the value of this accounting change. Two global accounting firms and several consumer goods companies are also eager to see the next steps.
Changing accounting rules isn’t easy. Reforms can only be adopted if a broad spectrum of corporations and other interests advocate for it. Energy Shift, a nonpartisan and nonpolitical partnership, is the perfect group to catalyze a broad spectrum of stakeholders into action. In fact the biggest obstacle to implementing this accounting change is cohering the political will from enough Government agencies and enough policy makers.
Energy Shift is engaging a broad spectrum of corporations to advocate on behalf of this new reform. Join us. Offer your views.
For more information, contact:
Strategic Partner, RESOLVE
(646) 522 0291