RIO DE JANEIRO - Corporate and government accounting will likely reflect environmental profit and loss within a decade, thanks partly to progress made this week at a UN conference in Rio de Janeiro, backers of the plan told Reuters on Thursday.
Company accounting and calculations of gross domestic product (GDP) are flawed because they fail to show governments, consumers and managers the true costs of their activities, said Pavan Sukhdev, a board member of US environmental group Conservation International and a former Deutsche Bank AG banker.
The main reason is that accounting practices fail to account for the creation, use and degradation of air, water, trees, and other "natural assets" in the same way they account for factories, credit and other assets, he said.
He estimates that the top 3,000 companies fail to account for $2.1 trillion of charges related to the use or pollution of natural assets - say by releasing carbon dioxide into the air or waste into a river. That figure nearly doubles to $4 trillion, or about 6.7 percent of global GDP, when the world's entire corporate sector is included, he said.
"We cannot continue to do business thinking we are adding value to shareholders while at the same time destroying value for stakeholders," Sukhdev said. "This is bad management."
Exchanges worldwide are working on ways to include carbon emissions in the basic information that publicly traded companies must provide shareholders, he said. Common standards for world companies are likely to be ready in three to five years with implementation coming within about seven years.
Such accounting wouldn't just add to losses, he said.
"You could get 10, 20, 30 percent extra to your GDP because you'd be finally measuring the services of nature," Sukhdev said. "But you'd also get losses because you'd have to account for the natural capital that is lost."
On Thursday, the World Bank said 57 countries and the European Commission and 86 companies agreed to draw up "natural capital accounting" rules to implement the kind of changes Sukhdev, who has been working for a decade on such proposals, has called for.
"On this plain, I'm delighted. I've been slogging my guts out for over a decade hoping that something would move," he said adding that even voluntary use of the accounting changes he backs will help consumers and shareholders make better choices about the true value of companies.
Companies that signed onto the natural capital accounting commitments include Puma PUMA.L Unilever Wal-Mart , Woolworths Holdings and Standard Chartered , according to the World Bank and the Natural Capital Accounting group.
Countries include the United States, Britain, France and Germany, but not China, or host Brazil.
Sukhdev's optimism is not shared by many of the other environmentalists at the UN Rio+20 conference, whose joint declaration has been widely denounced as weak.
The critics include some who plan to sign it, including French President Francois Hollande and British Deputy Prime Minister Nick Clegg.
But Peter Seligmann, Conservation International's chief executive and a major backer of Sukhdev's proposals, said the proposal criticized by Hollande and Clegg was about the best that the United Nations could get.
"The agreement is fine, but global agreements aren't going to solve anything. The solutions will only come through the enlightened self interest of countries, companies and individuals," he said.
A participant at the last UN environment conference in Rio de Janeiro in 1992 he expressed concern about the state of the planet but suggested that the problems associated with a warming climate such as melting polar ice caps and extinctions would help accelerate change.
For Sukhdev and Seligmann the key to that change is figuring out what things are worth.
"We have to get our metrics right," Sukhdev said.