Hugging an Accountant is Smarter than Hugging a Tree

Big-ass, diesel-guzzling SUVs shouldn't be the main focus of environmentalists.

We can keep bickering about the carbon emissions of industrialized nations, but that won't get us far. Environmentalists are wasting their time by hugging trees and buying hybrid cars. Installing solar panels or building wind farms is great, but these are only band-aids. I believe it is more productive to treat the cause and not the symptom, and short-termism is the main cause of our environmental problems. My argument here is simple: We don't have much time to address climate change, and if we are going to limit the damage from climate change we need to address the cause (short-termism) as soon as possible, and not waste precious time and resources by treating the symptoms.

Photo:Chotda, Creative Commons, Flickr
I once read about an experiment where subjects were offered a snack: fruit or chocolate. Seven out of ten subjects asked for chocolate. But when the experimenters offered other subjects a different choice, the answer was different too: "I'll bring you a snack next week. What would you like then, fruit or chocolate?" Three-quarters of subjects chose fruit.

We can all agree that we should take steps to secure our environmental future (choose fruit above chocolate), but unfortunately short-termism rhymes with capitalism (have the chocolate now). Companies spend most of their energy and resources on short-term goals, and there is a lack of attention to the strategy, fundamentals, and conventional approaches to long-term value creation (e.g. a lack of commitment to addressing climate change). When managers focus on short-term goals at the expense of long-term value creation, they create uncertainty for long term investors. The cost of capital for long term projects increases as uncertainty increases, and fewer long term projects are undertaken because of these higher costs. Why should 20-something investors like myself hand over our pension contributions when companies are rewarded for short-term gains that often come at the expense of long term growth?

It's more important for managers to beat analyst estimates for the next earnings announcement, and very few managers worry about the return on investment they will get for projects in 2015. After all, if their next pay-check is to be based on the share price at the end of the current year, why should managers care about the impact climate change will have on the company's share price in 2015? When society as a whole is fixated on immediate gratification, it is unlikely that investors will be any different.

The main problem is that short-term strategies are often based on accounting-driven metrics that are not fully reflective of the complexities of corporate management and investment. Managers are judged and rewarded on their profit figures, but current accounting methods make no distinction between how profits are earned. Are they the result of "good profits" (eg. profits derived from being environmentally responsible), or were they the result of "bad profits" (eg. profits generated by dumping toxic waste or employing sweatshop labor)? This is why the jokers say an accountant is someone who knows the cost of everything and the value of nothing.

I believe that financial accounting is probably the most powerful weapon we have to tackle short-termism, the cause of our environmental problems. We may all have to count on the bean counters to save the day. An example: Under current accounting methods, a company capitalizes the expense of installing solar panels. This needs to change. We need to devise accounting methods where companies are rewarded for installing solar panels. Accountants need to find new ways to define cash flows associated with environmental responsibility. Accountants need a way to separate "good profits" from "bad profits." The time has come to turn an accounting-driven problem into an accounting-driven solution.

What's easier to achieve in the next decade: A regulatory overhaul of accounting methods to reflect the urgency of climate change, or convincing the whole world to switch to alternative energy sources?