Sustainable Performance Accounting

Sustainable Performance Accounting (SPA) is a scientific concept in the field of corporate sustainability accounting. In contrast to the practice-related methods and projects we primarily focus on, SPA represents groundbreaking work toward a paradigm shift in corporate accounting and balancing.

Nowadays, sustainability is insufficiently reflected in corporate decision-making – we are not accounting correctly. Our current economic practices lead to the transgression of the planetary boundaries of our ecosystems, and the foundation for a good life for all is (still) not being fulfilled – to put it into Kate Raworth’s wording of Doughnut Economics (see Figures 1 and 2). However, this issue is not reflected in corporate balance sheets. To address this fundamental problem, we have delved into the depths of corporate reporting, accounting and balancing.

Figure 1: Doughnut Economics: „Doughnut of Good Life“

Figure 2: Value creation and value destruction regarding sustainability (Doughnut Economics, adaptation: Regionalwert Research)

Key messages of Sustainable Performance Accounting (SPA):
1) Corporate success is measured using performance indicators such as EBIT.
2) Corporate balance sheets should realistically reflect the costs and performances of companies.
3) Sustainability reporting according to CSRD: A multitude of data points, but assessment and monetization are lacking.
4) From EBIT to SEBIT: Integration of ESG matters into accounting and financial reporting.

Figure 3: Key messages of Sustainable Performance Accounting (SPA)

The Objective

Corporate decisions are made based on performance indicators and business evaluations. As long as sustainability is not incorporated into management and accounting, aspects of sustainable business practices – in the sense of Environment, Social, Governance (ESG) – remain merely a “nice to have.” However, long-term business success and the well-being of the environment and society cannot be viewed separately. We are proposing a way to integrate both.

The aim of Sustainable Performance Accounting is to translate corporate responsibility towards the general public into accounting terms. By “general public” (German: „die Allgemeinheit“), we mean nature and society or rather socio-ecological systems that interact with businesses. The relation between businesses and common good(s) have long been subject to business ethics and macroeconomics. We bring it to microeconnomics and – more precise – to the balance sheet. For this, we have introduced the equity position “ESG Capital,” which provides space for common good-related matters. When companies contribute to the public good, these appear as assets. When they cause harm to the common good, these appear as provisions. In this way, the negotiation over public welfare contributions and damages can be conducted within the accounting framework. The public thus becomes a shareholder of companies in the ESG domain. For SPA to function successfully, it requires a legal basis that ensures the same rules for all companies – a same level playing field.

Compatibility with European Reporting Standards

Sustainable Performance Accounting considers ESG (Environmental, Social, Governance) matters from a double materiality perspective. This includes corporate ESG matters (financial materiality, outside-in perspective) and public welfare-related ESG matters (impact materiality, inside-out perspective), i.e., negative and positive externalities. Corporate ESG matters align with financial materiality according to the European Sustainability Reporting Standards (ESRS). This perspective is called the outside-in perspective, as it includes the financial impacts of ecological and societal dynamics on businesses. Public welfare-related ESG matters correspond to impact materiality according to the ESRS. This perspective, known as the inside-out perspective, reflects the impacts of companies on environmental and societal systems. Through this structure, SPA is compatible with the European Sustainability Reporting Standards.

SPA aims to promote a sustainability transformation using market-based mechanisms. The existing market distortion or market failure regarding ecological and social harm should be corrected by accounting for the “true costs” or actual ESG-related added and diminished values. This does not contradict regulatory policy. The integration of sustainability into existing accounting frameworks is already stated as a goal in the current German coalition agreement. This includes the possibility of recording sustainability matters in the balance sheet and profit and loss account. SPA complements regulatory measures (e.g., price incentives or penalty payments) by integrating them into accounting. We even go a step further by anticipating regulatory measures (e.g., CO2 taxes and penalties for violations of climate policy guidelines) within the ESG Capital. Examples of this can be found in the article on integrating CO2 into accounting (in German).

Figure 4: Materiality assessment based on double materiality (according to the European Sustainability Reporting Standards)

For sustainability matters to be integrated into performance-relevant indicators, especially in success and profitability ratios, they must be accounted for and included in the balance sheet. However, this is not straightforward, as certain recognition criteria for the activation of assets under both the German Commercial Code (Handelsgesetzbuch, HGB) and International Financial Reporting Standards (IFRS) are not met for the ESG matters discussed here. The same applies to the recognition of provisions as liabilities. SPA offers a solution to this dilemma: sustainability-related matters are recorded in a second accounting system, the ESG accounting. For this, the chart of accounts is expanded. We made an initial proposal for the expansion of the chart of accounts as part of the project QuartaVista.

Background

Prof. Knut Henkel and Dr. Jenny Lay-Kumar developed Sustainable Performance Accounting, building on the preliminary work of Christian Hiß and Regionalwert AG Freiburg. In the research project QuartaVista, sustainability-related matters (services and risks) were first implemented in accounting. The term Sustainable Performance Accounting was first used in February 2022 in the context of the SPA position paper (in German). Since then, we have been working on the concept and concrete implementation examples. In January 2023, we presented SPA for the first time to a larger professional audience at the ESMT Workshop.

The Method

Sustainable Performance Accounting is a business concept for integrating sustainability into corporate performance reporting. SPA uses the logic and mechanisms of classical business administration, specifically: accounting. To link financial and sustainability data, SPA proposes establishing a second accounting system alongside financial accounting (F-accounting): ESG accounting. ESG refers to sustainability matters and covers Environment (E), Social (S), and Governance (G). These two forms of accounting thus constitute an integrated and holistic accounting system, the S-accounting (sustainable accounting). SPA provides a closed accounting system for recording negative and positive ESG effects in the balance sheet as well as the profit and loss account (see figure 4).

More information about the methodical implementation of SPA will follow soon.

Figure 5: Steps of the Methodical Implementation of Sustainable Performance Accounting (SPA)

Publications (sorted chronologically)

English Publications

Henkel, Knut/Lay-Kumar, Jenny/Hiß, Christian (2024): From EBIT to SEBIT (Sustainable EBIT): Sustainable Performance Accounting (SPA) using the example of CO2 accounting, in: Journal of Modern Accounting and Auditing, Bd. 20, Nr. 2, S. 49-71, [online] doi:10.17265/1548-6583/2024.02.002.

Henkel, Knut/Lay-Kumar, Jenny (2023): EU Taxonomy: Overview of all “green” economic activities as of June 2023, in: Journal of Modern Accounting and Auditing, Bd. 19, Nr. 3, S. 73-81, [online] doi:10.17265/1548-6583/2023.03.002.

Henkel, Knut/Lay-Kumar, Jenny (2022): Sustainable Performance Accounting (SPA), summary with booking example, Regionalwert Research, [online] https://regionalwert-research.de/wp-content/uploads/2024/10/Henkel_Lay-Kumar_SPA_Methodology_Summary_08.08.2022-EN.pdf.

Henkel, Knut/Lay-Kumar, Jenny/Hiß, Christian (2022): Comments on question 8 to 12 of EFRAG sustainability reporting board consultation survey 1A, Hochschule Emden-Leer und Regionalwert Research, [online] https://regionalwert-research.de/wp-content/uploads/2022/12/ESRS-Kommentierung_Henkel_Lay-Kumar_Hiss_8.8.2022_Homepage_EN.pdf.

Walkiewicz, Juliana/Lay-Kumar, Jenny/Herzig, Christian (2021): The integration of sustainability and externalities into the „corporate DNA“: a practice-orientated approach, in: Corporate Governance: The International Journal of Business in Society, Bd. 21, Nr. 3, S. 479-496, [online] doi:10.1108/CG-06-2020-0244.

All Publications

Henkel, Knut/Lay-Kumar, Jenny (2024): Sustainable Performance Accounting (SPA), Haufe, [online] https://www.haufe.de/sustainability/strategie/sustainable-performance-accounting-spa_575772_633426.html.

Henkel, Knut/Lay-Kumar, Jenny/Hiß, Christian (2024): Il Sustainable Performance Accounting (SPA) applicato alla contabilizzazione delle emissioni di C02, in: Schriftenreiche Hochschule Emden-Leer, OPUS, [online] urn:nbn:de:gbv:755-opus4-4957.

Sustainable Performance Accounting (2024): Wikipedia, [online] https://de.wikipedia.org/wiki/Sustainable_Performance_Accounting.

Lay-Kumar, Jenny/Henkel, Knut (2024): Vorausschauende Unternehmenssteuerung mit Sustainable Performance Accounting [Präsentationsfolien], B.A.U.M. Unternehmenstreffs, [online] https://regionalwert-research.de/wp-content/uploads/2024/03/Praesentation-BAUM-Unternehmenstreff-Sustainable-Performance-Accounting.pdf.

Lay-Kumar, Jenny/Henkel, Knut (2023): Integration von CO2 in Rechnungslegungsstandards: Sustainable Performance Accounting (SPA) [Präsentationsfolien], European School of Management and Technology, [online] https://regionalwert-research.de/wp-content/uploads/2023/06/Henkel-Lay-Kumar_Integration-von-CO2-in-Rechnungslegungsstandards-1.pdf.

Henkel, Knut/Lay-Kumar, Jenny/Hiß, Christian (2023): Sustainable Performance Accounting (SPA) am Beispiel der Bilanzierung von CO2-Emissionen, in: Schriftenreiche Hochschule Emden-Leer, OPUS, [online] urn:nbn:de:gbv:755-opus4-2517.

Henkel, Knut/Lay-Kumar, Jenny (2022): Sustainable Performance Accounting (SPA), Kurzfassung mit Buchungsbeispiel, Regionalwert Research, [online] https://regionalwert-research.de/wp-content/uploads/2022/12/SPA_Methodik_kompakt_08.08.2022_DE.pdf.

Lay-Kumar, Jenny/Heck, Andreas/Walkiewicz, Juliana/Hiß, Christian (2022): Sustainable Performance Accounting: Nachhaltigkeitsleitungen und -risiken von Unternehmen bilanzieren, Positionspapier zur Wissenschaftskonferenz 2022, [online] https://regionalwert-research.de/wp-content/uploads/2022/12/Positionspapier-Sustainable-Performance-Accounting_Regionalwert-AG-Freiburg-2022.pdf.