| Brian Wenzel: | Accounting perhaps has been part of the problem with sustainability because, not that we’re doing anything nefarious, but accounting I feel has led to short-termism inside organizations. Next quarter’s profits are much more tangible than something that will happen five or 10 years down the road. Even if making a sacrifice now will lead to a greater good in a decade, that’s harder to quantify because it’s so far in the future. Accounting maybe has been part of the problem but could also solve it. |
| Robyn Fadden – host: | What does accounting have to do with sustainability? Essentially, everything. In general, accounting isn’t the first thing that comes to mind when most people think about sustainability, whether that means climate targets or diversity on boards. But just as research and regulations around sustainability have expanded in recent years, so has the field of sustainability accounting, which focuses on the activities of an organization that have a direct impact on its environmental, social, and governance aspects. Beyond that however, accounting researchers say that sustainability approaches and new global standards should be integrated into general accounting practices to take into account all aspects of an organization’s performance, from the big picture to the bottom line. |
| Robyn Fadden – host: | Welcome to the Delve podcast, an initiative of Delve, the thought leadership platform of the McGill Desautels Faculty of Management. I’m Robyn Fadden, your host for this episode. On this episode, I talk with Desautels accounting professor Brian Wenzel about the role of accounting, accounting research, and accounting standards in facilitating how organizations reach their sustainability goals. As it turns out, many people are talking about accounting and sustainability, including at the upcoming McGill Accounting Research Conference, taking place at McGill on June 7 and 8, 2023. The goal of this year’s conference is to bring together and promote discussions among accounting scholars and practitioners and share their insights on sustainability within the accounting profession and capital markets. |
| Robyn Fadden – host: | This episode of the podcast is a collaboration between Delve, the McGill Sustainable Growth Initiative and its Director and Desautels Professor Javad Nasiry. The Sustainable Growth Initiative is also co-sponsoring the conference. |
| Robyn Fadden – host: | Welcome to the podcast Brian. Could we start by talking about the practical or cross-disciplinary ways that accounting and sustainability are linked? |
| Brian Wenzel: | I might ask you a question first: What do you think accounting is? |
| Robyn Fadden – host: | My perception is going to an accountant, but also knowing that all businesses and organizations have an accountant, they need to record their transactions, their expenses, their revenue, etc, etc. |
| Brian Wenzel: | That is more than what most people understand. I mean, that’s probably the boring side of what accounting is. Accounting just communicates. That’s all we are; we’re just communicators. So yes, we do record information. And we have output, but there’s a purpose to that. We’re taking information from someone and then we’re communicating it in a different way to someone else. So that’s all we do in accounting. That sounds… egalitarian is the wrong word, that sounds like very nice, but we just we just share information with others. That’s how sustainability fits into this. Because we’re reporting on it, we’re doing something, whatever that might be: diversity metrics, carbon emissions, material composition, there can be a lot of raw information that goes into something. We can take that, aggregate it, and disseminate it in an understandable way to a broader audience. |
| Robyn Fadden – host: | When you say communication, a lot of people and me included might think, Oh, is this numbers, you’re communicating numbers? But it’s more than that. |
| Brian Wenzel: | Maybe this is the accountant in me, I think everything can be turned into a number at the end of the day. So if I want to communicate something, almost anything can be quantified, even if that might not make sense upfront. But I can count something, just counting the number of instances of something that’s qualitative now becomes quantifiable. So even something that’s a bit more abstract than a number – that can be turned into a number and then reported to someone, that number can be tracked over time, it can be compared to somebody else. And that’s how we can monitor and share this information with others. |
| Robyn Fadden – host: | So if we look at carbon emissions. There is the management dictum, if we can’t measure it, we can’t manage it. |
| Brian Wenzel: | If I can’t measure it, well, one, why are we measuring it? So maybe somebody wants it, either the company cares, or maybe governments care, or the shareholders care, or the consumers care. There’s got to be a reason that we’re monitoring it and quantifying it and tracking it, then that’s where the accountant comes in. There’s a lot that can go into it. Carbon emission, that’s an easy thing to capture. That’s a very complicated number to capture. There’s a lot of raw inputs that go into that, to at the end of the day, come out with just three numbers: Scope 1, 2 and 3 admissions. So there’s a lot that goes into that. But then that helps us track it over time. |
| Robyn Fadden – host: | Why is accounting responsible for sustainability? Why is it linked with the part of a business that is responsible for sustainability? |
| Brian Wenzel: | Again, you might think of accountants, we’re tracking numbers or communicating numbers and the role we have in accounting is maybe like turn off the lights at the end of the… That’s all we can do in the accounting department or the accounting area of a company. But it’s our role because we are the communicator, nobody else in the company, the business, the organization, the government, communicates – it all comes to the accounting department. So accounting is central to almost any organization we can think of because we take something from one place and then disseminate that piece of information in a different way to someone else. That’s why we’re responsible for it, because we’re the ones tracking it, monitoring it. Accounting wouldn’t be that department in the organization that reduces the emissions, we can just track it in the submissions example. And then that can help us like make decisions going forward in the future. |
| Robyn Fadden – host: | The people who do reduce the emissions rely on this tracking. |
| Brian Wenzel: | Exactly, they have to rely on the numbers. They give us the numbers, and we give it to somebody else a decision maker, and then they’ll give us information back. So we’re always like the linchpin in all these decision-making areas. We’re always in the background, accounting is always in the background. We’re very central to everything, but we kind of hide in the corner; we’re touching almost anything that’s happening in an organization. |
| Robyn Fadden – host: | Exactly. So let’s get into the conference. Why did the McGill Accounting Research Conference decide on the theme of sustainability this year? |
| Brian Wenzel: | For this third one, we wanted to be a bit more focused, have a hot topic, if you will, something that’s important, or that we at least care about, and then set the theme. I’ve always thought I struggled in my research, like how can I contribute to sustainability? Because I research not just accounting but taxes, it’s something even a bit more abstract that’s removed from sustainability. But this is one way I feel like I can contribute to sustainability. And it’s hot in the profession right now. So it’s a nice time to have the conference. Related, the International Sustainability Standards Board, it’s a new initiative, via the IFRS Foundation. There is a standards setting body around the world, for almost every country except the United States that makes the accounting rules. They’ve just established the ISSB. And one of the main offices is headquartered here in Montreal. So this is another reason we thought it was a nice time to have the sustainability theme. |
| Robyn Fadden – host: | That makes sense, tying in with the creation of the Standards Board. What kinds of topics will be discussed? |
| Brian Wenzel: | When I think of sustainability, it’s a broad topic, and I try to put everything into buckets. One of the buckets is what we refer to with the acronym ESG, the environmental, social, and governance aspects of a company, or SEE, the social, the environmental, and the economic aspects of a business. And so we’re hitting on each of those three topics. We have a couple of people who are looking at emissions. So either, what leads into voluntary disclosure of carbon emissions, because it’s not quite mandatory everywhere. A lot of governments have signed on to the Paris Climate Accords. But getting that down into the business level isn’t exactly mandatory yet. So what leads to voluntary disclosure of our emissions? |
| Brian Wenzel: | Or conversely, when we mandate disclosure, emissions, what are the outcomes of that? We have two different papers looking at those different aspects. We have a paper that’s looking at board diversity and the implications of having gender diversity on the board. And then we have some others related to governance. So how can I set compensation structures that incentivize managers or employees to engage in sustainable activities? Or if I align myself with governmental policies, what are the impacts of that aligning my businesses with what policy wants to happen? And we also have like a keynote speaker, so one of the board members of the International Sustainability Standards Board is coming in. He’s going to open up the conference, which I’m really excited about. So it’s a bit of a brand new thing that we’re doing. We’ll all have a talk with him about that. |
| Robyn Fadden – host: | That’s great to have that person doing the keynote, as well to set the tone of what’s happening right now. |
| Brian Wenzel: | And it’s here in Montreal, we’re one of the main offices here as well. So hopefully, we’ll see how it all ties together. |
| Robyn Fadden – host: | This goes into the next question. You talked a bit about standards and governance. There are different ways to define sustainability practices and goals, and standards and governance. What are some of the ways that sustainability in accounting shows up in an organization? Where in an organization would sustainability be talked about in terms of accounting? |
| Brian Wenzel: | The high-level answer is everywhere. When I think about sustainability, sure, it is climate change or governance policies, EDI/DEI practices, profits are also sustainability as well—a business has to be profitable to remain around at the end of the day, an NGO and nonprofit still has to have funds coming in. So I can’t be sustainable if I don’t have money coming in. At the core, accounting has always been sustainability in that respect. My definition of sustainability, and this differs for everyone, it comes from the Brundtland Report, I don’t know if you’ve ever heard of it, or if anything listeners have. It was a report commissioned by the UN in the 80s. And the outcome was this high-level definition that sustainable development is just meeting the needs of now without sacrificing the needs of the future. So it’s that balance between short-termism and long-termism of any organization. So profits, that’s accounting, that’s the outcome of accounting. But any other metric, anything I can quantify that accounting has a role in monitoring and tracking and disseminating that at the end of the day. |
| Robyn Fadden – host: | There’s sort of this question of the tension between growth and sustainability. We’re talking about profits, but we’re also talking about growing profits. And how that can be reconciled with sustainability. |
| Brian Wenzel: | So I will answer this, I have strong feelings about this. Accounting perhaps has been part of the problem with sustainability because, not that we’re doing anything nefarious, but accounting I feel has led to short-termism inside organizations. Next quarter’s profits are much more tangible than something that will happen five or 10 years down the road. Even if making a sacrifice now will lead to a greater good in a decade that’s harder to quantify because it’s so far in the future. Accounting, I say, it maybe has been part of the problem, but we could also solve it. And we’ve been working on this for decades, trying to balance these different ways of reporting and disclosing, and disclosing on other sustainability metrics can help address other issues. It’s not required necessarily to disclose diversity inside a company, the emissions, the pollution, at least within the financial standards. If we can find a way to standardize these disclosures, and look at it and quantify it and track it, that could help and theoretically will help address it because we can actually see it going forward. |
| Robyn Fadden – host: | And addressing these long-term numbers and things like, we’re talking about Net Zero 2050, to a business that is concerned with this year, that’s in the future. But things like this conference, and there’s just more and more talking about accounting and sustainability, can perhaps influence that short-term versus long-term way of thinking about growth and profit. |
| Brian Wenzel: | Exactly. That’s the hope and the goal at least. |
| Robyn Fadden – host: | To what extent can accounting support an organization’s sustainability goals, whether they are short term or long term? |
| Brian Wenzel: | Accounting is that central node, so accounting is primed, probably the only area of an organization that can handle this that we have, to take the information and communicate it to somebody else. We are central to the decision of this. |
| Robyn Fadden – host: | How can accounting research itself help move the needle on researching or reaching climate objectives such as net zero? |
| Brian Wenzel: | Accounting research, it can be theoretical, so it’s modeling what might happen in an idealistic world, you need models to even guess what might happen. But things are already happening within organizations. We can aggregate that data and look at it, which is what we’re going to do in the conference. Here’s what we have seen that’s happened in these organizations, and here has been the outcome of these organizations. If it’s good, that could create a standard for how we can move forward and if some bad things, I don’t know if nefarious is the right word, but some less than ideal outcomes came from any sort of disclosure or monitoring, now we know that and maybe we can adjust it and create a better policy or a standard going forward. |
| Robyn Fadden – host: | So yes, it can affect policy and standard making, and so on. |
| Brian Wenzel: | Accounting, academic research in general – accounting is kind of in its own weird area, so we kind of create our own rules and accounting, we don’t I like that. I’m not sure if everybody does, I wouldn’t really want a government telling me exactly how I want to monitor or communicate, disclose something to report something. Because when the political process gets into things, then politicians take control of the reporting. This is where academic research in general comes into play in accounting, we create our own policies. So we need to make sure we’re making the best policy going forward so that we don’t do something bad where politics comes into play. |
| Robyn Fadden – host: | So, staying objective. |
| Brian Wenzel: | Staying objective. |
| Robyn Fadden – host: | Of course, doing the research and staying objective in a slightly longer-term way. Studies take a long time but the outcome is actual research. |
| Brian Wenzel: | Oftentimes, academic research and accounting as well, it feels like it can take too long, but part of that is we need the data. And then you have to synthesize the data and write it well, you have to be an accountant. And then you have to write it to communicate it to somebody else. But that objective, that focused approach to it could lead to better outcomes. |
| Robyn Fadden – host: | That’s one of the things that some people, including myself, years ago, didn’t quite understand – how much data is needed to come to even broad conclusions. You can’t just do it on a year’s worth of data. |
| Brian Wenzel: | No, you can’t. Because that one year, that year could have been 2020, right? Which is not the best year to say what’s going to happen in 2030, or 2040. |
| Robyn Fadden – host: | You talked about ESG. How exactly are ESG and accounting intertwined? |
| Brian Wenzel: | I’m always coming back to this communication role of accounting. So we take the information, it can be communicated to someone else. ESG, or any of these acronyms, we might think they’re fine because there’s a balance between the different stakeholders. So I might need to do something for the social aspect for my employees that might be detrimental to the environment. Or maybe I want to reduce my emissions to help the environment, but that’s going to have a profit impact. Then my shareholders may or may not be happy with that decision. |
| Brian Wenzel: | There’s always a balance. And what we’re trying to do with sustainability and accounting can come into play because that’s where we monitor these numbers and disclose it. And an academic could look at the numbers and do something. But even in an organization, you can just look at trends over time and literally project something to see what might happen. So, we’ll have to make a sacrifice here to meet this goal, or maybe everybody wins at the end of the day, we don’t know unless we can actually look at the data and the numbers that are collected by the accountants and sent out to everyone. |
| Robyn Fadden – host: | From an accounting research perspective, could universal standards be created for how organizations measure and report on sustainability efforts, such as carbon emissions or something, you talked about how this is the standards of government with governance, counties do their own thing, but… |
| Brian Wenzel: | Yes, and this is the goal of the new International Sustainability Standards Board. So I wouldn’t want politicians to come in to dictate. That’s the accountant in me that wants to say, aside from the political process, but we already have universal standards for financial reporting. There are options in that sometimes as well. But there’s a framework and how we disclose and arrive at these numbers. That’s the goal with sustainability reporting as well. It’s been voluntary for the past couple of decades on disclosing certain aspects of sustainability. But the ISSB is trying to bring that all into one centralized place, create a universal set of standards that could apply to everyone. And it’s important, because if we have five or 10 different frameworks of sustainability, how we might disclose things, it’s hard to compare across companies, organizations, governments, jurisdictions, but if we have one central framework, one central body, then everything is standardized. And then we can be comparable across time and across individuals and organizations. |
| Robyn Fadden – host: | Giving organizations access to these standards, or just even access to what other organizations can help benefit people. |
| Brian Wenzel: | Exactly. I think about carbon emissions or greenhouse gas emissions, that sounds easy. I just need to know what my emissions are. But my emissions, they’re not just what I’m producing, but it’s the emissions from the electric grid. How does an organization know what that is? You need somebody to be able to quantify that. My emissions inside an organization or a business particularly, there’s also the end use of my product, everything across the supply chain are the emissions within what I’m doing. That’s even harder to quantify and monitor. So you need some centralized framework to say, here are the rules, here’s how we will we can collect this data. And here’s the impact of it. |
| Robyn Fadden – host: | Along with the policy impact question we already talked about, can accounting research impact organizations’ sustainability goals and can it impact Corporate Social Responsibility standards? Nobody’s forcing anybody to pick up this research and create a policy around it. Whose responsibility is it, and I’m thinking about the standards board, to argue that this research should impact policy and policy should change to reflect it? |
| Brian Wenzel: | And all prior accounting policy rules have a lot of that comes from academic research, academics are on this standards setting board, as one arm of what we’re doing, because we can look at data in a different way than practitioners can and that businesses can or that governments can. We have always kind of had a say in this, one vote in what’s happening, because we can look at it from a different way. Either we look at what we find interesting, and then we research it, or we could see what the Standards Board wants to look at. And then that gives a signal of here’s what other people are saying is needed and interesting that maybe we can find a way to tackle that from a different way than everybody else in the game. |
| Robyn Fadden – host: | I think that’s interesting to some people about how policy, to know that academic researchers are sitting together with practitioners, with governments, to figure out what will work for everybody. |
| Brian Wenzel: | Governmental policy, that sometimes can just come out of who knows where. But it gets a bit more rigid and standardized, at least with accounting, and it’s fine. That’s why I love my job. I get to contribute in a lot of different ways. |
| Robyn Fadden – host: | Contribute is a good way to put it, rather than influence. |
| Brian Wenzel: | I’m just one voice. We’re all just one voice in the grand scheme. But if a lot of us look at things in different ways, and we all kind of come to similar conclusions, that’s pretty strong evidence of here’s an approach that might be beneficial. |
| Robyn Fadden – host: | And that’s why it’s important to have a conference. What do you hope the conference will achieve, or what do you hope the outcomes of the conference might be? |
| Brian Wenzel: | I’m very, very interested in speaking with Jeffrey Hales – he’s the ISSB board member that’s coming to present – just to see what the ISSB intends to do. It’s still kind of a sister organization to the financial reporting framework. I’m interested to see how sustainability can merge with financial reporting, because at the end of the day, financial reporting is profit driven, it’s focused on the shareholder, and the debt holder. I’m interested in how sustainable disclosures can impact other types of stakeholders as well. So this conversation should be illuminating hopefully, what the ISSB wants to do, or maybe we can actually contribute to what the ISSB can do. Here’s what we want from the academic side. And from the research aspect, I’m just very interested to see what my peers around the world are doing just the very different ways. |
| Robyn Fadden – host: | When you say other stakeholders, who do you mean? |
| Brian Wenzel: | You and I, we’re part of society, the consumers and an organization, government are stakeholders. So all of us are the animals outside are technically stakeholders inside the business because they are impacted. They don’t have a say, unfortunately, because they can’t speak right. But they are like a stakeholder inside any sort of organization. So that’s what I mean, it’s more than just who owns a business, or who’s financing it with debt. All of us are impacted by business decisions. |
| Robyn Fadden – host: | Especially when we think about sustainability and climate, the circle of stakeholders widens. |
| Brian Wenzel: | With sustainability it’s very easy for us, we always think of emissions and climate change. But again, we’re all impacted by diversity inside our organization, as well. There are a lot of different ways that are more than just the environment, that businesses contribute to bad outcomes or can contribute to better solutions by approaching different aspects in a stakeholder manner. |
| Robyn Fadden – host: | This also goes back to your definition of sustainability that you talked about in the beginning of our conversation. Accounting looks at the whole organization, so has everything to do with sustainability, so it’s about meeting an organization’s needs now without sacrificing the needs of future generations, and balancing short-termism versus long-termism, as you said. |
| Brian Wenzel: | So in that definition, it’s what I would call a stakeholder view of any sort of organization. It’s more than just who owns the organization, or who’s financing it. It’s everybody who has a stake, which is where we get the word from inside that organization. So the consumers, the employees, the local community that an organization operates, and these are all impacted by business decisions or nonprofit decisions. And it’s nice if they have a say, and we think about the impact to them as well, not just to issuing dividends to our owners, say if I’m a corporation or paying back my loan with interest to a bank, there are other impacts organizations have besides those to financiers. So, what’s the best we can do to balance and make everybody as happy as they can? We’re dealing with that reality. That’s all we can do. |
| Robyn Fadden – host: | Thank you so much. |
| Brian Wenzel: | Yeah, this was fun. Thanks so much, Robyn. It was good to talk with you. |
| Robyn Fadden – host: | Our guest today on the Delve podcast was Desautels Professor Brian Wenzel, discussing accounting and sustainability and the need for organizations, leaders, and regulatory bodies to address these issues today. This conversation is also in light of the upcoming McGill Accounting Research Conference, this year taking on the theme of sustainability – the conference is happening in person at McGill University on June 7 and 8. I’d also like to note that this episode of the Delve podcast is a collaboration between the McGill Sustainable Growth Institute, SGI Director Javad Nasiry, and Delve. You can find more about these topics on delve.mcgill.ca. |
| Robyn Fadden – host: | Thank you for listening to the Delve podcast, produced by Delve, the thought leadership platform of the Desautels Faculty of Management at McGill University. You can follow DelveMcGill on Facebook, LinkedIn, Twitter and Instagram. And subscribe to the DelveMcGill podcast on your favourite podcasting app. |
