Experts call for systemic change in accounting, ESG to reflect true value

Accounting systems need an overhaul to better capture modern-day value creation, particularly in the context of climate and intangible assets, according to a discussion between Shivaram Rajgopal, professor, Columbia Business School, and Anjali Bansal, founding partner, Avaana Capital, at the Columbia Global Center Mumbai.

 

During the conversation, Rajgopal emphasised the inadequacy of traditional accounting frameworks, which remain rooted in 20th-century practices. “If you take the framework to a modern-day income statement, it's completely opaque. Income statements in the US haven't changed since maybe 1920,” he said, highlighting how intangibles, such as research and development (R&D) contributions, and externalities, both positive and negative, are often ignored.

   

Rajgopal cited examples like Coca-Cola’s minimal costs for water usage and the societal benefits from innovations like Pfizer’s COVID-19 vaccine to underline the misalignment in measuring corporate value. He added that while negative externalities like carbon emissions are captured, consumer value created through R&D is often overlooked.

 

Bansal, in turn, linked governance and intent to broader accountability issues in corporate operations. She pointed out how equity-heavy executive compensation structures incentivise short-term shareholder gains at the expense of broader stakeholder value, including environmental sustainability.

 

“I think this is the problem that we have with the quarter-to-quarter management style of most enterprises today. How is your stock price going? Executive compensation getting linked more and being very equity-heavy means that there is an incentive to maximise one aspect of value creation, which is value creation for shareholders, and not necessarily value creation for your stakeholders, which includes the community, suppliers, and customers,” said Bansal.

 

The discussion touched on the polarisation of environmental, social, and governance (ESG) initiatives, especially in the US, where political divisions have hampered progress. “ESG has become a bad word, at least in the US, with that whole conversation being highly politicised,” said Rajgopal, noting that frameworks like carbon taxes are politically unpalatable due to inflationary concerns.

 

Rajgopal suggested that aligning corporate “values and value” is essential for integrating ESG into business strategies, adding that a more holistic definition of value creation encompassing societal expectations is needed.

 

However, both experts acknowledged the complexities of implementing ESG principles globally. “If it’s not incentive-compatible, it won’t work,” said Rajgopal, criticising systems that rely on voluntary compliance or rating agencies.

 

Bansal pointed to financing hurdles in climate adaptation and mitigation, especially in developing countries. She added that without measurable, systematic strategies, climate financing becomes inaccessible to those who need it most.

 

While discussing how India can compete globally, Rajgopal stated that it is challenging to decarbonise and grow simultaneously, but quality of life remains a concern, with the Air Quality Index (AQI) in Indian cities worsening by the day. “Maybe the state needs to be a better actor. These are externality problems that the private sector by itself cannot solve,” he said.

 

As the global economy pivots towards decarbonisation, the need for strong regulatory oversight is evident, particularly in the allocation of climate finance and ensuring investments in sustainability are responsibly managed. Countries and corporations must integrate governance structures that prioritise long-term societal value over short-term profits.

 

The dialogue concluded with a call for systemic change in governance. While both experts underscored the importance of intent over rules, they also highlighted the absence of a unified global enforcement mechanism.