Thought Leadership Articles

Tackling climate change will mean embracing economic models that prioritise the many, not just the elite few, writes Kate van der Merwe. In the pursuit of a holistic and inclusive economy that can serve current and future generations, we need to take a fresh look at our economic alternatives.  We are facing existential challenges: a climate crisis that we continue to escalate; a biodiversity crisis that is the sixth mass extinction; and significant inequities that the coronavirus pandemic has served to both highlight and exacerbate.  We must review how our economy works with a focus on real value and equity. In doing so, let’s scrutinise the underlying assumptions and realities, and consider alternative options, including the transformative innovations of social and circular economies. The current context Traditionally, economics is often framed as the study of how people make choices and allocate scarce resources over time, individually and collectively — for example, forsaking consumption now for later benefit (in finance, the choice to invest). Key concepts include ‘utility’ (the satisfaction from something) and ‘consumption.’  The relationship between both is represented by the ‘utility curve,’ which defines utility in direct and positive relation to consumption. Simplified, this means that the more we consume, the happier we are.  In finance theory, utility becomes defined in terms of monetary value. The concept of ‘consumption’ also defaults to a narrow definition of a one-time event. When supply meets demand in the market, for example, economic actors (businesses) are driven to mass-produce for one-off transactions, placing emphasis on short term profits.  When core concepts are so narrowly defined, the underlying utility or value is distorted. By focusing so narrowly on monetary value, we can become disconnected from the real value of the ‘thing’ money is buying and being valued upon. An investor following these limited definitions might, for example, invest in a high-yield mining company even if those yields are derived from destroying the health and wellbeing of their community, and feasibly worsening the investor’s overall utility, particularly in the long term.  If we assume that the fulfilment of our essential physiological needs has the highest incremental utility, then a theory assuming and supporting insatiable consumption — despite the consequences of that consumption threatening our essential physiological needs — appears contradictory.  As the COVID-19 pandemic has highlighted, inequity remains a significant challenge. In the current global economy, just one percent of the population holds 38 percent of wealth, while 50 percent holds just two percent.   During the pandemic, the world’s 10 richest men doubled their wealth. As the average worker faced job insecurity, CEO compensation rocketed. In the US, the CEO-to-worker compensation ratio reached 351:1 (in 1965 it was 21:1).  The pandemic has been a relatively mild precursor to the disruption that is building because of climate change – a threat that we have created, one that our current economic system perpetuates and that we have the power to stem. In facing this disruption, we will need economic models that prioritise the many, not just the elite few.  Alternative approaches Alternative models and ideas include circular, ecological, ‘donut,’ community, collaborative or sharing, social and solidarity economies. Loosely speaking, many focus on or draw inspiration from addressing social inequity and/or the environmental crises.  They look to democratise the economy, to better address systemic inequities, as well as incorporating realistic assessments of nature’s limits, so that we might begin to tackle our self-destructive environmental trajectory. Many of these ideas are not new. They are part of our history.  Their elegance is in their flexibility and compatibility with being layered and combined, an example being a social enterprise engaged in the circular economy. Given the breadth of this topic, this article briefly discusses two of the alternative models: social economy and circular economy. The social economy While the concept of the social economy is long-standing, its definition is evolving. Existing forms of social economy businesses include cooperatives, mutuals and social enterprises. Key features include a core organisational purpose of maximising societal and/or environmental impact, not profit, through the reinvestment of profits, and often incorporating democratic governance.  Existing forms of social economy businesses include cooperatives, mutuals and social enterprises. Within the EU, 2.8 million (10 percent) of all organisations are social economy enterprises, employing 13.6 million people.  While GDP is a problematic measure, the social economy contributes eight percent of the EU’s. One growing and exciting part of the social economy are those social start-ups that are applying innovative solutions to some of our biggest problems, like climate change, often tackling social and environmental issues simultaneously.  During the COVID-19 pandemic, the social economy gained visibility for its resilience and its value creation on a broader scorecard and structural supports are developing.  Last year, when announcing social enterprise funding, Minister for Rural and Community Development, Heather Humphreys, recognised social enterprises for “the invaluable role” they played throughout the pandemic, making “an important contribution in areas such as mental health, social inclusion and the circular economy.” In 2019, the Irish Government published the National Social Enterprise Policy for Ireland 2019–2022, which is also a core component of the State’s plans for rural and community development.  The EU is also scaling up support for the social economy, publishing the Social Economy Action Plan in 2021 for implementation this year, with plans for an EU Social Taxonomy.  A European stalwart of the social economy, based in the Basque Region of Northern Spain, is the Mondragon Cooperative Corporation.  Established in 1956, Mondragon is one of the largest corporates in Spain, with sales in over 150 countries. It comprises a collection of mutually supporting social enterprises engaged in education and innovation, finance, retail, and manufacturing/engineering (including the esteemed Orbea bicycles brand and Urssa, the world-renowned steel manufacturer).  Mondragon is particularly intriguing given its social impact aspirations — the structures and practices it has created to differentiate itself as social (such as maintaining a pay ratio limit of 6:1), while maintaining success in an ill-fitting capitalist economic structure.  Ireland also has its own booming social enterprise sector, with plenty of examples across a wide range of sectors, such as:  FoodCloud (connecting retailers with charities to donate food);  Airfield Estate (a working farm, kitchen, education, and food destination in Dublin); WeMakeGood (Ireland’s first social enterprise design brand) and; Moyee Coffee (“a radical company with radical [Fairchain] impact”). The circular economy The circular economy is also gaining ground, driven by the threat of climate change. The circular economy designs out waste by optimising scarce resources to build a restorative and regenerative economy.  It does this by deploying interdisciplinary systems thinking, i.e. considering complex systems holistically, and incorporating relationships and interdependencies between parts.  A long-term approach to resources, especially minimising the use of raw materials, fundamentally contrasts the circular economy with the linear ‘take-make-waste’ economic system.  The circular economy treats natural resources as scarce, which serves to keep climate breakdown and the threat to our survival front and centre. Maintenance and repair services grow, while production becomes more focused on non-virgin sources, thereafter prioritising regenerative materials. The emphasis is on prolonging the life and utility to be gained from products. This shifts the focus from expiry-bound consumption to ongoing use. The circular economy also diversifies the ways we transact – from individual ownership to shared ownership or rental (product-as-a-service).  The Whole of Government Circular Economy Strategy 2022–2023: Living More, Using Less, the first of its kind in Ireland and the Environmental Protection Agency’s Circular Economy Programme 2021–2027, both launched in December 2021.  These are core to the Irish Government’s drive to achieve a 51 percent reduction in greenhouse gas emissions by 2030 and to reach net-zero emissions by no later than 2050. A Circular Economy Bill is also in development.  Similarly, the EU is enabling the circular economy as part of the European Green Deal, adopting a new circular economy action plan (CEAP) in March 2020.  This action plan introduces both legislative and non-legislative measures aimed at facilitating the transition to a circular economy, including the establishment of the European Circular Economy Stakeholder Platform for sharing and scaling up the circular economy. Examples of businesses successfully applying circular principles include MUD Jeans, which offers a discount on the next purchase or lease for each pair of end-of-life jeans returned, recycling the returns into new jeans, eliminating waste, and using 92 percent less water in production.  Locally, the Rediscovery Centre in Dublin is the National Centre for the Circular Economy in Ireland. It hosts four up-cycling social enterprises in fashion, furniture, bicycles, and paint, as well as an Eco Store, and provides various educational offerings. Traditional businesses are also increasingly incorporating circular elements. Harvey Norman, for example, is offering preowned, refurbished phones. Holistic view While the traditional economy has a limited singular focus on the point-of-purchase, many of the alternative economy models, such as social and circular, take a more holistic view and can recognise and pursue multiple goals simultaneously.  Such models reflect the complexities of our environment, including the challenges of climate change, and intrinsic value, more accurately. These alternative ideas are also more dynamic. They can be combined with one another and enable better designed, more resilient outcomes.  Greater care is taken in defining what an organisation does as well as how it does it, generating more equitable outcomes by holistically considering impact, and providing greater long-term efficiency in synthesising society’s needs and the management of scarce natural resources.  In doing so, these alternatives better address critical unpriced externalities and offer ways to change our current self-destructive trajectory. Our traditional economy appears to focus on scarcity of value, durable efficiency, and resources, while the alternative economy models focus on their regeneration and restoration.  These alternative ideas offer fundamentally different approaches in how value is created, measured, and maintained, and are better suited to the holistic and inclusive economy needed by current and future generations. Kate van der Merwe, FCA, is a Sustainability Advocate and member of the Institute’s Sustainable Expert Working Group.

As the sustainability movement continues to gather speed, businesses across the world are beginning to realise they are going to need to make significant changes to ensure they are the right side of climate policy, as well as doing their part to save the planet. Fingers are being pointed towards the finance professionals to steer the sustainability ship. And there is good reason for this. Finance professionals generally carry a reputation as trusted advisors and as their bread and butter usually involves collecting, measuring, summarising, and reporting all business activities, they are likely to be best placed to analyse the risks and opportunities businesses face. According to recent surveys of chartered accountants, 55% believe that accountants have a great deal of responsibility in relation to sustainability and 60% of businesses surveyed in Northern Ireland have taken steps to address ESG. Sustainability is both a risk and an opportunity. And the risk of taking no action might be greater in the long run, as stakeholders are increasingly demanding more than just financial reward from businesses. According to Bloomberg, approximately $120 billion flowed into ESG-focused exchange-traded funds in 2021, signalling that investors are betting on growth for businesses with the best credentials in this area. But it’s not just the stakeholders that are supporting this movement. It is now high on the agenda for investors, employees and professionals alike. Furthermore, there are moves to introduce global standards for reporting on sustainability matters and finance professionals will need to ensure business disclosures are meeting their requirements not just for regulatory requirements but also for procurement as suppliers increasingly look to the ESG credentials of supply chain partners. Unlike the rest of the UK, Northern Ireland has yet to legislate its carbon reduction targets but there are two Climate Bills currently going through the Assembly. When legally binding targets are in place, significant changes across businesses will be needed to achieve these targets. To tackle the problem, the first step each business will need to make is to take stock and measure their own environmental impact. A recent Harvard Business Review discussed how finance professionals are starting to find themselves in a hybrid position between finance and sustainability, doing boundary work and bridging the gap by teaching themselves about sustainability. Chief Sustainability Officers are not yet common, but even in businesses where this position exists, they usually serve the purpose of being an expert on sustainability issues themselves, rather than having the skills required to measure and report the businesses actual environmental impact. This means that while they may help set the goalposts, the measuring itself will likely fall to the finance professionals. The Economist refers to 2021 as “the year when climate and sustainability entered the mainstream”. This year, the focus will shift to the implementation of the changes called for last year, meaning that businesses will need to examine their strategic plans and start to act. The CFO will be central in this and will need to analyse the cost and return of proposed ESG investments. There will be rewards for outflows as increasing resilience to sustainability risks is expected to result in increased investor confidence and brand reputation. Greater efficiency will lead to financial savings and good publicity is anticipated for the businesses who embrace this area. There is a growing sentiment that businesses that don’t act on this issue will be left behind, generating the wrong kind of publicity as a result and potentially losing future investments. From this perspective, it is self-serving for businesses to start implementing carbon reduction measures now, reaping the benefits by being ahead of the curve and gaining competitive advantage over those who don’t respond quickly enough. Your CFO might just be the person to talk to. Zara Duffy Head of Chartered Accountants Northern Ireland. First published in The Irish News on 8 February 2022.

In simplistic terms, inflation is a word for an increase in prices. In practical terms, it means you can afford to buy less. It means our current wages, and any savings we might have, are worth less. According to the Office for National Statistics, the UK’s Consumer Prices Index including owner occupiers’ housing costs rose by 5.4% in the 12 months to January 2022. This is a stark statistic for low-income households previously struggling to afford the basics, as in a period of high inflation, these necessities will cost more. For people living on a fixed or low income, while costs continue to soar, it’s harder for them to just survive. The pandemic has resulted in a new playing field. The economy has bounced back quickly, outstripping expectations, and driven an upsurge in demand. The UK economy grew 7.5% in 2021, an annual rate not seen since the 1940s. On the other side, production has been slower to recover. Consumers are demanding more when there is less available, and in a world where demand outstrips supply, prices will inevitably rise. Too much demand chasing too little supply leads to inflation. One major reason production has been slow to recover is down to supply chain issues, which are, in many cases, global and difficult to solve. Northern Ireland is experiencing more than its fair share as Brexit adds additional complexity to the supply chain. The House of Commons Committee of Public Accounts released a paper this week confirming that the new border arrangements have added costs to business and they “remain concerned” about the impact of trading arrangements changes. Shortages of labour are being experienced across many sectors right now. The shortage of lorry drivers has been well highlighted, given the number of European drivers working in the UK dropped by over a third in the year ending March 2021 according to official figures. This drop is pushing up the salaries for available drivers, with the Road Haulage Association reporting an 18 percent increase in driver employment costs in a survey conducted in October 2021. Energy prices can also be a major cost driver. In recent months, the UK has seen a sharp rise in the price of oil and gas, in part due to the ongoing situation in Russia and Ukraine. These are driving the costs of goods even further. A US based CFO survey found that 80 percent of firms are passing all these cost increases to customers through higher prices and we are all feeling the impact of this. Unfortunately, people’s beliefs and behaviours are part of the problem. There is a school of thought called inflation expectation which goes on the premise that if we think we are entering a prolonged state of high inflation, the chances are we will and we will make decisions on that basis. Employees will demand wage increases to cover the higher cost of goods and services. Consumers will scramble to buy before costs go up further. These actions will result in further pressure the demand side, which will push costs up even more. It’s not just Northern Ireland and the wider UK that is going through this right now, the US inflation rate of 7.5% is at its highest for 40 years. History teaches us that once inflation takes hold, it’s hard to get out of it and there is no quick fix. One tool that might help combat inflation is to increase interest rates. In the US in the 1980s, measures that successfully brought inflation down involved bans on wage increases and record high interest rates. High interest rates meant borrowing money was expensive and the resulting increase in mortgage rates meant that people had less money, which reduced overall demand in the economy. This triggered a recession in 1981, which caused even more hardship for those trying to make ends meet. Certainly not a good outcome, even if it did sort inflation out. Some economists believe the current bottlenecks will eventually resolve, prices will subside, and inflation will return to a low rate without a need for significant change in monetary policy. In other words, this is a temporary period of high inflation driven by the pandemic’s impact on the supply chain issues, giving hope to some that the current strains will be short-term. High inflation could, in part, be a result of inflation expectation, and therefore that answer may in fact be to remain calm. However, with no control over the evolving situation in Russia and Ukraine, which is driving the price of oil and gas to near record highs, it is a little more difficult to remain calm. Zara Duffy Head of Chartered Accountants Northern Ireland. First published in The Irish News on 15 March 2022.