The Rethinking Capital Foundation

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We’re stuck in an outdated mindset
Economic policy is trapped in an industrial-age mindset. What once worked no longer does. Instead of adapting to a transformed, digital economy, policymakers continue to treat the economy like a machine: pull the right lever, push the right button, and it will ‘work’.

Nowhere is this more obvious than in how we tackle inflation.

The blunt instrument of interest rates
When inflation rises, the default response is to raise interest rates. The logic seems straightforward: higher rates reduce the value of money, slowing spending and ‘cooling’ the economy.

But this is a blunt instrument – a sledgehammer used to crack a nut. It doesn’t distinguish between what’s driving inflation or consider its broader effects. The result? Businesses are squeezed, household budgets break and investment stalls – often without solving the underlying problem.

What’s really driving inflation
Recent inflation wasn’t caused by excess consumer demand or runaway government spending. Instead, it came from supply shocks:
 COVID-19 fractured global supply chains.
 Russia’s invasion of Ukraine sent energy prices soaring.
 Private banks withdrew credit, slowing economic activity.

These forces eased largely on their own. Inflation fell because of this, not because of interest rate hikes – yet the rate hikes still inflicted economic pain.

Why the current approach is failing
The focus on interest rates isn’t just ineffective; it’s harmful. It assumes that one policy lever is enough to manage a complex, interconnected economy. Worse, it blinds policymakers to alternative approaches that could tackle inflation at its roots rather than punishing the entire economy.

We need a new playbook
Inflation policy must be reimagined. That means:
 Diagnosing the real drivers of inflation – rather than applying the same tool regardless of the cause.
 Broadening the policy toolkit beyond interest rates.
 Rethinking outdated economic assumptions that shape today’s decisions.

This is why The Rethinking Capital Foundation calls for a new approach – one that recognises how value is created in today’s economy and aligns policy to support it.

The bottom line
We don’t need to keep using a sledgehammer to crack a nut. We need smarter, targeted policies that reduce inflation without stifling growth – and that starts by rethinking the mindset behind our current approach.


The next in the series on Rethinking Inflation follows below.

The one-dimensional view of inflation
For decades, policymakers have operated under a simple rule: inflation is always and everywhere a monetary phenomenon. This mindset, shaped by monetarist thinking, reduces a complex economic reality to a single chain of cause and effect:
 Government spends too much.
 The money supply increases.
 Prices rise.
 Higher interest rates are the only way to restore balance.

It’s neat, it’s simple – and it’s wrong.

How monetarism took hold
Milton Friedman’s famous declaration that “inflation is always and everywhere a monetary phenomenon” became the intellectual backbone of modern economic policy. The International Monetary Fund reinforced this orthodoxy: too much money chasing too few goods drives prices up, so governments must tighten the money supply.

But this logic ignores the fact that inflation is driven by far more than just monetary expansion. It also overlooks how our economy has evolved since the industrial age.

The ‘debt is bad” myth
Layered on top of monetarist thinking is another powerful narrative: debt is inherently bad. If debt is dangerous for households, the argument goes, it must also be dangerous for nations.

This view of economics leads to policies obsessed with ‘balancing the books’ at the expense of investment in education, health and infrastructure – the very things that create long-term value. It’s an outdated mindset that prevents governments from addressing the real drivers of inflation.

Why this logic fails in the real world
Look at the past few years. Inflation was driven by:
 Global supply chain disruptions during COVID.
 Energy price shocks from Russia’s invasion of Ukraine.
 Credit contraction from private banks.

None of these were caused by ‘too much government spending’. Yet policy responses still defaulted to rate hikes and austerity – hitting households and businesses while doing little to tackle the root causes.


Breaking free from old thinking
Inflation is not a single-variable problem and interest rates are not a one-size-fits-all solution. We need a new framework – one that recognises:
 The complexity of the modern economy.
 The role of supply-side shocks and global dynamics.
 That investment in value creation (education, health, research) is a solution, not a cost.

Until policymakers abandon the flawed logic of monetarism, we’ll keep reaching for the same blunt tools – and keep getting the same unsatisfactory results.

The bottom line
Rethinking inflation means rethinking the assumptions that underpin policy. It’s time to retire the myths and rebuild our economic playbook for the world as it actually is – not as it was imagined 50 years ago.

The next in the series on Rethinking Inflation follows below.

The myth of government-driven inflation
Ask most policymakers what causes inflation and you’ll hear the same answer: excessive government spending. It’s an easy explanation – and it fits neatly into the monetarist playbook.

But reality tells a different story. The sharp rise in inflation over recent years wasn’t primarily the result of fiscal irresponsibility. Instead, it came from forces far beyond government balance sheets.

The real causes of recent inflation
1️⃣ Supply chain disruptions
The COVID-19 pandemic fractured global supply chains. Manufacturing slowed, shipping costs soared and key goods became scarce. These supply constraints pushed prices higher across entire sectors – regardless of government spending.
1️⃣ Energy price shocks
Russia’s invasion of Ukraine sent energy markets into turmoil. Rising oil and gas prices filtered through every part of the economy, from food production to transportation.
1️⃣ Private credit contraction
Meanwhile, private banks tightened lending. As credit dried up, households and businesses cut spending and investment – compounding the slowdown and amplifying the drag on economic growth.

Why interest rates miss the point
Raising interest rates to fight this kind of inflation is like prescribing antibiotics for a broken bone: the treatment doesn’t match the problem.

Supply-driven inflation cannot be solved by making borrowing more expensive. Instead, rate hikes suppress demand, choke off investment and inflict unnecessary economic pain – all while leaving the root causes untouched.

How inflation actually came down
Inflation began to ease not because of aggressive interest rate policies, but because the underlying drivers subsided:
 Supply chains recovered.
 Energy markets stabilised.
 The private banking sector’s contraction slowed.

In other words, inflation fell largely in spite of government policy, not because of it.

What this means for policymakers
If we want better outcomes, we need a better diagnosis.
Tackling inflation effectively means:
 Distinguishing between supply-driven and demand-driven inflation.
 Targeting interventions to the actual source of price rises.
 Recognising that rate hikes are not a universal cure.

Until this shift happens, we risk continuing to use outdated tools that hurt growth without addressing the problem.

The bottom line
Inflation is complex – but our response doesn’t have to be simplistic. By understanding what really drives price rises, policymakers can stop treating symptoms and start addressing causes.

The next in the series on Rethinking Inflation follows below.

Why our measures of value are stuck in the past
For decades, governments have used outdated tools like GDP to measure economic success. These tools were designed for an industrial economy built on factories, machinery and physical production.

But the world has changed. Today’s economy is driven by knowledge, networks and relationships. Yet our policies still revolve around metrics and assumptions from another era.

From tangible assets to intangible value
The post-war economy was built on tangible assets: plant, equipment and infrastructure. These were easy to count and easy to value.
Today, value is created in very different ways:
 Through people and their skills.
 Through intellectual property and innovation.
 Through relationships, data and networks.

These intangible assets are now the primary drivers of prosperity. But because they are poorly measured, they are also undervalued in policy debates.

Why this matters for inflation and growth
When we don’t measure value properly, we misunderstand the economy. This has two major consequences:
1️⃣ Underinvestment in the future
Education, research and innovation are treated as ‘costs’ rather than long-term assets. Policymakers slash spending in the name of ‘fiscal discipline’, undermining the very foundations of future growth.
2️⃣ A distorted view of debt.

If you only look at liabilities without recognising the value of assets, public finances appear far weaker than they really are. This feeds the false narrative that debt must be cut at all costs – even if that means cutting the investments that create real economic strength.

The case for a national balance sheet
We need a new way of thinking. Instead of treating public finances like a household budget, we should:
 Value the nation’s assets (tangible and intangible) alongside its liabilities.
 Recognise investment as a source of long-term returns, not simply a line-item expense.
 Develop modern accounting tools that reflect the true drivers of economic value in a digital, networked economy.

This would give policymakers a clear picture of the resources they have – and how to use them effectively.

Building policy for a modern economy
A modern economy needs modern policy. That means:
 Measuring what matters – not just what’s easy to count.
 Rewarding investment in skills, research and infrastructure.
 Linking economic policy to how value is actually created today, not how it was created in 1950.

If we change how we see value, we’ll change how we shape policy – and that’s the key to tackling inflation and building lasting prosperity.

The bottom line
We can’t solve 21st-century problems with 20th-century metrics. By rethinking value, we can create a stronger foundation for growth, a smarter approach to public finances, and a fairer economy for the future.

The next in the series on Rethinking Inflation follows below.

The debt narrative that won’t die
“High national debt is unfair to future generations.”
It’s a line repeated by politicians and commentators alike. It frames debt as dangerous and morally wrong – something to be ‘paid down’ like a household credit card bill.

But this comparison is deeply misleading. National debt is not like personal debt and clinging to this myth limits our ability to invest in the economy we need.

Of course, the annual interest charge on debt has to be acknowledged – but is not as great a burden as we think it is.

Why national debt is different
Unlike a household, a nation does not go bankrupt if it fails to ‘repay’ its debt in full. National debt is held collectively by the government on behalf of the public. It is financed, not paid off in the conventional sense.

In fact, eliminating government debt would destabilise the economy. Pension funds and insurance companies rely on government bonds as a safe, liquid asset. Debt isn’t a sign of failure – it’s a core part of how modern economies function.

The role of assets we don’t count
The way we talk about debt ignores the other side of the balance sheet: assets.
 We measure liabilities (debt) in exhaustive detail.
 But we ignore the value of public assets, from infrastructure to education.
 We also fail to account for intangible assets, like innovation, research and human capital, that drive long-term economic growth.

Without this full picture, we underestimate our true capacity to manage debt and invest in the future.

Why ‘paying it off’ is the wrong goal
When we obsess over shrinking national debt, we treat investment in health, education, and infrastructure as ‘costs’ to be cut rather than as value-creating assets.

This short-term focus leads to austerity – cutting the very spending that builds a stronger, wealthier society. In reality, sustainable debt isn’t a problem. Failing to invest is.

A better approach: Managing, not eliminating, debt
Instead of treating debt as a failing, we should treat it as a tool:
 Value national assets: Build a national balance sheet to measure both what we owe and what we own.
 Invest strategically: Fund health, education and infrastructure that create long-term returns.
 Break the household analogy: Recognise that governments are not families balancing a chequebook.

This isn’t about being reckless with public finances – it’s about being smarter.

The bottom line
Debt is not the enemy. Misunderstanding it is. If we keep clinging to outdated analogies, we’ll keep underinvesting in the things that matter most.
It’s time to stop treating debt as a threat — and start using it as a tool for growth.

The last in the series on Rethinking Inflation follows below.

Why inflation demands a new approach
Inflation isn’t just an economic challenge – it’s a test of how well our policy frameworks match the world we live in. Yet governments continue to rely on outdated tools, built for an industrial-age economy that no longer exists.

Raising interest rates may appear decisive, but it’s a blunt instrument. It punishes households and businesses while ignoring the true drivers of inflation. To build a stronger, fairer economy, we need to rethink inflation from the ground up.

Three questions policymakers must answer
Any credible strategy for tackling inflation must start with three core questions:
1️⃣ What should we really do about inflation?
2️⃣ How do we manage national debt responsibly?
3️⃣ How can we fund the things society needs without undermining growth? These questions are interconnected. Solving them demands a shift from mechanistic, one-size-fits-all policymaking to a holistic, forward-looking approach.

These questions are interconnected. Solving them demands a shift from mechanistic, one-size-fits-all policymaking to a holistic, forward-looking approach.

Tackling inflation at its source
The first step is to move beyond treating inflation as purely a monetary phenomenon. Instead, policy must:
 Diagnose the drivers of price rises — from supply chain shocks to energy costs — and design targeted responses.
 Use interest rates sparingly, only where they directly address demand-driven inflation.
 Coordinate across government so fiscal, industrial and social policies work together to reduce inflationary pressures without strangling growth.

This means replacing blunt interventions with smarter, more surgical tools.

Rethinking debt and investment
National debt should be understood not as a danger to be ‘paid off’ but as a tool to finance growth. We must:
 Develop a national balance sheet that values both assets and liabilities, including intangible drivers of future prosperity like education and health.
 Prioritise investment in areas that create long-term value rather than treating them as short-term costs.
 Stop equating public finances with household budgets — a damaging analogy that has held back investment for decades.

Debt, when properly managed, is not a burden; it’s the scaffolding for a resilient, future-ready economy.

Financing the future
To fund this shift, governments need more than the tired debate between ‘raise taxes’ and ‘borrow more’.
Alternatives include:
 Sovereign money: Financing critical national priorities through government-created money, as has been done historically and China has been doing for years.
 Modernised accounting: Recognising the value of intangible assets so policymakers can invest with confidence.

These measures, combined with traditional fiscal tools, can unlock new capacity for growth and resilience.

A call for a new policy agenda
Inflation is the symptom of a deeper problem: the mismatch between old economic thinking and new economic realities.

The solution isn’t just lower inflation numbers – it’s a smarter economic system, one that measures value differently, invests strategically and uses every tool available, not just the most familiar one.

If we want better outcomes, we need a better playbook. The question is no longer whether we can afford to change – it’s whether we can afford not to.

11 March 2025
We are proud to be partnering with Accirculate ACC, a Brussels-based niche consulting firm specialising in Circular Supply Chains helping organisations in navigating the complexity of today’s global issues such as the geopolitical turmoil, resource scarcity and affordability, constant disruptions, market shifts, and of the twin green & digital transition towards supply chain resilience.

ACC’s commitment to advancing the principles of a circular economy is reflected in its mission, embedded in its name and logo, to “accelerate circularity” in supply chains with a value generation perspective and approach.

ACC brings an experienced team of advisors, domain experts, academics, and certified PM² Trainers (project management methodology) and an outstanding network in the domain of circularity.

ACC and The Rethinking Capital Foundation are joining forces to promote and to support value-driven transitions towards the Circular Economy and Circular Supply Chains, through the recognition and accounting of all the drivers of value creation – tangible and intangible.

The western world is facing a crisis of policy making. Tried and trusted solutions – quantitative easing, tax cuts, public spending cuts/increases – are ever less effective. It’s not just that the post-war consensus has run out of steam, the fundamentals have changed – the industrial model of value creation no longer drives growth, social norms are shifting.

What’s worked is failing. To change complex social systems, systems theorist Donella Meadows identified these critical interventions:
 The goals of the system (#3)
 The mindset or paradigm out of which the system arises (#2)
 The power to transcend paradigms (#1).

We’ve been here before. After 1945, with the establishment of powerful ‘multilateral’ institutions – the UN, IMF, World Bank, NATO – providing the framework to establish shared values across the West, which relied on and promoted policies and practices rooted in core beliefs:
 The primacy of the individual. Ayn Rand, the architect of the ethical system ‘Objectivism’, argued: “Man – every man – is an end in himself, not the means to the ends of others.”
 Rationality. Rand: “Man’s essential characteristic is his rational faculty. Man’s mind is the basic means of survival.”
 Society does not exist. Rand: “The Common Good (or the public interest) is an undefined and indefinable concept: there is no such entity as ‘the tribe’… only a number of individual men.”
 Markets rule – avoid government. Milton Friedman, leading monetarist economist: “The government solution to a problem is usually as bad as the problem. The most important single central fact about a free market is that no exchange takes place unless both parties benefit.”

These core beliefs of neoliberalism are fundamental to neoclassical economics. The real world impact is shown by the case for Brexit made in the Sovereign Individual (1997) by Eurosceptic Rees-Mogg (senior). He forecast a future driven by digital technology, the nation state withering and welfare states ‘unfinanceable’.

These core beliefs provide a powerful logic to justify the wealth of a global elite, preventing the creation of a worldview able to meet the challenges we face to build just and inclusive societies and protect the planet.

A normative perspective is rooted in very different beliefs:
 The individual as a part of society
 The value of the whole self
 The necessary role of government rooted in healthy democracy
 The importance of markets recognising their limitations
 A commitment to the common good through stewardship

These beliefs respond to changes in social norms and how value is created – enabling a productive and dynamic balance to be achieved between economy, society and environment.

The Rethinking Capital Foundation sets out a comprehensive alternative to neo-liberalism to renew capitalism in the 21st century.

If you asked the public, or indeed, a majority of informed figures, ‘what is the most important development in the history of civilisation’, very few would say accounting.

However, if you were to start with the realisation that the modern era began with the codification of accounting and ‘double-entry’ bookkeeping in the 15th century: you might get a different answer.

Early versions of double-entry were developed in ancient Samaria, but accounting achieved a very high level of sophistication in the 9th century, during Islam’s Golden Age. From an historical point of view, the adoption of modern accounting from its originating Islamic sources was a major turning point in Western history. So, what’s so special about double-entry bookkeeping?

Double-entry bookkeeping is an accounting system rooted in the premise that at the base of the Income Statement, which records all the inputs and outgoings of a business, lays an underlying duality, represented by its assets and liabilities. Accounting for commercial transactions properly on the balance sheet allows for both the identification and valuation of a company’s assets (the causal source of future earnings), shareholder equity and its (potentially) bankable collateral. In other words, accounting is central to the identification of the most potent force on earth: capital. Accounting is vital, because we would not have any idea about capital if we did not first have modern accounting and formal balance sheet assets. 

Assets are capitalism’s secret sauce, its unique storehouse for value.

Assets are institutional ‘vessels’ that we invent to store human energy and other forms of economically important value. The reinforcement that assets enjoy from society at large, particularly in accounting, law and with the business managers who deal with them day to day, creates a kind of institutional buoyancy. These special qualities allow the value stored within assets to rise or fall with the ebb and flow of economic currents.

Assets buttress the economy because the stored value in assets can be owned by an individual, public body, or corporation, and leveraged to create liquidity (i.e. turned into cash or credit) for all kinds of productive purposes.

Sadly, assets get no respect. The vast majority of us are either unaware of assets or consider them boring accounting entries. But closer examination reveals a different story, and a much more important role for assets in the history of civilisation. Assets may be unassuming, but they also have near mystical qualities that allow value to be stored and to accumulate. In fact, capital accumulation in the West only began in any meaningful sense with the consolidation of mercantile (trading) assets in the 16th century.

Today, you could say we are all beneficiaries of assets and their remarkable properties. Modern civilisation is able to organise itself to higher purpose and great complexity because it can draw upon the accrued value stored in our rapidly expanding asset foundations.
So, yes, you can make a case that accounting and double-entry bookkeeping provide the critical bridge between the modern and ancient worlds; as a result, they are ‘the most important development in the history of civilisation’.

More importantly, it has been accountants’ ability to adapt, to legitimise new classes of assets that facilitated the rise of civilisation these past centuries. The historic innovations inspired by the introduction of double-entry bookkeeping sparked the rise of trade in medieval Venice, Florence, and Genoa, eventually triggering the Italian Renaissance.

It is equally clear that accounting innovations in the early industrial era codified the value of ‘real’ capital – the plant, equipment and machinery that underpinned the Factory System – and drove the industrial age. Which makes the present inertia in the ‘practice’ of accounting so troubling.

The economy today is nothing like the economy of our fathers and grandfathers. We are in a post-industrial (digital) economy that is being driven by new value drivers like software, big data, artificial intelligence algorithms and networks-of-value like Facebook. Ironically, Accounting Standards permit capitalisation, but modern accountants continue to refuse to recognise these new value drivers as formal balance sheet assets, expensing all related development costs for tax purposes. They are essentially flushing our new economy with all its capital potential down the accounting drain.

New developments in Normative Accounting hold out some hope; for capitalising intangible assets on the balance sheet could reward (instead of penalise) investments in Green Energy Futures or launch a ‘thousand ships’ of innovation presently trapped in SMEs or accelerate the adoption of circular planning regimes to eliminate plastic and other harmful waste.

Accounting innovation, rather than accounting per se, is truly ‘the most important development’, and we need it now more than ever, if we are to rebound from lockdown and achieve our own 21st century renaissance. 

(No, we haven’t ‘maxed out our credit card’)

The consensus that government debt is bad – and to be avoided at all costs – is an excellent example of the need to rethink the rules that govern modern capitalism. It justifies the claim that ‘we have maxed out our credit card’. It reinforces a poverty of ambition for the future and the difference that can be made by any government.

The misunderstanding of debt is going to blight the next decade or more, as it has the last. It’s rooted in the legacy of the orthodoxy that has set the rules for many years, but which fails to offer solutions to the problems we face.

The Economic Times defines debt as: ‘the sum that a person borrows from the other’. Government debt is public debt: there is no ‘other’, it’s all ours. How we talk about government debt rests on a fundamental misconception. It needs to be financed – what’s at issue is how and when. For example, the time taken to pay off war debts: ‘WWII debts from the US and Canada were paid off in 2006 by the UK. The US loaned $4.33 billion in 1945 at 2% interest. At that rate of interest, the UK paid $7.5 billion back to the US, over 61 years’ Quora. ‘Almost 100 years after the debt was issued, the UK government has finally finished paying for WWI. (In 2015) the Treasury redeemed the outstanding £1.9 billion of debt from the “War Loan”, originally taken out in 1917’ CNBC. What immutable law requires that the ‘once in a generation’ devastation of COVID has to be paid off over the short to medium term?

The Rethinking Capital Foundation focuses on the options that can meet these and other challenges by taking a ‘normative’ approach – recognising the power of changing social norms in the context of new drivers of value creation. It’s not set in stone: – reconsidering what gets paid back, when; – supporting profitable investment in the industries and services of the future; – renegotiating the trade barriers which have been set up through the Brexit agreement, to reverse the 5% reduction in GDP and boost tax revenues; – reviewing the Treasury’s fiscal rules to incentivise capital investment; – leading an assessment of the opportunities for the kind of sovereign money strategy that the US used to finance WWII and China uses now.

The Rethinking Capital Foundation rethinks the rules governing modern capitalism. Rules no longer fit for purpose given fundamental changes in how value is created and changing social norms. These changes call into question the continued relevance of policies rooted in neo-liberal thinking and practice. The Foundation believes there is an imperative to step up to the national and global challenges we face, making possible the transformation from the industrial economy, for a restorative, zero carbon and just future, harnessing all talents and assets.

At the height of the pandemic more than 150 of the world’s largest corporations made a commitment to change. They promised, as part of their economic recovery plans, to “reach net-zero (carbon) emissions before 2050”. Commendable ambitions, but how are these costly transitions to be paid for while avoiding the inevitable negative market reaction?

Surprisingly, the practice of accounting is the problem and the bottleneck to environmental progress. Traditional accounting practices rooted in outdated neoclassical economic assumptions, impose a series of financial disincentives to ‘doing the right thing’ by forcing companies to ‘write off’ against income all expenditures designed to reduce carbon emissions or to achieve other socially desirable goals.

Why does this matter? Expensing investments in a Green Future reduces profits on a company’s income statement. It also slashes earnings-per-share and a host of other key investor metrics. Not an ideal situation for most corporate CEOs.

But two recent innovations in Normative Accounting for Intangibles are overcoming these restrictions, positively encouraging management teams to accelerate their carbon reduction programs.

The first innovation involves asset identification.
Recognising intangibles as formal balance sheet assets and showing their current value opens a variety of new financial reporting options for management. Advances in normative economics are repudiating the neoclassical concept of value objectivity. Value, as many of us know from practical experience is NOT objective, but annoyingly subjective. In normative accounting practice this means that financial statements prepared for taxation purposes, for example, are only relevant for taxing authorities. They do not represent, nor are they intended to represent, the commercial reality of a business. In Normative Accounting for Intangibles, parallel management statements, prepared to represent true value-in-use, will more accurately reflect that commercial reality. These statements would include the capitalisation and current value of all classes of intangible assets – the very assets which dominate the post-industrial economy, but which are either missing or vastly underreported on company financials.

The second major development in Normative Accounting for Intangibles involves the treatment of carbon liabilities. Presently, neoclassical conventions encourage companies to consider carbon emissions to be externalities – in other words carbon pollution is society’s problem and not a serious threat to their shareholder equity. Apart from recognising the rise of intangibles, normative accounting aligns itself with the public good and rising social concern around climate degradation.

For example, let us examine how normative accounting could accelerate Shell’s commitment to reduce Green House Gases (GHG).
Shell is planning to reach net-zero on Scope 1 and 2 emissions. These are the carbon emissions associated with its industrial processes and the emissions associated with the power sources it chooses to employ. To achieve all these reductions, Shell has announced its plans to use low or zero-carbon energy products, including hydrogen, biofuels, solar and wind power. It also means investing in zero-emission vehicles to replace existing fleets, switching to renewable fuels, while improving energy efficiency in buildings, facilities, and other logistical operations. Accounting practice would insist that the costs of these Green investments be ‘written off’ against income in the period of their expenditure. A financial penalty on this scale would likely delay the planned investment for years, if not decades. Meanwhile the environment continues to deteriorate.

How would normative accounting for intangibles resolve this apparent dilemma?

To begin, utilising existing accounting standards, normative accounting would authorise Shell to both measure it carbon liability and acknowledge its social obligation to reduce carbon. The environmental liability would now be resident on the company’s normative balance sheet. Normative approaches would then offset this negative liability by also capitalising the company’s presently undocumented intangible assets.

Shell’s full suite of intangible assets would include many ‘easier to identify’ intangibles like the company’s portfolio of internally developed intangibles, its patented innovations, present and future design assets etc. and – more importantly – formalise its ‘harder to identify’ relational capital assets like corporate reputation.

Doing so under normative principles opens multiple options for the company’s management to capitalise the expenditures utilised to mitigate the carbon liability and build its Green Future, creating a win-win financial solution aligned with societal goals.

Normative accounting treatment not only strengthens shareholder equity by broadening the inventory of legitimate assets and capitalising carbon-related expenditures that build the assets (tangible and intangible) of its new Green future, but also spares the company the market penalty of reduced quarterly or annual earnings on its income statement.

The post-COVID commercial reality is much different from the world we knew pre-pandemic. Society is moving rapidly, and social norms are changing for business.

Business leaders need to act and for that to happen accounting needs to adapt quickly and help create a suite of 21st century accounting practices that are more closely aligned with existing accounting standards, societal norms, and the lofty ambitions of a new generation.  

Reaction to Rt Hon Rachel Reeves MP’ recent #MaisLecture 2024 highlighted the formidable constraints facing Labour:
1. Truss government legacy: October 2021 – OBR forecast net debt interest would cost £29 billion in 2024, now expected to cost £82 billion
2. Impact of Brexit on trade: new barriers equivalent to a 13% in increase in tariffs for manufacturing and a 21% increase for services (Resolution Foundation)
3. Impact of Brexit on GDP and tax revenues: GDP would otherwise be 4% higher (OBR)
4. Long-term history of underperformance: ‘If the UK economy had grown at the OECD average, it would be £140 billion larger today, equivalent to £5,000 per household, an additional £50 billion in tax revenues‘, Reeves

Economic policy fails to recognise the transformation taking place ‘bottom up’, in enterprises where value is created. Economics takes a ‘top down’ view.

The stock market values enterprises at more than their ‘book’ value – there’s a growing gap between what’s valued by focussing on ‘things’ (plant, machinery and equipment) and the total value of the business including brands, most types of intellectual property, leadership and governance, reputation, the capacity for innovation.

We have been going through an ‘asset revolution’ – intangible #assets are now far more important than the tangible assets of the industrial economy. The operating rules haven’t kept pace: accounting focuses overwhelmingly on tangible assets, giving a partial view of total enterprise value.

This matter for economic policy because:
 UK GDP figures only measure physical capital ‘output’ based on a factory-like economic model that ignores the increasing value of intangibles. “Traditionally, the acquisition of intangible assets has been considered intermediate consumption and not investment, and therefore subtracted from total output when calculating gross value added.” (Professor Sir Charles Bean, 2016)
 Intangibles are typically expensed, so true enterprise value is reduced. The human and relational assets that drive enterprise success are undervalued; firms don’t secure the finance they need to invest; communities are damaged.

Using Normative Accounting for Intangibles with businesses in North America, we have restated the value of company assets, identifying opportunities for growth and securing new funding.

Applied to UK SMEs it would have a significant impact. With around 36,000 medium sized enterprises in the UK with 50-249 employees, and an annual #turnover of under €50 million, if just a third received a 10% uplift in value, the value of the UK economy would be around €50 billion – and that’s before the ‘multiplier’ benefits flow through from greater investment and improved performance.

By encouraging new operating rules for the UK economy, and a scheme to underwrite those revalued businesses, an incoming Chancellor – without increasing public spending – could transform the UKs economic outlook.

Only by making fundamental changes to financial reporting and broadening our measures can we release the iron grip that financial statements have on corporate priorities and decision-making.

The CEO stood before the chirpy group of employees on the fifth floor of their office tower brandishing their recently completed Environmental Report, which had just been received to considerable fanfare. The occasion was the release of the company’s initial Sustainability Report, a non-financial report on efforts the company was planning to make to reduce carbon emissions; a goal that the team of young enthusiastic employees had been working on together for months.

The CEO smiled and, holding up the freshly printed report, declared, “This is the start of our next great journey together to build a more sustainable company and a better, more sustainable future.”

After the meeting, I followed the CEO and the rest of the senior leadership team as they headed to the executive offices on the 35th floor. As we entered the boardroom, the CEO chatted casually to his team and as we were about to enter the boardroom he nonchalantly tossed the report on to a vacant desk close by. Once the CFO arrived, we got down to the serious business of reviewing the company’s financial statements. That was the last we heard of ‘the great journey together’.

I was reminded of this incident while reading about the sorry state of corporate governance and environmental performance in The New York Times. The news report suggested that “single-minded devotion (to shareholder primacy) overran nearly every other constituent, pushing aside the interests of customers, employees and communities”.

From my experience, the journalist was missing an important point – it’s not just shareholder primacy, as inappropriate as that is, but also the iron grip that financial statements have on corporate priorities and decision-making.

Financial statements not only measure corporate performance, but also provide the platform and metrics that define the success or failure of that company to the rest of the world. The problem is, non-financial reporting of the company’s commitment to reducing carbon emissions, for example, doesn’t penetrate the core, as it’s not integrated into the financial architecture of the corporation, impacting profits, shareholder equity, etc.  As a result, it doesn’t get the attention of senior management. Regrettably, non-financial reporting gets the same treatment as the sustainability team I was talking about. But could this all change?

Several years ago, pre pandemic, 181 CEOs signed a new ‘Statement on the Purpose of a Corporation’ that was published by the Business Roundtable. CEOs of major companies like JPMorgan Chase, Apple, Amazon and Walmart made a ‘fundamental commitment’ to putting all stakeholders on an equal footing in an attempt to end shareholder tyranny. This could have been a major turning point in the way we do business, but it wasn’t. It was yet another ‘great journey together’, which joined the sustainability report on the vacant desk.

Before there can be meaningful reordering of corporate priorities, changes need to be made to financial reporting and, ultimately, to what is essentially a toxic operating ‘theory of business’. The prevailing theory suggests that a business exists not to produce quality goods and services, but to generate financial returns for shareholders. Therefore, as my former CEO client understood, anything that detracts from this financial goal, such as investing in ESG should be avoided.

Statistics suggest that upwards of 80 per cent of a company’s value today resides in intangible assets. Included in that inventory resides perhaps the most important undocumented asset for a corporation, its reputation. In a social media-driven world, a reputation can be damaged almost instantly, and as companies are discovering, publicly committing to becoming carbon neutral and not delivering on this promise can seriously damage a business.

Investing in environmental sustainability is important, but it won’t really matter until the value of this investment is integrated into the financial architecture of the company for all to see.

There is so much that is wrong with corporate behaviour and, ironically, our current financial reporting standards and an outdated ‘theory of business’ legitimise it all.  

If we want to begin a ‘great journey together’ with socially responsible businesses, we need to make fundamental changes in financial reporting, broadening what we measure and how we define success in the business world.