The Case for Energy Statements
For a more detailed discussion of the Energy statements, please refer to Chapter 6 of the Corporate Energy Strategist’s Handbook
It is a frequent saying among environmentalists that businesses need to value the environment more. They point to examples of pollution, global warming, deforestation. At the same time, the proliferation of climate metric systems, such as the triple bottom line, science-based targets, the GRIs, have been unable to put the brakes on seemingly wanton environmental destruction.
Perhaps a simple reason for the lack of environmental progress is buried within accounting. The measure of valuation is a balance sheet metric and we don’t have an environmental balance sheet.
Let me explain. The three financial statements – the balance sheet, profit and loss statement and the cash flow statement – have been developed over thousands of years to help corporations manage their monetary resources. These tools have grown in sophistication to be able to help organizations understand their performance and strategy. As a record of past activity, they create an audit train, enabling compliance and detection of fraud. As a predictor of the future, pro forma versions help evaluate what’s attainable.
In the environmental field, we focus on the release of MCO2E, or the metric tons of carbon-equivalents emitted, as the primary metric for success. In the energy sector, which is a primary contributor to climate change, the kWh is the basis for measurements. Both of these are flow metrics, akin to cash flow.
Before we continue, let us see why we need three reports to manage a flow of a resource. In essence, we need to keep track of what we own, what we did with it and did we get paid for it.
The Balance Sheet is a snapshot-in-time that categorizes what a company owns and owes. Assets are resources owned from which future economic benefits can be derived. This could be cash and equipment. Liabilities are obligations due to the ownership of the asset This could be bills, loans, etc. Shareholder’s equity is the residual once all liabilities are deducted from assets. The value of a company is calculated within the shareholder’s equity.
The Profit and Loss Statement are the activities taken between two balance sheets. The revenue generated from the assets is the top-line. Expenses due to actions taken is deducted from the revenue until we derive the bottom-line profits, which get added into shareholder’s equity.
The Cash Flow Statement shows the exchange in cash between two balance sheets. Not every activity taken immediately generates cash. One can pay or purchase on credit, taking home a product yet exchanging money at a future date. Thus, the record keeping of cash needs to be kept separate from the record keeping of expenses due to actions taken.
To enable strategic management of energy, we created an Energy Statements system that mirrors the financial statements. An Energy Balance Sheet is a snapshot-in-time of the energy assets and obligations that arise from consuming energy. An Energy Gains and Uses report depicts where the energy comes from and what end uses it enables. And lastly, the Flow and Offsets statement records the transactions of consumption and offsets purchased to mitigate impacts.
In creating the parallel energy balance sheet, one is able to better view alignment between the financial capital strategy with the ESG strategy. Furthermore, as in the table below, one can identify and vet technologies that can improve the management aspects on many different timescales. Most importantly, the energy statements create a system where we can value the environment. Recall that financial valuation is derived from the Shareholders Equity within the financial balance sheet. On the energy balance sheet, the comparable residuals will measure how much is available for future generations to use. This forward thinking will help us approach the future with a far higher level of environmental stewardship.
Source: Table 6-1 from J. Jia, The Corporate Energy Strategist’s Handbook Palgrave Macmillan (2020)