Calculation of environmentally sustainable residual income (eSRI) from IFRS financial statements: An extension of richard (2012)

Abstract

This chapter presents a flexible approach to evaluating the extent to which an organisation has the capacity to be both environmentally and economically sustainable based on financial statements, namely Environmentally Sustainable Residual Income (eSRI). Problematically, despite International Financial Reporting Standards (IFRS) being a key information source for investors and other stakeholders, they give little consideration to natural and social capital in the construction of financial statements. eSRI builds on the approach to financial statement analysis advocated by Penman (Financial statement analysis and security valuation, 5th edn. McGraw-Hill/Irwin, 2012) and others, whereby users make adjustments to financial statements to derive more informative accounts. eSRI is defined as Net Profit less (i) a capital charge to evaluate economic sustainability, and (ii) environmental sustaining costs. Environmental sustaining costs are an estimate of a charge to replace or restore natural capital degraded in earning the income; essentially an opportunity cost generated by the organisation’s activities. The calculation provides a representation (albeit with error) of how much environmental capital has been destroyed in the generation of income. A key advantage of eSRI is that it allows users to combine non-financial information disclosures (such as carbon emissions) with financial indicators in a theory informed manner. eSRI will be of interest to stakeholders with an interest in estimating the extent to which an organisation has the potential to be both economically and environmentally sustainable.