Reimagining the foundation of financial reporting: A rights-based approach to account for environmental externalities

There is increasing awareness in the critical accounting literature that the silos between financial accounts and sustainability reports cement the displacement of environmental externalities in the disclosure narrative of business entities. This paper aims to break down the silos between financial and sustainability reporting by proposing an alternative conceptual foundation that incorporates an entity’s environmental externalities into its financial accounts. In our endeavor, we draw inspiration from Boltanski and Thévenot’s (2006) “orders of worth” framework to detail how the logic of the market world underpins and reinforces the siloed approach in traditional financial reporting. We show how neo-institutional economics was translated into the conceptual foundation of assets and liabilities and shields an entity’s financial position and performance from its environmental externalities. Based on this analysis, the paper mobilizes features of a green order of worth and introduces the concept of environmental wealth owned by the society at large. We argue that the institutionalization of this transnational body creates an accounting device that can transcend both the market and green rationality within financial reporting, allowing for the recognition of a firm’s environmental liabilities in financial accounts.