This week, the New York Stock Exchange withdrew its proposal to create a new designation for public companies called Natural Asset Companies, or NACs. Had the rule gone through, it would have fundamentally altered mainstream economics and accounting practices. While the withdrawal offers a temporary reprieve, efforts to undermine standard economic statistics and corporate financial reporting will undoubtedly continue.
Under the proposed rule change, NACs would have been a new type of corporation whose purpose was to “maximize ecological performance.” NACs could engage in some revenue-generating operations, but their core goal would be environmental conservation. Alarmingly, NACs would have been required to publish annual Ecological Performance Reports with experimental metrics on the condition and purported economic value of the natural assets they manage.
This ecological accounting framework lacks scientific rigor, and it would insert misleading statistics into corporate income statements. The framework relies heavily on the UN’s controversial System of Environmental-Economic Accounting, which aims to assign monetary values to unpriced aspects of nature.
The UN methodology introduces bias and irrationality into environmental valuation. The reporting treats long- and short-run investments as if they are essentially the same by conflating compounding financial returns with short-lived experiences, like the pleasure enjoyed from a scenic view. While it might be sensible for an individual to forgo an investment opportunity in order to enjoy an afternoon in the country, the same cannot always be said for society, which has a time horizon that is essentially endless. Society can always wait for the long-run investments to pay off.
In this way, the proposed environmental reporting exhibits “present bias” by fixating on the short term. It also exhibits “anthropomorphic bias,” irrationally attributing human characteristics like time preference to all of society. And it will lead to “exponential growth bias,” whereby people have difficulty conceptualizing accelerating growth.
By moving to endorse this experimental environmental accounting, the SEC risked undermining confidence in financial reporting. Mainstream accounting standards like Generally Accepted Accounting Principles enable objective corporate performance measurement and benchmarking. By contrast, the UN methodology is ideological pseudoscience aimed at altering economic statistics to achieve political ends.
Fortunately, before finalizing its misguided rule change, the NYSE withdrew its proposal. For now, NACs remain just an idea, along with their dubious corporate environmental reporting. But recent history gives little cause for optimism that this threat is gone.
Powerful political forces are determined to implement new environmental accounting practices. Last year, the Biden administration issued a strategy for developing national environmental-economic statistics, again based largely on the UN’s accounting agenda. The Office of Management and Budget is working to expand cost-benefit analysis in a similar direction. These schemes aim to create alternative economic indicators that presumably would suggest society is becoming worse off even while living standards rise.
The goal may be to lay the groundwork for the claim that GDP growth harms the environment, thereby providing a justification for policies aimed at slowing or even reducing GDP. It is a de-growth agenda masquerading behind concern for the environment.
Indeed, the NYSE justified its proposal by asserting the need to correct “overconsumption of and underinvestment in nature.” Yet the NYSE’s proposal would actually have exacerbated overconsumption and underinvestment problems, by encouraging overconsumption of capital and underinvestment in the technologies that drive economic growth.
Anyone who believes in sound economic policy should push back against these efforts to inject activism into America’s core statistics. As the US works to rebuild from years of crises, reliable economic reporting has never been more important.