In the current era, surely everyone should be paying close attention to the financial health of companies like Pfizer, Moderna and AstraZeneca, since any misuse of their financial resources – intended or unintended – might impede their ability to service society with COVID vaccines and distribution.

Society also needs to pay more attention to the financial viability of other enterprises that directly affect human need, such as companies that build infrastructure like roads, railways and hospitals. The societal danger of not recognising, anticipating and intervening on financial malfeasance is reflected in the January 2018 collapse of UK government contractor Carillion.

This company was building schools, hospitals and roads, and providing critical services ranging from cleaning to school lunches. Financial shareholders lost a significant amount of capital in the company’s insolvency. But society lost as well because cities and towns didn’t get their hospitals and other projects built on time or on budget as more than 400 contracts were suddenly disrupted. A scathing UK parliamentary report cited “recklessness, hubris and greed” among directors.

Grey deficits – and green ones

A company’s obligation to its retired employees is another area where credible financial reporting serves a vital societal function. And this time, it turns out that there is a link with share-price performance.

A 2020 report by Morgan Stanley looked at 50 companies with the largest pension deficits and found that those underfunded by more than 5% of the value of the company “significantly underperform” both broader stock markets and their sector peers. There are also indications that these underfunded liabilities are being materially underreported in annual reports.

I am increasingly concerned that the same is true of environmental issues ranging from toxic cleanup obligations to writedowns of so-called “stranded assets” that will never be exploited. There is growing evidence that firms are not allocating enough money to cover these potential environmental liabilities. If firms can’t pay, the costs will either fall to taxpayers or the cleanups simply won’t be done.

Two facets of environmental and social impact are not yet fully accounted for in traditional financial reports: the effect of social and environmental climate change on the financial viability of the enterprise and the effects of the enterprise on social and environmental climate change. As UN accounting experts said more than two decades ago, conventional financial reporting “routinely ignores environmental issues unless they have a financial impact of sufficient materiality”.

Many agencies, including Accounting for Sustainability (A4S), the International Accounting Standards Board (IASB), the Task Force for Climate-Related Financial Disclosures (TCFD) and the Climate Disclosures Standards Board (CDSB), are engaged in developing better reporting on these issues. Some companies are volunteering to participate in the improved schemes around environmental reporting that these agencies are advocating, but very little is mandatory at this stage.

So while companies absolutely need to improve their reporting in this area, matters would probably move forward with more urgency with more public support, since reporting-standard setters and market regulators actively solicit feedback from stakeholders to inform their proposed solutions.

More generally, there is a need for more people to be more aware of the relationship between financial announcements, business and society. There is plenty that business could do to make its reporting clearer and to better reflect reality. But if society and individuals invested more in financial literacy, and paid more attention to the information that companies produce, it would make it easier to demand that it met higher standards.

This article originally appeared in The Conversation on 19 January 2021 and is republished here with permission. The fact box on E.M. Forster and additional quotes from the text were added by StoryCode. The Conversation is a source of insights and analysis from academics and researchers.