Draft:Sustainable Performance Accounting

Sustainable Performance Accounting (SPA, 2022) is a business management concept designed to integrate sustainability into the corporate internal and external income statement (P&L). It incorporates sustainability matters into established performance indicators derived from the income statement, such as net income, EBIT (earnings before interest and taxes), or ROE (return on equity).

SPA leverages the logic and mechanisms of traditional business administration, specifically bookkeeping. To link financial and sustainability data, it proposes the establishment of a second bookkeeping system alongside financial bookkeeping (F-bookkeeping). ESG bookkeeping is also guided by the principles of proper accounting (HGB). ESG here represents sustainability matters, covering Environment (E), Social (S), and Governance (G). The integrated holistic bookkeeping (S-bookkeeping, F- and ESG bookkeeping) is thus composed of financial bookkeeping (F-bookkeeping) and ESG bookkeeping. SPA provides a coherent system for recording both negative and positive ESG effects in the balance sheet and income statement.

SPA considers both operational ESG matters (financial materiality, outside-in perspective) and ESG matters concerning common good (impact materiality, inside-out perspective), which encompass negative and positive external effects. Operational ESG matters align with financial materiality as defined by the European Sustainability Reporting Standards (ESRS). This perspective is referred to as the outside-in perspective, as it includes the financial impacts of environmental and social dynamics on companies. ESG common good aspects align with impact materiality as defined by the ESRS. This perspective is referred to as the inside-out perspective, illustrating the impacts of companies on environmental and social systems. This structure ensures SPA is compatible with European Reporting Sustainability Standards (ESRS).

Sustainable Performance Accounting translates a company's responsibility to the general public into accounting. The term "general public" (common good) is defined as referring to nature and society or rather socio-environmental systems that interact with businesses. ESG common good aspects are recorded in SPA against the new equity position "ESG capital," thereby implicitly making the general public a shareholder in the company.

Based on S-bookkeeping (sustainable bookkeeping), S-performance indicators can be calculated and explained using sustainability information from frameworks such as the ESRS. For instance, the established performance indicator EBIT (earnings before interest and taxes) is expanded into SEBIT (sustainable EBIT). Sustainable bookkeeping within SPA represents sustainability in a broader sense. According to SPA, corporate success is sustainable when economic activities are financially viable and all ESG matters (sustainability in the narrower sense) are considered in these calculations. [Note: In ESG, the "S" stands for "Social"; otherwise, it stands for "Sustainable."]

Background

ESG issues are playing an increasingly prominent role in the operational income statement.^[1] These sustainability-related issues are ever more regarded as pre-financials, which can have both a financial materiality as well as an impact materiality. From the business year 2024, the first EU companies have to prepare a sustainability report in accordance with the Corporate Sustainability Reporting Directive (CSRD) in conjunction with the EU Taxonomy Regulation (EU TaxR).^[2]

The multidimensional and increasingly quantitative approach of the CSRD represents an important step towards integrated financial and sustainability reporting, which recognises all stakeholders as the recipients of the report. However, due to the large number of additional data points in the management report, there is a risk of information overload. Such a supposed overload of information in the management report also poses the risk of a loss of quality in corporate reporting for stakeholders, with the risk of a lack of visibility of management-relevant parameters. There is no internalisation of positive and/or negative external effects of sustainability (ESG) in the balance sheet and income statement. as the recognition criteria are usually not met. ESG issues are therefore not included in the financial performance indicators, although they have a significant influence on the management of the company as a whole, and on the remuneration of the Executive Board and consequently on the main decision-makers in companies.

To integrate sustainability issues into management-relevant performance indicators, into particular earnings and profitability indicators, they must be posted in bookkeeping. However, this is not possible without further steps, as both International Financial Reporting Standards (IFRS) and the German Commercial Code (HGB) require certain recognition criteria to be met for assets to be recorded as assets, and these are not met for the ESG issues discussed here. The same applies to recording provisions as a liability. Ultimately, it boils down to the fact that for most ESG assets, there is no cash flow probable, assets and also probably no cash outflow for ESG liabilities. From a holistic perspective, this leads to unsatisfactory results: sustainable business practices not only do not lead to an advantage, but they also actually lead to a disadvantage, as ESG matters are not taken into account in the accounting nor in the key performance indicators. This is illustrated by the following simple numerical example.

ESG Capital

SPA uses the introduction of ESG capital to show the demands of the general public on  companies and vice versa. This item is in turn subdivided into the three ESG capital sub-  items; Environmental (E), Social (S) and Governance (G). 

ESG capital is based on the idea that other stakeholders or entities may be entitled to equity.^[3] The European sustainability standards explicitly refer to nature as a silent stakeholder.^[4] The  nature of ESG capital is similar to the consolidated financial statements equity item  “Noncontrolling interests“ (non-Group shareholders). However, the entitlement to ESG  capital is based on an implicit not explicit contract with the general public. Both assets and  liabilities can be written off against ESG capital, depending on whether the company  generates positive or negative externalities. 

When an asset is derecognised in exchange for ESG capital, the company has provided  sustainability services to the public free of charge; in this case, contributions to climate  protection. From an accounting perspective, this constitutes a type of in-kind withdrawal by  the public, which is recorded as a debit entry on the ESG account. From a holistic accounting  analysis perspective, this is fundamentally considered positive. If such accounting were to  form the basis for a government transfer payment or a financial contribution from a private  funder, liquidity would flow to the company. 

The derecognition of a provision against ESG capital occurs when the reason for recognizing  the provision no longer applies. In this case, the company has left ESG costs to the public  without having paid for them. An example of this would be CO₂ emissions, which result in  negative impacts in climate (ESRS E1). From an accounting perspective, this constitutes a  kind of contribution in kind by the general public, which is recognised as a credit entry in the  ESG capital account. From an accounting analysis perspective, this is considered negative. If  such accounting served as the basis for a government transfer payment, the company would  have to pay money to the public (represented by the state).

Fundamentally, it is conceivable that a credit balance in the ESG capital account could be  used as a basis for ESG taxation, which would then be allocated to finance ESG related  services. Simplified, if a company had negative impacts on the environment and/or society,  for example in climate (impact materiality, ESRS E1), it would have to pay money under an  ESG taxation system. Conversely, if a company provided climate protection services that  generate positive impacts on the environment and/or society, it would receive money.

Accounting Example

Examples of individual journal entries for ESG bookkeeping have been detailed by Henkel & Lay-Kumar in “From EBIT to SEBIT (Sustainable EBIT): Sustainable Performance Accounting (SPA) using the Example of CO2 Accounting”.

The subject of the left part of the figure is the result of the double materiality analysis of a company. In addition to two ESRS E1 issues (CO2 emissions from production, CO2 sequestration), the company has three ESRS S1 issues (wage spread, employee health, apprentices) and two ESRS G1 issues (bribery, resilience). This means that a total of 7 ESG topics are material for the company B.

Figure: Reconciliation from EBIT to SEBIT

The figure indicates for each ESG topic whether it has a positive or negative impact. In addition, the degree of severity of each ESG issue is shown graphically with regard to the impact materiality (inside-out) and/or the financial materiality (outside-in).

The reconciliation to SEBIT could be based on this presentation of the results of the double materiality analysis. For each ESG issue, the bookkeeping amount could be added to the ESG P&L along with the reference to the corresponding page of the sustainability report, in which the respective ESG issue, particularly the measurement, is explained.

This value is also the subject of the red-framed field at the top right of the figure. For “positive” ESG issues, revenue (from the recognition of an asset in the ESG balance sheet) is shown in the ESG P&L. In the specific example, this relates to CO2 sequestration (+ €3.5 million), employee health (+ €4 million) and apprentices (€1million). Accordingly, an expense must be recognised in ESG P&L for “negative” ESG entries, as these are to be carried as a liability in the ESG balance sheet. On the one hand, this relates to CO2 emissions from production (-€28 million) and negative effects from bribery (-€3 million). It was not possible to measure two other "negative" ESG issues, meaning that no ESG entry was possible here (wage spread, resilience).

In total, this results in an additional burden from the ESG P&L of -€22.5 million. This figure is also shown in the top right-hand corner of the red-framed box in Figure 2. Based on Company B's EBIT of €90 million, subtracting -€22.5 million from ESG P&L results in SEBIT of €67.5 million. The reconciliation shows whether each individual ESG item was recorded in ESG bookkeeping and, if so, the amount. In addition, the page references from the sustainability report are shown which list details, such as influencing factors used in the measurement, threshold values and monetisation.

Current developments

The long-term goal of SPA must be that parallel F and ESG bookkeeping is no longer required because all ESG issues are subject to regular F bookkeeping and F accounting.^[5] The more ESG matters are regulated and/or the recognition criteria for F accounting is expanded ^[6], the more this will become reality. However, the basic prerequisite for regulation, e.g. in the form of ESG taxation and/or ESG transfer payments, is the pricing of ESG issues, as has already been determined by the German Regionalwert (sustainability) performance calculation for almost five hundred ESG performance indicators in agriculture and forestry.^[7] And ESG bookkeeping provides valuable data material for this.

Until this is the case, ESG bookkeeping is needed to determine S performance indicators. In this context, however, it should also be noted that there are still no (generally recognised) measurement methods for various sustainability issues, as (standardised) indicators, threshold values and/or monetisation are still to be developed.

However, this is a prerequisite for inclusion in ESG bookkeeping and thus ultimately inclusion in S performance indicators. Critical discussions and the emergence of further research contributions are an ongoing process in the field.^[8] It has been argued that it would be better to use imperfect standards for the internalisation of external effects in ESG bookkeeping than not to carry out any measurement and bookkeeping entry at all.^[9]

References

•  This article incorporates text by Knut Henkel, Jenny Lay-Kumar, Christian Hiß available under the CC BY-SA 3.0 license. Also released under the GNU Free Documentation License.

1. This article draws heavily from: Henkel, Knut; Lay-Kumar, Jenny; Hiß, Christian; Sustainable Performance Accounting (SPA) am Beispiel der Bilanzierung von CO2-Emissionen, OPUS – Hochschulschrift der Hochschule Emden/Leer, 15.10.2024, insbesondere S. 7 ff. (online; Accessed on: 12.09.2025).
2. For an overview of current legislation, see for instance this entry on the official website of the European Commission (online, Accessed on:12.09.2025).
3. See i.a.: Anthony, R. N. Tell It Like It Was: A Conceptual Framework for Financial Accounting. 1983.
4. Cf. European Financial Reporting Advisory Group (EFRAG), Implementation guidance for the materiality assessment, 08/2023, no.. 184c p. 38. The debate is further intensified in the area of environmental law and human rights under the term “rightsholder”. The UNRISD (United Nations Research Institute for Social Development), for example, uses the term “rightsholder” in the area of human rights. The focus is therefore not on whether actors or entities have a stake in the company, but on their rights vis-à-vis duty-bearers such as states or companies. cf. https://socialprotection-humanrights.org/key-issues/universality-of-protection-and-effective-access/rights-holders/. This logic can in turn be transferred to ecosystems or ecological entities, e.g. rivers, as the allocation of personal rights to the Ganges River, among others, shows, cf. https://www.scientificamerican.com/article/rivers-get-human-rights-they-can-sue-to-protect-themselves/. In the context of SPA, a broad understanding of stakeholders is applied that potentially includes rightsholders. As the focus is on business operationalisation, social and ecological groups or entities that interact with companies are grouped together under “the general public”.
5. Henkel, Knut; Lay-Kumar, Jenny; Hiß, Christian; From EBIT to SEBIT (Sustainable EBIT): Sustainable Performance Accounting (SPA) using the Example of CO2 Accounting, Journal of Modern Accounting and Auditing (JMAA) Apr.-June 2024, Vol. 20, No. 2, 49-71
6. EFRAG presented various extended recognition definitions of intangible assets for discussion. Cf. EFRAG, Better Information on Intangibles - Which is the best way to go? 27.04.2023, Recommendations and Feedback, 27.04.2023 (online; Accessed on: 12.09.2025).
7. For examples of the numerous research projects on regional value performance accounting, cf. www.regionalwert-research.de/laufende-projekte/pilotprojekt-in-niedersachsen/; www.regionalwert-leistungen.de/blog/2022/03/nachhaltigkeit-honorieren-die-zukunft-des-oekolandbaus/; Röttig, Bettina: Wahre Preise: Jetzt wird neu abgerechnet. Lebensmittel Praxis (onlinel; Accessed on: 12.09.2025).
8. For example, Project 37679/01 of the German Federal Environmental Foundation (BDU): “Standardisation of the recording of sustainability indicators for agricultural businesses” (online/; Accessed on:09/09/2023).
9. Analogue Rochol, Besser unvollkommene Biodiversitätsmaßstäbe als Untätigkeit, Tagesspiegel Background Sustainable Finance Commentary, 13.07.2023 (online; Accessed on: 12.09.2025).