The Fourth Financial Statement: When finance turns innovatively green

Adrian Zicari, Prof. of Accounting and Management Control at ESSEC Business School, and Luis Perera Aldama, Senior Partner at PwC Chile, look into an innovative use of Value-added Reporting – called the Fourth Financial Statement – as a tool for corporate sustainability.  

Adrian Zicari, Prof. of Accounting and Management Control at ESSEC Business School, and Luis Perera Aldama, Senior Partner at PwC Chile, look into an innovative use of Value-added Reporting – called the Fourth Financial Statement – as a tool for corporate sustainability.  

By Tom Gamble. Related research: Emerald Insight: Value-added reporting as a tool for sustainability: a Latin American experience, by Luis Perera Aldama and Adrián Zicari.

Why a CSR report?

People in all walks of professional life are aware of, and most probably concerned by, social and environmental issues. But it is only recently that the idea that firms should have a social responsibility has been generally accepted. Indeed, when CSR is mentioned, reactions may still vacillate between the wary, the ironic, the convinced and the unaware of just what CSR means.

This might in part be due to the fact that CSR – as with many concepts – has variants, if not different schools of thought, according, not least, to where you live in the world. But as a general definition, it could be said that CSR is the commitment of businesses to contribute to sustainable economic development (i.e. generate profit and employment) while balancing the interests of everyone – employees, local community, society at large and even the planet.

Firms have an interest in showing what their positive impact is on all these stakeholders. Because they might be convinced that they have an ethical duty to. They might also believe that they can contribute to improving the world through their activity or product. And they certainly believe that positive communication is good for their organisation and that, in the end run, investors will prefer to commit money to a company that does good for people, planet and profit rather than one oriented only and entirely towards profit.

The problem is that CSR is a complex notion and hard to measure. As such, advocates for CSR reporting have tended to use new and extended models of reporting rather than traditional accounting methods which are seen as unable to cater for this complexity.

A fourth financial statement

However, Adrian Zicari and Luis Perera Aldama think differently. They contend that traditional accounting, and more specifically the value-added statement (VAS), can indeed be used as a tool, and a complement to, CSR measurement. More specifically, Luis Perera Aldama in his role at PricewaterhouseCoopers, tailored a VAS which he termed The Fourth Financial Statement, and which is now used by over 15 firms in South America to show how companies create value and how that value is distributed among each category of stakeholder – employees, shareholders, community, taxes, suppliers and reinvestment.

Interestingly, this innovation is particularly suited to the continent and its emerging economies. Moreover, it is a tool that can quite relevantly be used by emerging countries on other continents. This is because the concerns of emerging countries are weighted differently from those of already advanced economies: wealth has to be first created in order to close the gap with the developed world, and then that wealth has to be distributed in order to improve usually unequal income distribution.

Intentionally and provocatively named, the Fourth Financial Statement implies that it should be used as an integral part of the firm’s annual accounts, accompanying and complementing the traditional other three statements: balance, P&L and cash flow.

Back to the future

Adrian Zicari, Prof. of Accounting and Management Control at ESSEC Business School, and Luis Perera Aldama, Senior Partner at PwC Chile, look into an innovative use of Value-added Reporting – called the Fourth Financial Statement – as a tool for corporate sustainability.  

As a value-added report, the Fourth Financial Statement model finds its precursor in the UK of the late 1970s and early 1980s and the sudden increase in VAS reporting sparked by a discussion paper presented by the Institute of Chartered Accountants in England and Wales (ICAEW).

The paper revolutionized the landscape by identifying that not only shareholders but seven different groups of stakeholders had ‘the right to information and whose information needs should be recognised by corporate reports’. In the years following the paper, four accounting bodies and a number of UK firms published VAS reports though the phenomenon rapidly began to disappear with the coming to power of the Thatcher government in 1979, an occurrence – mirrored in Spain – which led to the conclusion that VAS reporting seems to emerge with underperforming or emerging economies rather than established and vibrant ones.

Indeed, the financial crises of 2009 and 2011 once again saw a resurgence of the VAS with both the Inter-American Accountants Conference and the Global Reporting Initiative calling for this kind of reporting. One conclusion was that the VAS both reflects aspects of CSR performance – particularly value creation – and helps create improved development of CSR within firms.

Read Part 2 of Prof. Adrian Zicari’s article
Adrian Zicari

Useful links

  • Discover more about Prof. Adrian Zicari and his work
  • Visit ESSEC CEMAS (Center of Excellence Management and Society)
  • Read Adrian Zicari’s previous article Can Financial Markets Push for CSR? Part 1, Part 2

Learn more about the Council on Business & Society

The Council on Business & Society (The CoBS), visionary in its conception and purpose, was created in 2011, and is dedicated to promoting responsible leadership and tackling issues at the crossroads of business and society including sustainability, diversity, ethical leadership and the place responsible business has to play in contributing to the common good.  

In 2020, member schools now number 7, all “Triple Crown” accredited AACSB, EQUIS and AMBA and leaders in their respective countries.

The Council on Business & Society (The CoBS), visionary in its conception and purpose, was created in 2011, and is dedicated to promoting responsible leadership and tackling issues at the crossroads of business and society including sustainability, diversity, ethical leadership and the place responsible business has to play in contributing to the common good.  

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