Resilience Economics Accounting: Integration of Resilience Theory into
Financial Reporting and Decision-making
Introduction
There is an increasing realization that the current system of financial accounting and
reporting is inadequate for handling risks and uncertainties posed by complex socio-
ecological systems. Traditional accounting standards are built on simplistic assumptions of
stability, predictability and controllability which do not reflect the dynamics and complexity
of real-world systems (Bebbington et al., 2014). This has led to calls for integrating concepts
from resilience theory into accounting in order to make financial statements and decision-
making more robust to surprises and uncertainty (Franks, 2012; Fujihara & Kazmierczak,
2017).
Resilience, in its simplest terms, refers to the ability of a system to withstand disturbances
and reorganize itself while undergoing change so as to still retain essentially the same
function, structure, identity and feedbacks (Walker et al., 2004). Applying resilience concepts
to accounting would require accounting for nonlinear dynamics, thresholds, uncertainty and
system-level interdependencies which traditional accounting has so far struggled with. A
resilience-based approach could help make accounting standards and financial reports more
robust to shocks and enable anticipatory decision making.
This paper argues for the need to integrate resilience theory more explicitly into accounting
standards, financial reporting and strategic decision making processes. It outlines some of the
key elements that need to be incorporated based on insights from resilience thinking. The
paper is organized as follows:
- Resilience theory and its relevance for accounting
- Key elements of resilience accounting
- Stocks and flows accounting for dynamic complexity
- Thresholds, tipping points and uncertainty accounting
- System-level interdependencies and feedback loops
- Resilience metrics and scenario analysis
- Barriers and challenges to implementation
- Recommendations and conclusions
Resilience Theory and its Relevance for Accounting
Traditional accounting is based on basic assumptions of system predictability, controllability
and rational expectations (Bebbington et al., 2014). However, real world socio-ecological
systems display dynamic complexity arising from thresholds, feedbacks, interlinkages and
evolutionary unpredictability (Folke, 2006). Resilience theory provides an alternative
conceptual framework for understanding such complex adaptive systems.
Key insights from resilience thinking relevant for accounting include (Franks, 2012; Fujihara
& Kazmierczak, 2017):
- Recognition of nonlinear change, feedbacks and thresholds rather than linear causal
relationships assumed in accounting standards
- Emphasis on dynamic stability, adaptability and transformability rather than static
optimization or predictions of growth/decline
- Accounting for uncertainty arising endogenously from complex system structures and
dynamics rather than exogenous risks and uncertainties alone
- Viewing social and ecological systems as coupled rather than independent domains seen in
financial reports
- Focusing on sustaining key ecosystem services and functions rather than single-attribute
optimization of economic outputs
- Evaluating system-level impacts and trade-offs rather than impacts of individual actors in
isolation
- Adopting an anticipatory rather than retrospective approach to decision making
These insights highlight the limitations of traditional accounting frameworks for
understanding and managing resilience of socio-ecological systems. Integration of resilience
thinking can help make accounting standards, financial reports and business decisions more
robust to uncertainty and adaptive to change.
Key Elements of Resilience Accounting
Based on the principles of resilience theory, some of the key elements that need to be
incorporated in accounting standards and practices include (Bebbington et al., 2014; Franks,
2012):
Stocks and Flows Accounting for Dynamic Complexity
- Tracking changes in critical capital stocks (natural, social, physical, human etc.) over time
rather than flows alone
- Distinguishing regenerative from non-regenerative flows and setting thresholds on
consumption/depletion of different stocks
- Assessing interlinkages and trade-offs between different types of capital stocks
- Valuing ecosystem services from natural capital using revised valuation approaches
Thresholds, Tipping Points and Uncertainty Accounting
- Identifying potential thresholds and tipping points in social-ecological system dynamics
- Assessing tail risks and impacts of low probability high consequence events
- Employing scenario-based approaches and stress testing rather than single forecasts
- Accounting for unpredictable ecological surprises and ‘unknown unknowns’
- Disclosing uncertainties explicitly rather than presenting definitive predictions
System-level Interdependencies and Feedback Loops
- Mapping relationships, feedbacks and interdependencies between different actors/sectors
- Evaluating cross-scale and cross-sector impacts of organizational activities and strategies
- Highlighting reinforcing and balancing feedback loops that can amplify or dampen impacts
- Assessing vulnerability/exposure of supply chains to systemic disruptions and spill-overs
Resilience Metrics and Scenario Analysis
- Developing metrics to measure an entity’s exposure to risks, buffering capacity, adaptive
capacity, transformation potential etc.
- Linking financial performance metrics to sustainability of critical capital stocks over time
- Using scenario analysis and modelling to evaluate resilience under different plausible
futures
- Undertaking regular stress testing and contingency planning exercises
These elements aim to overcome the limitations of traditional accounting by explicitly
accounting for dynamic complexity, uncertainty and system-level interconnectedness
inherent to socio-ecological domains. Integrating them can help make accounting standards,
reports and decisions more robust.
Stocks and Flows Accounting for Dynamic Complexity
Traditional accounting focusses primarily on tracking financial and physical flows over
specific time periods through income statements, cash flow statements etc. However, it pays
little attention to changes in the underlying asset bases or critical capital stocks that generate
these flows. This neglects the dynamic complexity arising from interlinkages between
different asset classes and nonlinear feedbacks between their rates of depletion/renewal over
time (Bebbington et al., 2014).
A stocks and flows based resilience accounting would require clearly identifying and
monitoring changes in all important capital stocks - manufactured/produced capital (tools,
infrastructure etc.), natural capital (resources, ecosystems), human capital (skills, health) and
social capital (institutions, relationships) (UN, 2014). It would recognize the differences
between renewable and non-renewable resource endowments, regenerative and linear
material flows, and track how depletion/replenishment of different stocks impact each other
(Franks, 2012).
For example, depletion of groundwater stocks might initially increase crop yields and profits.
But reduced natural capital stock can undermine long term replenishment of aquifers
affecting future water security and crop productivity. Such dynamics and trade-offs between
different stocks over time are difficult to capture using flow-based accounting alone.
Resilience-based accounting would value and report ecological assets using new frameworks
like Natural Capital Protocols that assign economic value to ecosystem services and factors
like biodiversity and carbon sequestration (Natural Capital Coalition, 2016). It would track
changes in stocks of other intangible capitals like skills, knowledge and partnerships critical
for long term viability. By clearly distinguishing between consumption of renewable vs. non
renewable stocks, entities can ensure critical asset bases are maintained to ensure future
resilience and long term value creation (Fujihara & Kazmierczak, 2017).
Thresholds, Tipping Points and Uncertainty Accounting
Traditional financial reports are based on assumptions of known probabilities and linear
extrapolations of past trends. However, real world systems display thresholds, nonlinear
change and potential for low probability high impact events. Concepts like ‘unknown
unknowns’ challenge modeling predictability. Resilience accounting must account for such
dynamic complexities and uncertainties.
Integrating resilience involves identifying potential tipping points where small perturbations
cause disproportionate system changes (Biggs et al., 2015). Early warning signs and
indicators around critical thresholds should be monitored through techniques like Bayesian
belief networks (Fath et al., 2015). Scenario methods going beyond single predictions can be
used to understand impacts of plausible, but low probability events.
Explicit disclosure of uncertainties arising from internal system dynamics and lack of
historical precedence is needed rather than presenting reports as definitive (Bebbington et al.,
2014). Sensitivity analysis should evaluate resilience under changing conditions.
Contingency planning and adaptive strategies rather than optimization under stable
assumptions become important (Franks, 2012).
Stress testing methods involve modeling responses to severe but plausible shocks to evaluate
robustness of different strategies (Caballero et al., 2008). Scenario techniques enable
understanding system-level impacts of cross-scale interactions and spill-overs across
dependent domains, which are hard to anticipate using past correlations alone (Biggs et al.,
2015). Risk registries should record and rank vulnerabilities including at supply chain and
portfolio levels (Franks, 2012).
Such enhancements can enable resilience-based reporting and strategy to incorporate
thresholds, contingencies and uncertainties in a more transparent manner than traditional
single forecast approaches. This promotes agility to respond to surprises in a changing risk
landscape.
System-level Interdependencies and Feedback Loops
While financial statements of individual entities provide useful information, they fail to
capture cross-scale interdependencies that influence systemic resilience. Traditional
accounting treats different sectors as independent domains, but real world systems display
complex interactions, feedbacks and spillovers across scales (Bebbington et al., 2014).
Resilience accounting attempts to map relationships and feedbacks between stakeholders,
sectors and scales to understand cross- impacts of organization-level activities. It evaluates
how actions of individual entities transmit impacts onto the broader social-ecological system
and vice versa through mechanisms like feedbacks, lock-ins and path dependencies arising
from complementary assets/investments (Perrings, 2006).
For example, unsustainable agricultural practices like groundwater depletion can compromise
water security across a region by altering hydrological feedbacks over the long term. Loss of
biodiversity across landscapes impacts future resilience of individual farms through reduced
pollination services. Failure of infrastructure during extreme events like flooding might arise
from maladaptive development across broader regions.
By mapping cross-scale dependencies and visualizing potential reinforcing and balancing
feedback loops, resilience reports aim to provide a system-level perspective on how actions
of individual entities impacts overall sustainability and vulnerability of coupled human-
environment systems over the long term (Biggs et al., 2015). This ensures tailored strategies
addressing root causes rather than symptoms alone.
Resilience Metrics and Scenario Analysis
In order to monitor changes in resilience over time and evaluate strategy options, relevant
metrics need to be tracked along with narratives. A range of potential metrics proposed in
literature aim to quantify different dimensions of resilience thinking (Rodriguez-Labajos et
al., 2019):
- Exposure/Vulnerability metrics measure risks/sensitivity from stresses based on
characteristics like asset concentration, dependency on single markets etc.
- Buffering capacity metrics indicate ability to withstand disturbance, quantified through
metrics of reserves, substitutability, redundancy etc.
- Adaptive capacity metrics focus on learning, flexibility, innovation to enable
environmental/social adjustment.
- Transformability metrics evaluate potential and governance conditions for major regime
shifts if faced with large perturbations.
Metrics need to be tailored to specific organizational and system contexts. Multiple leading
sustainability indicators should complement quantified measures in resilience reports (Folke,
2006). Scenario analysis remains critical to evaluate diverse outcomes under alternative
plausible assumptions (Biggs et al., 2015). Sensitivity analysis of metrics under shifting
conditions further enhances robustness.
Metrics help quantify resilience dimensions, benchmark performance longitudinally and
inform strategic priorities. Scenario techniques allow evaluating how choices made today
may impact long term resilience and sustainability of human-environment systems in a
changing, uncertain future.
Barriers and Challenges to Implementation
While the case for integrating resilience thinking into accounting is strong conceptually,
several practical challenges exist in real world implementation:
Data and measurement challenges: Resilience attributes are complex and multi-dimensional,
posing difficulties in consistent measurement. Lack of long term historical data on some
capitals like ecosystems further complicates benchmarking.
Conflicts with shareholders’ short term interests: Resilience focus on long term viability may
conflict with pressures of quarterly reporting and short term profit maximization mindsets.
Lack of definitional clarity: Key resilience concepts like adaptability and transformability
remain open to interpretation, posing difficulties in standardizing metrics and criteria.
Trade-offs with other attributes: Prioritizing resilience sometimes involves short term costs
affecting metrics of productivity or efficiency that markets currently value more.
Static standards and mindsets: Changing entrenched accounting standards and moving away
from assumptions of predictability involves major reform challenges within the regulatory
environment.
Implementation requires substantive changes across accounting standards, business school
education, financial/legal practices and regulatory/policy frameworks that currently
emphasize stability over dynamism. Piloting initiatives, demonstration projects and
stakeholder engagement will be important to gradually build momentum. Continued refining
of conceptual frameworks is also imperative.
Recommendations and Conclusion
Mainstreaming resilience in accounting and mainstream finance requires sustained, multi-
pronged efforts across research, policy, business and civil society over the long term. Some
recommendations include:
- Pilot resilience reporting initiatives within frontrunner organizations to iteratively refine
accounting practices
- Stakeholder engagement forums to build consensus around core resilience concepts,
metrics, narratives
- Educational reform within accounting, finance and business schools to incorporate
resilience thinking
- New financial products/instruments incentivizing long term stability over quarterly returns
- Revision of accounting standards/guidelines by national/international bodies to include
resilience attributes
- Policy measures to internalize social and environmental costs, make markets price long term
risks better
- Business strategies factoring in dependencies between different capitals and alternative
futures
While challenges remain, building resilience into accounting is crucial for transparent
evaluation and strengthening long term viability of linked human and natural systems. Small-
scale pilots can catalyze gradual mindset shifts by demonstrating practical benefits. with
sustained efforts across multiple domains, resilience accounting can revamp practices to
handle complex realities of the 21st century.
There is an increasing realization that the current system of financial accounting and
reporting is inadequate for handling risks and uncertainties posed by complex socio-
ecological systems. Traditional accounting standards are built on simplistic assumptions of
stability, predictability and controllability which do not reflect the dynamics and complexity
of real-world systems (Bebbington et al., 2014). This has led to calls for integrating concepts
from resilience theory into accounting in order to make financial statements and decision-
making more robust to surprises and uncertainty (Franks, 2012; Fujihara & Kazmierczak,
2017).
Resilience, in its simplest terms, refers to the ability of a system to withstand disturbances
and reorganize itself while undergoing change so as to still retain essentially the same
function, structure, identity and feedbacks (Walker et al., 2004). Applying resilience concepts
to accounting would require accounting for nonlinear dynamics, thresholds, uncertainty and
system-level interdependencies which traditional accounting has so far struggled with. A
resilience-based approach could help make accounting standards and financial reports more
robust to shocks and enable anticipatory decision making.
This paper argues for the need to integrate resilience theory more explicitly into accounting
standards, financial reporting and strategic decision making processes. It outlines some of the
key elements that need to be incorporated based on insights from resilience thinking. The
paper is organized as follows:
- Resilience theory and its relevance for accounting
- Key elements of resilience accounting
- Stocks and flows accounting for dynamic complexity
- Thresholds, tipping points and uncertainty accounting
- System-level interdependencies and feedback loops
- Resilience metrics and scenario analysis
- Barriers and challenges to implementation
- Recommendations and conclusions
Resilience Theory and its Relevance for Accounting
Traditional accounting is based on basic assumptions of system predictability, controllability
and rational expectations (Bebbington et al., 2014). However, real world socio-ecological
systems display dynamic complexity arising from thresholds, feedbacks, interlinkages and
evolutionary unpredictability (Folke, 2006). Resilience theory provides an alternative
conceptual framework for understanding such complex adaptive systems.
Key insights from resilience thinking relevant for accounting include (Franks, 2012; Fujihara
& Kazmierczak, 2017):
- Recognition of nonlinear change, feedbacks and thresholds rather than linear causal
relationships assumed in accounting standards
- Emphasis on dynamic stability, adaptability and transformability rather than static
optimization or predictions of growth/decline
- Accounting for uncertainty arising endogenously from complex system structures and
dynamics rather than exogenous risks and uncertainties alone
- Viewing social and ecological systems as coupled rather than independent domains seen in
financial reports
- Focusing on sustaining key ecosystem services and functions rather than single-attribute
optimization of economic outputs
- Evaluating system-level impacts and trade-offs rather than impacts of individual actors in
isolation
- Adopting an anticipatory rather than retrospective approach to decision making
These insights highlight the limitations of traditional accounting frameworks for
understanding and managing resilience of socio-ecological systems. Integration of resilience
thinking can help make accounting standards, financial reports and business decisions more
robust to uncertainty and adaptive to change.
Key Elements of Resilience Accounting
Based on the principles of resilience theory, some of the key elements that need to be
incorporated in accounting standards and practices include (Bebbington et al., 2014; Franks,
2012):
Stocks and Flows Accounting for Dynamic Complexity
- Tracking changes in critical capital stocks (natural, social, physical, human etc.) over time
rather than flows alone
- Distinguishing regenerative from non-regenerative flows and setting thresholds on
consumption/depletion of different stocks
- Assessing interlinkages and trade-offs between different types of capital stocks
- Valuing ecosystem services from natural capital using revised valuation approaches
Thresholds, Tipping Points and Uncertainty Accounting
- Identifying potential thresholds and tipping points in social-ecological system dynamics
- Assessing tail risks and impacts of low probability high consequence events
- Employing scenario-based approaches and stress testing rather than single forecasts
- Accounting for unpredictable ecological surprises and ‘unknown unknowns’
- Disclosing uncertainties explicitly rather than presenting definitive predictions
System-level Interdependencies and Feedback Loops
- Mapping relationships, feedbacks and interdependencies between different actors/sectors
- Evaluating cross-scale and cross-sector impacts of organizational activities and strategies
- Highlighting reinforcing and balancing feedback loops that can amplify or dampen impacts
- Assessing vulnerability/exposure of supply chains to systemic disruptions and spill-overs
Resilience Metrics and Scenario Analysis
- Developing metrics to measure an entity’s exposure to risks, buffering capacity, adaptive
capacity, transformation potential etc.
- Linking financial performance metrics to sustainability of critical capital stocks over time
- Using scenario analysis and modelling to evaluate resilience under different plausible
futures
- Undertaking regular stress testing and contingency planning exercises
These elements aim to overcome the limitations of traditional accounting by explicitly
accounting for dynamic complexity, uncertainty and system-level interconnectedness
inherent to socio-ecological domains. Integrating them can help make accounting standards,
reports and decisions more robust.
Stocks and Flows Accounting for Dynamic Complexity
Traditional accounting focusses primarily on tracking financial and physical flows over
specific time periods through income statements, cash flow statements etc. However, it pays
little attention to changes in the underlying asset bases or critical capital stocks that generate
these flows. This neglects the dynamic complexity arising from interlinkages between
different asset classes and nonlinear feedbacks between their rates of depletion/renewal over
time (Bebbington et al., 2014).
A stocks and flows based resilience accounting would require clearly identifying and
monitoring changes in all important capital stocks - manufactured/produced capital (tools,
infrastructure etc.), natural capital (resources, ecosystems), human capital (skills, health) and
social capital (institutions, relationships) (UN, 2014). It would recognize the differences
between renewable and non-renewable resource endowments, regenerative and linear
material flows, and track how depletion/replenishment of different stocks impact each other
(Franks, 2012).
For example, depletion of groundwater stocks might initially increase crop yields and profits.
But reduced natural capital stock can undermine long term replenishment of aquifers
affecting future water security and crop productivity. Such dynamics and trade-offs between
different stocks over time are difficult to capture using flow-based accounting alone.
Resilience-based accounting would value and report ecological assets using new frameworks
like Natural Capital Protocols that assign economic value to ecosystem services and factors
like biodiversity and carbon sequestration (Natural Capital Coalition, 2016). It would track
changes in stocks of other intangible capitals like skills, knowledge and partnerships critical
for long term viability. By clearly distinguishing between consumption of renewable vs. non
renewable stocks, entities can ensure critical asset bases are maintained to ensure future
resilience and long term value creation (Fujihara & Kazmierczak, 2017).
Thresholds, Tipping Points and Uncertainty Accounting
Traditional financial reports are based on assumptions of known probabilities and linear
extrapolations of past trends. However, real world systems display thresholds, nonlinear
change and potential for low probability high impact events. Concepts like ‘unknown
unknowns’ challenge modeling predictability. Resilience accounting must account for such
dynamic complexities and uncertainties.
Integrating resilience involves identifying potential tipping points where small perturbations
cause disproportionate system changes (Biggs et al., 2015). Early warning signs and
indicators around critical thresholds should be monitored through techniques like Bayesian
belief networks (Fath et al., 2015). Scenario methods going beyond single predictions can be
used to understand impacts of plausible, but low probability events.
Explicit disclosure of uncertainties arising from internal system dynamics and lack of
historical precedence is needed rather than presenting reports as definitive (Bebbington et al.,
2014). Sensitivity analysis should evaluate resilience under changing conditions.
Contingency planning and adaptive strategies rather than optimization under stable
assumptions become important (Franks, 2012).
Stress testing methods involve modeling responses to severe but plausible shocks to evaluate
robustness of different strategies (Caballero et al., 2008). Scenario techniques enable
understanding system-level impacts of cross-scale interactions and spill-overs across
dependent domains, which are hard to anticipate using past correlations alone (Biggs et al.,
2015). Risk registries should record and rank vulnerabilities including at supply chain and
portfolio levels (Franks, 2012).
Such enhancements can enable resilience-based reporting and strategy to incorporate
thresholds, contingencies and uncertainties in a more transparent manner than traditional
single forecast approaches. This promotes agility to respond to surprises in a changing risk
landscape.
System-level Interdependencies and Feedback Loops
While financial statements of individual entities provide useful information, they fail to
capture cross-scale interdependencies that influence systemic resilience. Traditional
accounting treats different sectors as independent domains, but real world systems display
complex interactions, feedbacks and spillovers across scales (Bebbington et al., 2014).
Resilience accounting attempts to map relationships and feedbacks between stakeholders,
sectors and scales to understand cross- impacts of organization-level activities. It evaluates
how actions of individual entities transmit impacts onto the broader social-ecological system
and vice versa through mechanisms like feedbacks, lock-ins and path dependencies arising
from complementary assets/investments (Perrings, 2006).
For example, unsustainable agricultural practices like groundwater depletion can compromise
water security across a region by altering hydrological feedbacks over the long term. Loss of
biodiversity across landscapes impacts future resilience of individual farms through reduced
pollination services. Failure of infrastructure during extreme events like flooding might arise
from maladaptive development across broader regions.
By mapping cross-scale dependencies and visualizing potential reinforcing and balancing
feedback loops, resilience reports aim to provide a system-level perspective on how actions
of individual entities impacts overall sustainability and vulnerability of coupled human-
environment systems over the long term (Biggs et al., 2015). This ensures tailored strategies
addressing root causes rather than symptoms alone.
Resilience Metrics and Scenario Analysis
In order to monitor changes in resilience over time and evaluate strategy options, relevant
metrics need to be tracked along with narratives. A range of potential metrics proposed in
literature aim to quantify different dimensions of resilience thinking (Rodriguez-Labajos et
al., 2019):
- Exposure/Vulnerability metrics measure risks/sensitivity from stresses based on
characteristics like asset concentration, dependency on single markets etc.
- Buffering capacity metrics indicate ability to withstand disturbance, quantified through
metrics of reserves, substitutability, redundancy etc.
- Adaptive capacity metrics focus on learning, flexibility, innovation to enable
environmental/social adjustment.
- Transformability metrics evaluate potential and governance conditions for major regime
shifts if faced with large perturbations.
Metrics need to be tailored to specific organizational and system contexts. Multiple leading
sustainability indicators should complement quantified measures in resilience reports (Folke,
2006). Scenario analysis remains critical to evaluate diverse outcomes under alternative
plausible assumptions (Biggs et al., 2015). Sensitivity analysis of metrics under shifting
conditions further enhances robustness.
Metrics help quantify resilience dimensions, benchmark performance longitudinally and
inform strategic priorities. Scenario techniques allow evaluating how choices made today
may impact long term resilience and sustainability of human-environment systems in a
changing, uncertain future.
Barriers and Challenges to Implementation
While the case for integrating resilience thinking into accounting is strong conceptually,
several practical challenges exist in real world implementation:
Data and measurement challenges: Resilience attributes are complex and multi-dimensional,
posing difficulties in consistent measurement. Lack of long term historical data on some
capitals like ecosystems further complicates benchmarking.
Conflicts with shareholders’ short term interests: Resilience focus on long term viability may
conflict with pressures of quarterly reporting and short term profit maximization mindsets.
Lack of definitional clarity: Key resilience concepts like adaptability and transformability
remain open to interpretation, posing difficulties in standardizing metrics and criteria.
Trade-offs with other attributes: Prioritizing resilience sometimes involves short term costs
affecting metrics of productivity or efficiency that markets currently value more.
Static standards and mindsets: Changing entrenched accounting standards and moving away
from assumptions of predictability involves major reform challenges within the regulatory
environment.
Implementation requires substantive changes across accounting standards, business school
education, financial/legal practices and regulatory/policy frameworks that currently
emphasize stability over dynamism. Piloting initiatives, demonstration projects and
stakeholder engagement will be important to gradually build momentum. Continued refining
of conceptual frameworks is also imperative.
Recommendations and Conclusion
Mainstreaming resilience in accounting and mainstream finance requires sustained, multi-
pronged efforts across research, policy, business and civil society over the long term. Some
recommendations include:
- Pilot resilience reporting initiatives within frontrunner organizations to iteratively refine
accounting practices
- Stakeholder engagement forums to build consensus around core resilience concepts,
metrics, narratives
- Educational reform within accounting, finance and business schools to incorporate
resilience thinking
- New financial products/instruments incentivizing long term stability over quarterly returns
- Revision of accounting standards/guidelines by national/international bodies to include
resilience attributes
- Policy measures to internalize social and environmental costs, make markets price long term
risks better
- Business strategies factoring in dependencies between different capitals and alternative
futures
While challenges remain, building resilience into accounting is crucial for transparent
evaluation and strengthening long term viability of linked human and natural systems. Small-
scale pilots can catalyze gradual mindset shifts by demonstrating practical benefits. with
sustained efforts across multiple domains, resilience accounting can revamp practices to
handle complex realities of the 21st century.
There is an increasing realization that the current system of financial accounting and
reporting is inadequate for handling risks and uncertainties posed by complex socio-
ecological systems. Traditional accounting standards are built on simplistic assumptions of
stability, predictability and controllability which do not reflect the dynamics and complexity
of real-world systems (Bebbington et al., 2014). This has led to calls for integrating concepts
from resilience theory into accounting in order to make financial statements and decision-
making more robust to surprises and uncertainty (Franks, 2012; Fujihara & Kazmierczak,
2017).
Resilience, in its simplest terms, refers to the ability of a system to withstand disturbances
and reorganize itself while undergoing change so as to still retain essentially the same
function, structure, identity and feedbacks (Walker et al., 2004). Applying resilience concepts
to accounting would require accounting for nonlinear dynamics, thresholds, uncertainty and
system-level interdependencies which traditional accounting has so far struggled with. A
resilience-based approach could help make accounting standards and financial reports more
robust to shocks and enable anticipatory decision making.
This paper argues for the need to integrate resilience theory more explicitly into accounting
standards, financial reporting and strategic decision making processes. It outlines some of the
key elements that need to be incorporated based on insights from resilience thinking. The
paper is organized as follows:
- Resilience theory and its relevance for accounting
- Key elements of resilience accounting
- Stocks and flows accounting for dynamic complexity
- Thresholds, tipping points and uncertainty accounting
- System-level interdependencies and feedback loops
- Resilience metrics and scenario analysis
- Barriers and challenges to implementation
- Recommendations and conclusions
Resilience Theory and its Relevance for Accounting
Traditional accounting is based on basic assumptions of system predictability, controllability
and rational expectations (Bebbington et al., 2014). However, real world socio-ecological
systems display dynamic complexity arising from thresholds, feedbacks, interlinkages and
evolutionary unpredictability (Folke, 2006). Resilience theory provides an alternative
conceptual framework for understanding such complex adaptive systems.
Key insights from resilience thinking relevant for accounting include (Franks, 2012; Fujihara
& Kazmierczak, 2017):
- Recognition of nonlinear change, feedbacks and thresholds rather than linear causal
relationships assumed in accounting standards
- Emphasis on dynamic stability, adaptability and transformability rather than static
optimization or predictions of growth/decline
- Accounting for uncertainty arising endogenously from complex system structures and
dynamics rather than exogenous risks and uncertainties alone
- Viewing social and ecological systems as coupled rather than independent domains seen in
financial reports
- Focusing on sustaining key ecosystem services and functions rather than single-attribute
optimization of economic outputs
- Evaluating system-level impacts and trade-offs rather than impacts of individual actors in
isolation
- Adopting an anticipatory rather than retrospective approach to decision making
These insights highlight the limitations of traditional accounting frameworks for
understanding and managing resilience of socio-ecological systems. Integration of resilience
thinking can help make accounting standards, financial reports and business decisions more
robust to uncertainty and adaptive to change.
Key Elements of Resilience Accounting
Based on the principles of resilience theory, some of the key elements that need to be
incorporated in accounting standards and practices include (Bebbington et al., 2014; Franks,
2012):
Stocks and Flows Accounting for Dynamic Complexity
- Tracking changes in critical capital stocks (natural, social, physical, human etc.) over time
rather than flows alone
- Distinguishing regenerative from non-regenerative flows and setting thresholds on
consumption/depletion of different stocks
- Assessing interlinkages and trade-offs between different types of capital stocks
- Valuing ecosystem services from natural capital using revised valuation approaches
Thresholds, Tipping Points and Uncertainty Accounting
- Identifying potential thresholds and tipping points in social-ecological system dynamics
- Assessing tail risks and impacts of low probability high consequence events
- Employing scenario-based approaches and stress testing rather than single forecasts
- Accounting for unpredictable ecological surprises and ‘unknown unknowns’
- Disclosing uncertainties explicitly rather than presenting definitive predictions
System-level Interdependencies and Feedback Loops
- Mapping relationships, feedbacks and interdependencies between different actors/sectors
- Evaluating cross-scale and cross-sector impacts of organizational activities and strategies
- Highlighting reinforcing and balancing feedback loops that can amplify or dampen impacts
- Assessing vulnerability/exposure of supply chains to systemic disruptions and spill-overs
Resilience Metrics and Scenario Analysis
- Developing metrics to measure an entity’s exposure to risks, buffering capacity, adaptive
capacity, transformation potential etc.
- Linking financial performance metrics to sustainability of critical capital stocks over time
- Using scenario analysis and modelling to evaluate resilience under different plausible
futures
- Undertaking regular stress testing and contingency planning exercises
These elements aim to overcome the limitations of traditional accounting by explicitly
accounting for dynamic complexity, uncertainty and system-level interconnectedness
inherent to socio-ecological domains. Integrating them can help make accounting standards,
reports and decisions more robust.
Stocks and Flows Accounting for Dynamic Complexity
Traditional accounting focusses primarily on tracking financial and physical flows over
specific time periods through income statements, cash flow statements etc. However, it pays
little attention to changes in the underlying asset bases or critical capital stocks that generate
these flows. This neglects the dynamic complexity arising from interlinkages between
different asset classes and nonlinear feedbacks between their rates of depletion/renewal over
time (Bebbington et al., 2014).
A stocks and flows based resilience accounting would require clearly identifying and
monitoring changes in all important capital stocks - manufactured/produced capital (tools,
infrastructure etc.), natural capital (resources, ecosystems), human capital (skills, health) and
social capital (institutions, relationships) (UN, 2014). It would recognize the differences
between renewable and non-renewable resource endowments, regenerative and linear
material flows, and track how depletion/replenishment of different stocks impact each other
(Franks, 2012).
For example, depletion of groundwater stocks might initially increase crop yields and profits.
But reduced natural capital stock can undermine long term replenishment of aquifers
affecting future water security and crop productivity. Such dynamics and trade-offs between
different stocks over time are difficult to capture using flow-based accounting alone.
Resilience-based accounting would value and report ecological assets using new frameworks
like Natural Capital Protocols that assign economic value to ecosystem services and factors
like biodiversity and carbon sequestration (Natural Capital Coalition, 2016). It would track
changes in stocks of other intangible capitals like skills, knowledge and partnerships critical
for long term viability. By clearly distinguishing between consumption of renewable vs. non
renewable stocks, entities can ensure critical asset bases are maintained to ensure future
resilience and long term value creation (Fujihara & Kazmierczak, 2017).
Thresholds, Tipping Points and Uncertainty Accounting
Traditional financial reports are based on assumptions of known probabilities and linear
extrapolations of past trends. However, real world systems display thresholds, nonlinear
change and potential for low probability high impact events. Concepts like ‘unknown
unknowns’ challenge modeling predictability. Resilience accounting must account for such
dynamic complexities and uncertainties.
Integrating resilience involves identifying potential tipping points where small perturbations
cause disproportionate system changes (Biggs et al., 2015). Early warning signs and
indicators around critical thresholds should be monitored through techniques like Bayesian
belief networks (Fath et al., 2015). Scenario methods going beyond single predictions can be
used to understand impacts of plausible, but low probability events.
Explicit disclosure of uncertainties arising from internal system dynamics and lack of
historical precedence is needed rather than presenting reports as definitive (Bebbington et al.,
2014). Sensitivity analysis should evaluate resilience under changing conditions.
Contingency planning and adaptive strategies rather than optimization under stable
assumptions become important (Franks, 2012).
Stress testing methods involve modeling responses to severe but plausible shocks to evaluate
robustness of different strategies (Caballero et al., 2008). Scenario techniques enable
understanding system-level impacts of cross-scale interactions and spill-overs across
dependent domains, which are hard to anticipate using past correlations alone (Biggs et al.,
2015). Risk registries should record and rank vulnerabilities including at supply chain and
portfolio levels (Franks, 2012).
Such enhancements can enable resilience-based reporting and strategy to incorporate
thresholds, contingencies and uncertainties in a more transparent manner than traditional
single forecast approaches. This promotes agility to respond to surprises in a changing risk
landscape.
System-level Interdependencies and Feedback Loops
While financial statements of individual entities provide useful information, they fail to
capture cross-scale interdependencies that influence systemic resilience. Traditional
accounting treats different sectors as independent domains, but real world systems display
complex interactions, feedbacks and spillovers across scales (Bebbington et al., 2014).
Resilience accounting attempts to map relationships and feedbacks between stakeholders,
sectors and scales to understand cross- impacts of organization-level activities. It evaluates
how actions of individual entities transmit impacts onto the broader social-ecological system
and vice versa through mechanisms like feedbacks, lock-ins and path dependencies arising
from complementary assets/investments (Perrings, 2006).
For example, unsustainable agricultural practices like groundwater depletion can compromise
water security across a region by altering hydrological feedbacks over the long term. Loss of
biodiversity across landscapes impacts future resilience of individual farms through reduced
pollination services. Failure of infrastructure during extreme events like flooding might arise
from maladaptive development across broader regions.
By mapping cross-scale dependencies and visualizing potential reinforcing and balancing
feedback loops, resilience reports aim to provide a system-level perspective on how actions
of individual entities impacts overall sustainability and vulnerability of coupled human-
environment systems over the long term (Biggs et al., 2015). This ensures tailored strategies
addressing root causes rather than symptoms alone.
Resilience Metrics and Scenario Analysis
In order to monitor changes in resilience over time and evaluate strategy options, relevant
metrics need to be tracked along with narratives. A range of potential metrics proposed in
literature aim to quantify different dimensions of resilience thinking (Rodriguez-Labajos et
al., 2019):
- Exposure/Vulnerability metrics measure risks/sensitivity from stresses based on
characteristics like asset concentration, dependency on single markets etc.
- Buffering capacity metrics indicate ability to withstand disturbance, quantified through
metrics of reserves, substitutability, redundancy etc.
- Adaptive capacity metrics focus on learning, flexibility, innovation to enable
environmental/social adjustment.
- Transformability metrics evaluate potential and governance conditions for major regime
shifts if faced with large perturbations.
Metrics need to be tailored to specific organizational and system contexts. Multiple leading
sustainability indicators should complement quantified measures in resilience reports (Folke,
2006). Scenario analysis remains critical to evaluate diverse outcomes under alternative
plausible assumptions (Biggs et al., 2015). Sensitivity analysis of metrics under shifting
conditions further enhances robustness.
Metrics help quantify resilience dimensions, benchmark performance longitudinally and
inform strategic priorities. Scenario techniques allow evaluating how choices made today
may impact long term resilience and sustainability of human-environment systems in a
changing, uncertain future.
Barriers and Challenges to Implementation
While the case for integrating resilience thinking into accounting is strong conceptually,
several practical challenges exist in real world implementation:
Data and measurement challenges: Resilience attributes are complex and multi-dimensional,
posing difficulties in consistent measurement. Lack of long term historical data on some
capitals like ecosystems further complicates benchmarking.
Conflicts with shareholders’ short term interests: Resilience focus on long term viability may
conflict with pressures of quarterly reporting and short term profit maximization mindsets.
Lack of definitional clarity: Key resilience concepts like adaptability and transformability
remain open to interpretation, posing difficulties in standardizing metrics and criteria.
Trade-offs with other attributes: Prioritizing resilience sometimes involves short term costs
affecting metrics of productivity or efficiency that markets currently value more.
Static standards and mindsets: Changing entrenched accounting standards and moving away
from assumptions of predictability involves major reform challenges within the regulatory
environment.
Implementation requires substantive changes across accounting standards, business school
education, financial/legal practices and regulatory/policy frameworks that currently
emphasize stability over dynamism. Piloting initiatives, demonstration projects and
stakeholder engagement will be important to gradually build momentum. Continued refining
of conceptual frameworks is also imperative.
Recommendations and Conclusion
Mainstreaming resilience in accounting and mainstream finance requires sustained, multi-
pronged efforts across research, policy, business and civil society over the long term. Some
recommendations include:
- Pilot resilience reporting initiatives within frontrunner organizations to iteratively refine
accounting practices
- Stakeholder engagement forums to build consensus around core resilience concepts,
metrics, narratives
- Educational reform within accounting, finance and business schools to incorporate
resilience thinking
- New financial products/instruments incentivizing long term stability over quarterly returns
- Revision of accounting standards/guidelines by national/international bodies to include
resilience attributes
- Policy measures to internalize social and environmental costs, make markets price long term
risks better
- Business strategies factoring in dependencies between different capitals and alternative
futures
While challenges remain, building resilience into accounting is crucial for transparent
evaluation and strengthening long term viability of linked human and natural systems. Small-
scale pilots can catalyze gradual mindset shifts by demonstrating practical benefits. with
sustained efforts across multiple domains, resilience accounting can revamp practices to
handle complex realities of the 21st century.
There is an increasing realization that the current system of financial accounting and
reporting is inadequate for handling risks and uncertainties posed by complex socio-
ecological systems. Traditional accounting standards are built on simplistic assumptions of
stability, predictability and controllability which do not reflect the dynamics and complexity
of real-world systems (Bebbington et al., 2014). This has led to calls for integrating concepts
from resilience theory into accounting in order to make financial statements and decision-
making more robust to surprises and uncertainty (Franks, 2012; Fujihara & Kazmierczak,
2017).
Resilience, in its simplest terms, refers to the ability of a system to withstand disturbances
and reorganize itself while undergoing change so as to still retain essentially the same
function, structure, identity and feedbacks (Walker et al., 2004). Applying resilience concepts
to accounting would require accounting for nonlinear dynamics, thresholds, uncertainty and
system-level interdependencies which traditional accounting has so far struggled with. A
resilience-based approach could help make accounting standards and financial reports more
robust to shocks and enable anticipatory decision making.
This paper argues for the need to integrate resilience theory more explicitly into accounting
standards, financial reporting and strategic decision making processes. It outlines some of the
key elements that need to be incorporated based on insights from resilience thinking. The
paper is organized as follows:
- Resilience theory and its relevance for accounting
- Key elements of resilience accounting
- Stocks and flows accounting for dynamic complexity
- Thresholds, tipping points and uncertainty accounting
- System-level interdependencies and feedback loops
- Resilience metrics and scenario analysis
- Barriers and challenges to implementation
- Recommendations and conclusions
Resilience Theory and its Relevance for Accounting
Traditional accounting is based on basic assumptions of system predictability, controllability
and rational expectations (Bebbington et al., 2014). However, real world socio-ecological
systems display dynamic complexity arising from thresholds, feedbacks, interlinkages and
evolutionary unpredictability (Folke, 2006). Resilience theory provides an alternative
conceptual framework for understanding such complex adaptive systems.
Key insights from resilience thinking relevant for accounting include (Franks, 2012; Fujihara
& Kazmierczak, 2017):
- Recognition of nonlinear change, feedbacks and thresholds rather than linear causal
relationships assumed in accounting standards
- Emphasis on dynamic stability, adaptability and transformability rather than static
optimization or predictions of growth/decline
- Accounting for uncertainty arising endogenously from complex system structures and
dynamics rather than exogenous risks and uncertainties alone
- Viewing social and ecological systems as coupled rather than independent domains seen in
financial reports
- Focusing on sustaining key ecosystem services and functions rather than single-attribute
optimization of economic outputs
- Evaluating system-level impacts and trade-offs rather than impacts of individual actors in
isolation
- Adopting an anticipatory rather than retrospective approach to decision making
These insights highlight the limitations of traditional accounting frameworks for
understanding and managing resilience of socio-ecological systems. Integration of resilience
thinking can help make accounting standards, financial reports and business decisions more
robust to uncertainty and adaptive to change.
Key Elements of Resilience Accounting
Based on the principles of resilience theory, some of the key elements that need to be
incorporated in accounting standards and practices include (Bebbington et al., 2014; Franks,
2012):
Stocks and Flows Accounting for Dynamic Complexity
- Tracking changes in critical capital stocks (natural, social, physical, human etc.) over time
rather than flows alone
- Distinguishing regenerative from non-regenerative flows and setting thresholds on
consumption/depletion of different stocks
- Assessing interlinkages and trade-offs between different types of capital stocks
- Valuing ecosystem services from natural capital using revised valuation approaches
Thresholds, Tipping Points and Uncertainty Accounting
- Identifying potential thresholds and tipping points in social-ecological system dynamics
- Assessing tail risks and impacts of low probability high consequence events
- Employing scenario-based approaches and stress testing rather than single forecasts
- Accounting for unpredictable ecological surprises and ‘unknown unknowns’
- Disclosing uncertainties explicitly rather than presenting definitive predictions
System-level Interdependencies and Feedback Loops
- Mapping relationships, feedbacks and interdependencies between different actors/sectors
- Evaluating cross-scale and cross-sector impacts of organizational activities and strategies
- Highlighting reinforcing and balancing feedback loops that can amplify or dampen impacts
- Assessing vulnerability/exposure of supply chains to systemic disruptions and spill-overs
Resilience Metrics and Scenario Analysis
- Developing metrics to measure an entity’s exposure to risks, buffering capacity, adaptive
capacity, transformation potential etc.
- Linking financial performance metrics to sustainability of critical capital stocks over time
- Using scenario analysis and modelling to evaluate resilience under different plausible
futures
- Undertaking regular stress testing and contingency planning exercises
These elements aim to overcome the limitations of traditional accounting by explicitly
accounting for dynamic complexity, uncertainty and system-level interconnectedness
inherent to socio-ecological domains. Integrating them can help make accounting standards,
reports and decisions more robust.
Stocks and Flows Accounting for Dynamic Complexity
Traditional accounting focusses primarily on tracking financial and physical flows over
specific time periods through income statements, cash flow statements etc. However, it pays
little attention to changes in the underlying asset bases or critical capital stocks that generate
these flows. This neglects the dynamic complexity arising from interlinkages between
different asset classes and nonlinear feedbacks between their rates of depletion/renewal over
time (Bebbington et al., 2014).
A stocks and flows based resilience accounting would require clearly identifying and
monitoring changes in all important capital stocks - manufactured/produced capital (tools,
infrastructure etc.), natural capital (resources, ecosystems), human capital (skills, health) and
social capital (institutions, relationships) (UN, 2014). It would recognize the differences
between renewable and non-renewable resource endowments, regenerative and linear
material flows, and track how depletion/replenishment of different stocks impact each other
(Franks, 2012).
For example, depletion of groundwater stocks might initially increase crop yields and profits.
But reduced natural capital stock can undermine long term replenishment of aquifers
affecting future water security and crop productivity. Such dynamics and trade-offs between
different stocks over time are difficult to capture using flow-based accounting alone.
Resilience-based accounting would value and report ecological assets using new frameworks
like Natural Capital Protocols that assign economic value to ecosystem services and factors
like biodiversity and carbon sequestration (Natural Capital Coalition, 2016). It would track
changes in stocks of other intangible capitals like skills, knowledge and partnerships critical
for long term viability. By clearly distinguishing between consumption of renewable vs. non
renewable stocks, entities can ensure critical asset bases are maintained to ensure future
resilience and long term value creation (Fujihara & Kazmierczak, 2017).
Thresholds, Tipping Points and Uncertainty Accounting
Traditional financial reports are based on assumptions of known probabilities and linear
extrapolations of past trends. However, real world systems display thresholds, nonlinear
change and potential for low probability high impact events. Concepts like ‘unknown
unknowns’ challenge modeling predictability. Resilience accounting must account for such
dynamic complexities and uncertainties.
Integrating resilience involves identifying potential tipping points where small perturbations
cause disproportionate system changes (Biggs et al., 2015). Early warning signs and
indicators around critical thresholds should be monitored through techniques like Bayesian
belief networks (Fath et al., 2015). Scenario methods going beyond single predictions can be
used to understand impacts of plausible, but low probability events.
Explicit disclosure of uncertainties arising from internal system dynamics and lack of
historical precedence is needed rather than presenting reports as definitive (Bebbington et al.,
2014). Sensitivity analysis should evaluate resilience under changing conditions.
Contingency planning and adaptive strategies rather than optimization under stable
assumptions become important (Franks, 2012).
Stress testing methods involve modeling responses to severe but plausible shocks to evaluate
robustness of different strategies (Caballero et al., 2008). Scenario techniques enable
understanding system-level impacts of cross-scale interactions and spill-overs across
dependent domains, which are hard to anticipate using past correlations alone (Biggs et al.,
2015). Risk registries should record and rank vulnerabilities including at supply chain and
portfolio levels (Franks, 2012).
Such enhancements can enable resilience-based reporting and strategy to incorporate
thresholds, contingencies and uncertainties in a more transparent manner than traditional
single forecast approaches. This promotes agility to respond to surprises in a changing risk
landscape.
System-level Interdependencies and Feedback Loops
While financial statements of individual entities provide useful information, they fail to
capture cross-scale interdependencies that influence systemic resilience. Traditional
accounting treats different sectors as independent domains, but real world systems display
complex interactions, feedbacks and spillovers across scales (Bebbington et al., 2014).
Resilience accounting attempts to map relationships and feedbacks between stakeholders,
sectors and scales to understand cross- impacts of organization-level activities. It evaluates
how actions of individual entities transmit impacts onto the broader social-ecological system
and vice versa through mechanisms like feedbacks, lock-ins and path dependencies arising
from complementary assets/investments (Perrings, 2006).
For example, unsustainable agricultural practices like groundwater depletion can compromise
water security across a region by altering hydrological feedbacks over the long term. Loss of
biodiversity across landscapes impacts future resilience of individual farms through reduced
pollination services. Failure of infrastructure during extreme events like flooding might arise
from maladaptive development across broader regions.
By mapping cross-scale dependencies and visualizing potential reinforcing and balancing
feedback loops, resilience reports aim to provide a system-level perspective on how actions
of individual entities impacts overall sustainability and vulnerability of coupled human-
environment systems over the long term (Biggs et al., 2015). This ensures tailored strategies
addressing root causes rather than symptoms alone.
Resilience Metrics and Scenario Analysis
In order to monitor changes in resilience over time and evaluate strategy options, relevant
metrics need to be tracked along with narratives. A range of potential metrics proposed in
literature aim to quantify different dimensions of resilience thinking (Rodriguez-Labajos et
al., 2019):
- Exposure/Vulnerability metrics measure risks/sensitivity from stresses based on
characteristics like asset concentration, dependency on single markets etc.
- Buffering capacity metrics indicate ability to withstand disturbance, quantified through
metrics of reserves, substitutability, redundancy etc.
- Adaptive capacity metrics focus on learning, flexibility, innovation to enable
environmental/social adjustment.
- Transformability metrics evaluate potential and governance conditions for major regime
shifts if faced with large perturbations.
Metrics need to be tailored to specific organizational and system contexts. Multiple leading
sustainability indicators should complement quantified measures in resilience reports (Folke,
2006). Scenario analysis remains critical to evaluate diverse outcomes under alternative
plausible assumptions (Biggs et al., 2015). Sensitivity analysis of metrics under shifting
conditions further enhances robustness.
Metrics help quantify resilience dimensions, benchmark performance longitudinally and
inform strategic priorities. Scenario techniques allow evaluating how choices made today
may impact long term resilience and sustainability of human-environment systems in a
changing, uncertain future.
Barriers and Challenges to Implementation
While the case for integrating resilience thinking into accounting is strong conceptually,
several practical challenges exist in real world implementation:
Data and measurement challenges: Resilience attributes are complex and multi-dimensional,
posing difficulties in consistent measurement. Lack of long term historical data on some
capitals like ecosystems further complicates benchmarking.
Conflicts with shareholders’ short term interests: Resilience focus on long term viability may
conflict with pressures of quarterly reporting and short term profit maximization mindsets.
Lack of definitional clarity: Key resilience concepts like adaptability and transformability
remain open to interpretation, posing difficulties in standardizing metrics and criteria.
Trade-offs with other attributes: Prioritizing resilience sometimes involves short term costs
affecting metrics of productivity or efficiency that markets currently value more.
Static standards and mindsets: Changing entrenched accounting standards and moving away
from assumptions of predictability involves major reform challenges within the regulatory
environment.
Implementation requires substantive changes across accounting standards, business school
education, financial/legal practices and regulatory/policy frameworks that currently
emphasize stability over dynamism. Piloting initiatives, demonstration projects and
stakeholder engagement will be important to gradually build momentum. Continued refining
of conceptual frameworks is also imperative.
Recommendations and Conclusion
Mainstreaming resilience in accounting and mainstream finance requires sustained, multi-
pronged efforts across research, policy, business and civil society over the long term. Some
recommendations include:
- Pilot resilience reporting initiatives within frontrunner organizations to iteratively refine
accounting practices
- Stakeholder engagement forums to build consensus around core resilience concepts,
metrics, narratives
- Educational reform within accounting, finance and business schools to incorporate
resilience thinking
- New financial products/instruments incentivizing long term stability over quarterly returns
- Revision of accounting standards/guidelines by national/international bodies to include
resilience attributes
- Policy measures to internalize social and environmental costs, make markets price long term
risks better
- Business strategies factoring in dependencies between different capitals and alternative
futures
While challenges remain, building resilience into accounting is crucial for transparent
evaluation and strengthening long term viability of linked human and natural systems. Small-
scale pilots can catalyze gradual mindset shifts by demonstrating practical benefits. with
sustained efforts across multiple domains, resilience accounting can revamp practices to
handle complex realities of the 21st century.
There is an increasing realization that the current system of financial accounting and
reporting is inadequate for handling risks and uncertainties posed by complex socio-
ecological systems. Traditional accounting standards are built on simplistic assumptions of
stability, predictability and controllability which do not reflect the dynamics and complexity
of real-world systems (Bebbington et al., 2014). This has led to calls for integrating concepts
from resilience theory into accounting in order to make financial statements and decision-
making more robust to surprises and uncertainty (Franks, 2012; Fujihara & Kazmierczak,
2017).
Resilience, in its simplest terms, refers to the ability of a system to withstand disturbances
and reorganize itself while undergoing change so as to still retain essentially the same
function, structure, identity and feedbacks (Walker et al., 2004). Applying resilience concepts
to accounting would require accounting for nonlinear dynamics, thresholds, uncertainty and
system-level interdependencies which traditional accounting has so far struggled with. A
resilience-based approach could help make accounting standards and financial reports more
robust to shocks and enable anticipatory decision making.
This paper argues for the need to integrate resilience theory more explicitly into accounting
standards, financial reporting and strategic decision making processes. It outlines some of the
key elements that need to be incorporated based on insights from resilience thinking. The
paper is organized as follows:
- Resilience theory and its relevance for accounting
- Key elements of resilience accounting
- Stocks and flows accounting for dynamic complexity
- Thresholds, tipping points and uncertainty accounting
- System-level interdependencies and feedback loops
- Resilience metrics and scenario analysis
- Barriers and challenges to implementation
- Recommendations and conclusions
Resilience Theory and its Relevance for Accounting
Traditional accounting is based on basic assumptions of system predictability, controllability
and rational expectations (Bebbington et al., 2014). However, real world socio-ecological
systems display dynamic complexity arising from thresholds, feedbacks, interlinkages and
evolutionary unpredictability (Folke, 2006). Resilience theory provides an alternative
conceptual framework for understanding such complex adaptive systems.
Key insights from resilience thinking relevant for accounting include (Franks, 2012; Fujihara
& Kazmierczak, 2017):
- Recognition of nonlinear change, feedbacks and thresholds rather than linear causal
relationships assumed in accounting standards
- Emphasis on dynamic stability, adaptability and transformability rather than static
optimization or predictions of growth/decline
- Accounting for uncertainty arising endogenously from complex system structures and
dynamics rather than exogenous risks and uncertainties alone
- Viewing social and ecological systems as coupled rather than independent domains seen in
financial reports
- Focusing on sustaining key ecosystem services and functions rather than single-attribute
optimization of economic outputs
- Evaluating system-level impacts and trade-offs rather than impacts of individual actors in
isolation
- Adopting an anticipatory rather than retrospective approach to decision making
These insights highlight the limitations of traditional accounting frameworks for
understanding and managing resilience of socio-ecological systems. Integration of resilience
thinking can help make accounting standards, financial reports and business decisions more
robust to uncertainty and adaptive to change.
Key Elements of Resilience Accounting
Based on the principles of resilience theory, some of the key elements that need to be
incorporated in accounting standards and practices include (Bebbington et al., 2014; Franks,
2012):
Stocks and Flows Accounting for Dynamic Complexity
- Tracking changes in critical capital stocks (natural, social, physical, human etc.) over time
rather than flows alone
- Distinguishing regenerative from non-regenerative flows and setting thresholds on
consumption/depletion of different stocks
- Assessing interlinkages and trade-offs between different types of capital stocks
- Valuing ecosystem services from natural capital using revised valuation approaches
Thresholds, Tipping Points and Uncertainty Accounting
- Identifying potential thresholds and tipping points in social-ecological system dynamics
- Assessing tail risks and impacts of low probability high consequence events
- Employing scenario-based approaches and stress testing rather than single forecasts
- Accounting for unpredictable ecological surprises and ‘unknown unknowns’
- Disclosing uncertainties explicitly rather than presenting definitive predictions
System-level Interdependencies and Feedback Loops
- Mapping relationships, feedbacks and interdependencies between different actors/sectors
- Evaluating cross-scale and cross-sector impacts of organizational activities and strategies
- Highlighting reinforcing and balancing feedback loops that can amplify or dampen impacts
- Assessing vulnerability/exposure of supply chains to systemic disruptions and spill-overs
Resilience Metrics and Scenario Analysis
- Developing metrics to measure an entity’s exposure to risks, buffering capacity, adaptive
capacity, transformation potential etc.
- Linking financial performance metrics to sustainability of critical capital stocks over time
- Using scenario analysis and modelling to evaluate resilience under different plausible
futures
- Undertaking regular stress testing and contingency planning exercises
These elements aim to overcome the limitations of traditional accounting by explicitly
accounting for dynamic complexity, uncertainty and system-level interconnectedness
inherent to socio-ecological domains. Integrating them can help make accounting standards,
reports and decisions more robust.
Stocks and Flows Accounting for Dynamic Complexity
Traditional accounting focusses primarily on tracking financial and physical flows over
specific time periods through income statements, cash flow statements etc. However, it pays
little attention to changes in the underlying asset bases or critical capital stocks that generate
these flows. This neglects the dynamic complexity arising from interlinkages between
different asset classes and nonlinear feedbacks between their rates of depletion/renewal over
time (Bebbington et al., 2014).
A stocks and flows based resilience accounting would require clearly identifying and
monitoring changes in all important capital stocks - manufactured/produced capital (tools,
infrastructure etc.), natural capital (resources, ecosystems), human capital (skills, health) and
social capital (institutions, relationships) (UN, 2014). It would recognize the differences
between renewable and non-renewable resource endowments, regenerative and linear
material flows, and track how depletion/replenishment of different stocks impact each other
(Franks, 2012).
For example, depletion of groundwater stocks might initially increase crop yields and profits.
But reduced natural capital stock can undermine long term replenishment of aquifers
affecting future water security and crop productivity. Such dynamics and trade-offs between
different stocks over time are difficult to capture using flow-based accounting alone.
Resilience-based accounting would value and report ecological assets using new frameworks
like Natural Capital Protocols that assign economic value to ecosystem services and factors
like biodiversity and carbon sequestration (Natural Capital Coalition, 2016). It would track
changes in stocks of other intangible capitals like skills, knowledge and partnerships critical
for long term viability. By clearly distinguishing between consumption of renewable vs. non
renewable stocks, entities can ensure critical asset bases are maintained to ensure future
resilience and long term value creation (Fujihara & Kazmierczak, 2017).
Thresholds, Tipping Points and Uncertainty Accounting
Traditional financial reports are based on assumptions of known probabilities and linear
extrapolations of past trends. However, real world systems display thresholds, nonlinear
change and potential for low probability high impact events. Concepts like ‘unknown
unknowns’ challenge modeling predictability. Resilience accounting must account for such
dynamic complexities and uncertainties.
Integrating resilience involves identifying potential tipping points where small perturbations
cause disproportionate system changes (Biggs et al., 2015). Early warning signs and
indicators around critical thresholds should be monitored through techniques like Bayesian
belief networks (Fath et al., 2015). Scenario methods going beyond single predictions can be
used to understand impacts of plausible, but low probability events.
Explicit disclosure of uncertainties arising from internal system dynamics and lack of
historical precedence is needed rather than presenting reports as definitive (Bebbington et al.,
2014). Sensitivity analysis should evaluate resilience under changing conditions.
Contingency planning and adaptive strategies rather than optimization under stable
assumptions become important (Franks, 2012).
Stress testing methods involve modeling responses to severe but plausible shocks to evaluate
robustness of different strategies (Caballero et al., 2008). Scenario techniques enable
understanding system-level impacts of cross-scale interactions and spill-overs across
dependent domains, which are hard to anticipate using past correlations alone (Biggs et al.,
2015). Risk registries should record and rank vulnerabilities including at supply chain and
portfolio levels (Franks, 2012).
Such enhancements can enable resilience-based reporting and strategy to incorporate
thresholds, contingencies and uncertainties in a more transparent manner than traditional
single forecast approaches. This promotes agility to respond to surprises in a changing risk
landscape.
System-level Interdependencies and Feedback Loops
While financial statements of individual entities provide useful information, they fail to
capture cross-scale interdependencies that influence systemic resilience. Traditional
accounting treats different sectors as independent domains, but real world systems display
complex interactions, feedbacks and spillovers across scales (Bebbington et al., 2014).
Resilience accounting attempts to map relationships and feedbacks between stakeholders,
sectors and scales to understand cross- impacts of organization-level activities. It evaluates
how actions of individual entities transmit impacts onto the broader social-ecological system
and vice versa through mechanisms like feedbacks, lock-ins and path dependencies arising
from complementary assets/investments (Perrings, 2006).
For example, unsustainable agricultural practices like groundwater depletion can compromise
water security across a region by altering hydrological feedbacks over the long term. Loss of
biodiversity across landscapes impacts future resilience of individual farms through reduced
pollination services. Failure of infrastructure during extreme events like flooding might arise
from maladaptive development across broader regions.
By mapping cross-scale dependencies and visualizing potential reinforcing and balancing
feedback loops, resilience reports aim to provide a system-level perspective on how actions
of individual entities impacts overall sustainability and vulnerability of coupled human-
environment systems over the long term (Biggs et al., 2015). This ensures tailored strategies
addressing root causes rather than symptoms alone.
Resilience Metrics and Scenario Analysis
In order to monitor changes in resilience over time and evaluate strategy options, relevant
metrics need to be tracked along with narratives. A range of potential metrics proposed in
literature aim to quantify different dimensions of resilience thinking (Rodriguez-Labajos et
al., 2019):
- Exposure/Vulnerability metrics measure risks/sensitivity from stresses based on
characteristics like asset concentration, dependency on single markets etc.
- Buffering capacity metrics indicate ability to withstand disturbance, quantified through
metrics of reserves, substitutability, redundancy etc.
- Adaptive capacity metrics focus on learning, flexibility, innovation to enable
environmental/social adjustment.
- Transformability metrics evaluate potential and governance conditions for major regime
shifts if faced with large perturbations.
Metrics need to be tailored to specific organizational and system contexts. Multiple leading
sustainability indicators should complement quantified measures in resilience reports (Folke,
2006). Scenario analysis remains critical to evaluate diverse outcomes under alternative
plausible assumptions (Biggs et al., 2015). Sensitivity analysis of metrics under shifting
conditions further enhances robustness.
Metrics help quantify resilience dimensions, benchmark performance longitudinally and
inform strategic priorities. Scenario techniques allow evaluating how choices made today
may impact long term resilience and sustainability of human-environment systems in a
changing, uncertain future.
Barriers and Challenges to Implementation
While the case for integrating resilience thinking into accounting is strong conceptually,
several practical challenges exist in real world implementation:
Data and measurement challenges: Resilience attributes are complex and multi-dimensional,
posing difficulties in consistent measurement. Lack of long term historical data on some
capitals like ecosystems further complicates benchmarking.
Conflicts with shareholders’ short term interests: Resilience focus on long term viability may
conflict with pressures of quarterly reporting and short term profit maximization mindsets.
Lack of definitional clarity: Key resilience concepts like adaptability and transformability
remain open to interpretation, posing difficulties in standardizing metrics and criteria.
Trade-offs with other attributes: Prioritizing resilience sometimes involves short term costs
affecting metrics of productivity or efficiency that markets currently value more.
Static standards and mindsets: Changing entrenched accounting standards and moving away
from assumptions of predictability involves major reform challenges within the regulatory
environment.
Implementation requires substantive changes across accounting standards, business school
education, financial/legal practices and regulatory/policy frameworks that currently
emphasize stability over dynamism. Piloting initiatives, demonstration projects and
stakeholder engagement will be important to gradually build momentum. Continued refining
of conceptual frameworks is also imperative.
Recommendations and Conclusion
Mainstreaming resilience in accounting and mainstream finance requires sustained, multi-
pronged efforts across research, policy, business and civil society over the long term. Some
recommendations include:
- Pilot resilience reporting initiatives within frontrunner organizations to iteratively refine
accounting practices
- Stakeholder engagement forums to build consensus around core resilience concepts,
metrics, narratives
- Educational reform within accounting, finance and business schools to incorporate
resilience thinking
- New financial products/instruments incentivizing long term stability over quarterly returns
- Revision of accounting standards/guidelines by national/international bodies to include
resilience attributes
- Policy measures to internalize social and environmental costs, make markets price long term
risks better
- Business strategies factoring in dependencies between different capitals and alternative
futures
While challenges remain, building resilience into accounting is crucial for transparent
evaluation and strengthening long term viability of linked human and natural systems. Small-
scale pilots can catalyze gradual mindset shifts by demonstrating practical benefits. with
sustained efforts across multiple domains, resilience accounting can revamp practices to
handle complex realities of the 21st century.
There is an increasing realization that the current system of financial accounting and
reporting is inadequate for handling risks and uncertainties posed by complex socio-
ecological systems. Traditional accounting standards are built on simplistic assumptions of
stability, predictability and controllability which do not reflect the dynamics and complexity
of real-world systems (Bebbington et al., 2014). This has led to calls for integrating concepts
from resilience theory into accounting in order to make financial statements and decision-
making more robust to surprises and uncertainty (Franks, 2012; Fujihara & Kazmierczak,
2017).
Resilience, in its simplest terms, refers to the ability of a system to withstand disturbances
and reorganize itself while undergoing change so as to still retain essentially the same
function, structure, identity and feedbacks (Walker et al., 2004). Applying resilience concepts
to accounting would require accounting for nonlinear dynamics, thresholds, uncertainty and
system-level interdependencies which traditional accounting has so far struggled with. A
resilience-based approach could help make accounting standards and financial reports more
robust to shocks and enable anticipatory decision making.
This paper argues for the need to integrate resilience theory more explicitly into accounting
standards, financial reporting and strategic decision making processes. It outlines some of the
key elements that need to be incorporated based on insights from resilience thinking. The
paper is organized as follows:
- Resilience theory and its relevance for accounting
- Key elements of resilience accounting
- Stocks and flows accounting for dynamic complexity
- Thresholds, tipping points and uncertainty accounting
- System-level interdependencies and feedback loops
- Resilience metrics and scenario analysis
- Barriers and challenges to implementation
- Recommendations and conclusions
Resilience Theory and its Relevance for Accounting
Traditional accounting is based on basic assumptions of system predictability, controllability
and rational expectations (Bebbington et al., 2014). However, real world socio-ecological
systems display dynamic complexity arising from thresholds, feedbacks, interlinkages and
evolutionary unpredictability (Folke, 2006). Resilience theory provides an alternative
conceptual framework for understanding such complex adaptive systems.
Key insights from resilience thinking relevant for accounting include (Franks, 2012; Fujihara
& Kazmierczak, 2017):
- Recognition of nonlinear change, feedbacks and thresholds rather than linear causal
relationships assumed in accounting standards
- Emphasis on dynamic stability, adaptability and transformability rather than static
optimization or predictions of growth/decline
- Accounting for uncertainty arising endogenously from complex system structures and
dynamics rather than exogenous risks and uncertainties alone
- Viewing social and ecological systems as coupled rather than independent domains seen in
financial reports
- Focusing on sustaining key ecosystem services and functions rather than single-attribute
optimization of economic outputs
- Evaluating system-level impacts and trade-offs rather than impacts of individual actors in
isolation
- Adopting an anticipatory rather than retrospective approach to decision making
These insights highlight the limitations of traditional accounting frameworks for
understanding and managing resilience of socio-ecological systems. Integration of resilience
thinking can help make accounting standards, financial reports and business decisions more
robust to uncertainty and adaptive to change.
Key Elements of Resilience Accounting
Based on the principles of resilience theory, some of the key elements that need to be
incorporated in accounting standards and practices include (Bebbington et al., 2014; Franks,
2012):
Stocks and Flows Accounting for Dynamic Complexity
- Tracking changes in critical capital stocks (natural, social, physical, human etc.) over time
rather than flows alone
- Distinguishing regenerative from non-regenerative flows and setting thresholds on
consumption/depletion of different stocks
- Assessing interlinkages and trade-offs between different types of capital stocks
- Valuing ecosystem services from natural capital using revised valuation approaches
Thresholds, Tipping Points and Uncertainty Accounting
- Identifying potential thresholds and tipping points in social-ecological system dynamics
- Assessing tail risks and impacts of low probability high consequence events
- Employing scenario-based approaches and stress testing rather than single forecasts
- Accounting for unpredictable ecological surprises and ‘unknown unknowns’
- Disclosing uncertainties explicitly rather than presenting definitive predictions
System-level Interdependencies and Feedback Loops
- Mapping relationships, feedbacks and interdependencies between different actors/sectors
- Evaluating cross-scale and cross-sector impacts of organizational activities and strategies
- Highlighting reinforcing and balancing feedback loops that can amplify or dampen impacts
- Assessing vulnerability/exposure of supply chains to systemic disruptions and spill-overs
Resilience Metrics and Scenario Analysis
- Developing metrics to measure an entity’s exposure to risks, buffering capacity, adaptive
capacity, transformation potential etc.
- Linking financial performance metrics to sustainability of critical capital stocks over time
- Using scenario analysis and modelling to evaluate resilience under different plausible
futures
- Undertaking regular stress testing and contingency planning exercises
These elements aim to overcome the limitations of traditional accounting by explicitly
accounting for dynamic complexity, uncertainty and system-level interconnectedness
inherent to socio-ecological domains. Integrating them can help make accounting standards,
reports and decisions more robust.
Stocks and Flows Accounting for Dynamic Complexity
Traditional accounting focusses primarily on tracking financial and physical flows over
specific time periods through income statements, cash flow statements etc. However, it pays
little attention to changes in the underlying asset bases or critical capital stocks that generate
these flows. This neglects the dynamic complexity arising from interlinkages between
different asset classes and nonlinear feedbacks between their rates of depletion/renewal over
time (Bebbington et al., 2014).
A stocks and flows based resilience accounting would require clearly identifying and
monitoring changes in all important capital stocks - manufactured/produced capital (tools,
infrastructure etc.), natural capital (resources, ecosystems), human capital (skills, health) and
social capital (institutions, relationships) (UN, 2014). It would recognize the differences
between renewable and non-renewable resource endowments, regenerative and linear
material flows, and track how depletion/replenishment of different stocks impact each other
(Franks, 2012).
For example, depletion of groundwater stocks might initially increase crop yields and profits.
But reduced natural capital stock can undermine long term replenishment of aquifers
affecting future water security and crop productivity. Such dynamics and trade-offs between
different stocks over time are difficult to capture using flow-based accounting alone.
Resilience-based accounting would value and report ecological assets using new frameworks
like Natural Capital Protocols that assign economic value to ecosystem services and factors
like biodiversity and carbon sequestration (Natural Capital Coalition, 2016). It would track
changes in stocks of other intangible capitals like skills, knowledge and partnerships critical
for long term viability. By clearly distinguishing between consumption of renewable vs. non
renewable stocks, entities can ensure critical asset bases are maintained to ensure future
resilience and long term value creation (Fujihara & Kazmierczak, 2017).
Thresholds, Tipping Points and Uncertainty Accounting
Traditional financial reports are based on assumptions of known probabilities and linear
extrapolations of past trends. However, real world systems display thresholds, nonlinear
change and potential for low probability high impact events. Concepts like ‘unknown
unknowns’ challenge modeling predictability. Resilience accounting must account for such
dynamic complexities and uncertainties.
Integrating resilience involves identifying potential tipping points where small perturbations
cause disproportionate system changes (Biggs et al., 2015). Early warning signs and
indicators around critical thresholds should be monitored through techniques like Bayesian
belief networks (Fath et al., 2015). Scenario methods going beyond single predictions can be
used to understand impacts of plausible, but low probability events.
Explicit disclosure of uncertainties arising from internal system dynamics and lack of
historical precedence is needed rather than presenting reports as definitive (Bebbington et al.,
2014). Sensitivity analysis should evaluate resilience under changing conditions.
Contingency planning and adaptive strategies rather than optimization under stable
assumptions become important (Franks, 2012).
Stress testing methods involve modeling responses to severe but plausible shocks to evaluate
robustness of different strategies (Caballero et al., 2008). Scenario techniques enable
understanding system-level impacts of cross-scale interactions and spill-overs across
dependent domains, which are hard to anticipate using past correlations alone (Biggs et al.,
2015). Risk registries should record and rank vulnerabilities including at supply chain and
portfolio levels (Franks, 2012).
Such enhancements can enable resilience-based reporting and strategy to incorporate
thresholds, contingencies and uncertainties in a more transparent manner than traditional
single forecast approaches. This promotes agility to respond to surprises in a changing risk
landscape.
System-level Interdependencies and Feedback Loops
While financial statements of individual entities provide useful information, they fail to
capture cross-scale interdependencies that influence systemic resilience. Traditional
accounting treats different sectors as independent domains, but real world systems display
complex interactions, feedbacks and spillovers across scales (Bebbington et al., 2014).
Resilience accounting attempts to map relationships and feedbacks between stakeholders,
sectors and scales to understand cross- impacts of organization-level activities. It evaluates
how actions of individual entities transmit impacts onto the broader social-ecological system
and vice versa through mechanisms like feedbacks, lock-ins and path dependencies arising
from complementary assets/investments (Perrings, 2006).
For example, unsustainable agricultural practices like groundwater depletion can compromise
water security across a region by altering hydrological feedbacks over the long term. Loss of
biodiversity across landscapes impacts future resilience of individual farms through reduced
pollination services. Failure of infrastructure during extreme events like flooding might arise
from maladaptive development across broader regions.
By mapping cross-scale dependencies and visualizing potential reinforcing and balancing
feedback loops, resilience reports aim to provide a system-level perspective on how actions
of individual entities impacts overall sustainability and vulnerability of coupled human-
environment systems over the long term (Biggs et al., 2015). This ensures tailored strategies
addressing root causes rather than symptoms alone.
Resilience Metrics and Scenario Analysis
In order to monitor changes in resilience over time and evaluate strategy options, relevant
metrics need to be tracked along with narratives. A range of potential metrics proposed in
literature aim to quantify different dimensions of resilience thinking (Rodriguez-Labajos et
al., 2019):
- Exposure/Vulnerability metrics measure risks/sensitivity from stresses based on
characteristics like asset concentration, dependency on single markets etc.
- Buffering capacity metrics indicate ability to withstand disturbance, quantified through
metrics of reserves, substitutability, redundancy etc.
- Adaptive capacity metrics focus on learning, flexibility, innovation to enable
environmental/social adjustment.
- Transformability metrics evaluate potential and governance conditions for major regime
shifts if faced with large perturbations.
Metrics need to be tailored to specific organizational and system contexts. Multiple leading
sustainability indicators should complement quantified measures in resilience reports (Folke,
2006). Scenario analysis remains critical to evaluate diverse outcomes under alternative
plausible assumptions (Biggs et al., 2015). Sensitivity analysis of metrics under shifting
conditions further enhances robustness.
Metrics help quantify resilience dimensions, benchmark performance longitudinally and
inform strategic priorities. Scenario techniques allow evaluating how choices made today
may impact long term resilience and sustainability of human-environment systems in a
changing, uncertain future.
Barriers and Challenges to Implementation
While the case for integrating resilience thinking into accounting is strong conceptually,
several practical challenges exist in real world implementation:
Data and measurement challenges: Resilience attributes are complex and multi-dimensional,
posing difficulties in consistent measurement. Lack of long term historical data on some
capitals like ecosystems further complicates benchmarking.
Conflicts with shareholders’ short term interests: Resilience focus on long term viability may
conflict with pressures of quarterly reporting and short term profit maximization mindsets.
Lack of definitional clarity: Key resilience concepts like adaptability and transformability
remain open to interpretation, posing difficulties in standardizing metrics and criteria.
Trade-offs with other attributes: Prioritizing resilience sometimes involves short term costs
affecting metrics of productivity or efficiency that markets currently value more.
Static standards and mindsets: Changing entrenched accounting standards and moving away
from assumptions of predictability involves major reform challenges within the regulatory
environment.
Implementation requires substantive changes across accounting standards, business school
education, financial/legal practices and regulatory/policy frameworks that currently
emphasize stability over dynamism. Piloting initiatives, demonstration projects and
stakeholder engagement will be important to gradually build momentum. Continued refining
of conceptual frameworks is also imperative.
Recommendations and Conclusion
Mainstreaming resilience in accounting and mainstream finance requires sustained, multi-
pronged efforts across research, policy, business and civil society over the long term. Some
recommendations include:
- Pilot resilience reporting initiatives within frontrunner organizations to iteratively refine
accounting practices
- Stakeholder engagement forums to build consensus around core resilience concepts,
metrics, narratives
- Educational reform within accounting, finance and business schools to incorporate
resilience thinking
- New financial products/instruments incentivizing long term stability over quarterly returns
- Revision of accounting standards/guidelines by national/international bodies to include
resilience attributes
- Policy measures to internalize social and environmental costs, make markets price long term
risks better
- Business strategies factoring in dependencies between different capitals and alternative
futures
While challenges remain, building resilience into accounting is crucial for transparent
evaluation and strengthening long term viability of linked human and natural systems. Small-
scale pilots can catalyze gradual mindset shifts by demonstrating practical benefits. with
sustained efforts across multiple domains, resilience accounting can revamp practices to
handle complex realities of the 21st century.
There is an increasing realization that the current system of financial accounting and
reporting is inadequate for handling risks and uncertainties posed by complex socio-
ecological systems. Traditional accounting standards are built on simplistic assumptions of
stability, predictability and controllability which do not reflect the dynamics and complexity
of real-world systems (Bebbington et al., 2014). This has led to calls for integrating concepts
from resilience theory into accounting in order to make financial statements and decision-
making more robust to surprises and uncertainty (Franks, 2012; Fujihara & Kazmierczak,
2017).
Resilience, in its simplest terms, refers to the ability of a system to withstand disturbances
and reorganize itself while undergoing change so as to still retain essentially the same
function, structure, identity and feedbacks (Walker et al., 2004). Applying resilience concepts
to accounting would require accounting for nonlinear dynamics, thresholds, uncertainty and
system-level interdependencies which traditional accounting has so far struggled with. A
resilience-based approach could help make accounting standards and financial reports more
robust to shocks and enable anticipatory decision making.
This paper argues for the need to integrate resilience theory more explicitly into accounting
standards, financial reporting and strategic decision making processes. It outlines some of the
key elements that need to be incorporated based on insights from resilience thinking. The
paper is organized as follows:
- Resilience theory and its relevance for accounting
- Key elements of resilience accounting
- Stocks and flows accounting for dynamic complexity
- Thresholds, tipping points and uncertainty accounting
- System-level interdependencies and feedback loops
- Resilience metrics and scenario analysis
- Barriers and challenges to implementation
- Recommendations and conclusions
Resilience Theory and its Relevance for Accounting
Traditional accounting is based on basic assumptions of system predictability, controllability
and rational expectations (Bebbington et al., 2014). However, real world socio-ecological
systems display dynamic complexity arising from thresholds, feedbacks, interlinkages and
evolutionary unpredictability (Folke, 2006). Resilience theory provides an alternative
conceptual framework for understanding such complex adaptive systems.
Key insights from resilience thinking relevant for accounting include (Franks, 2012; Fujihara
& Kazmierczak, 2017):
- Recognition of nonlinear change, feedbacks and thresholds rather than linear causal
relationships assumed in accounting standards
- Emphasis on dynamic stability, adaptability and transformability rather than static
optimization or predictions of growth/decline
- Accounting for uncertainty arising endogenously from complex system structures and
dynamics rather than exogenous risks and uncertainties alone
- Viewing social and ecological systems as coupled rather than independent domains seen in
financial reports
- Focusing on sustaining key ecosystem services and functions rather than single-attribute
optimization of economic outputs
- Evaluating system-level impacts and trade-offs rather than impacts of individual actors in
isolation
- Adopting an anticipatory rather than retrospective approach to decision making
These insights highlight the limitations of traditional accounting frameworks for
understanding and managing resilience of socio-ecological systems. Integration of resilience
thinking can help make accounting standards, financial reports and business decisions more
robust to uncertainty and adaptive to change.
Key Elements of Resilience Accounting
Based on the principles of resilience theory, some of the key elements that need to be
incorporated in accounting standards and practices include (Bebbington et al., 2014; Franks,
2012):
Stocks and Flows Accounting for Dynamic Complexity
- Tracking changes in critical capital stocks (natural, social, physical, human etc.) over time
rather than flows alone
- Distinguishing regenerative from non-regenerative flows and setting thresholds on
consumption/depletion of different stocks
- Assessing interlinkages and trade-offs between different types of capital stocks
- Valuing ecosystem services from natural capital using revised valuation approaches
Thresholds, Tipping Points and Uncertainty Accounting
- Identifying potential thresholds and tipping points in social-ecological system dynamics
- Assessing tail risks and impacts of low probability high consequence events
- Employing scenario-based approaches and stress testing rather than single forecasts
- Accounting for unpredictable ecological surprises and ‘unknown unknowns’
- Disclosing uncertainties explicitly rather than presenting definitive predictions
System-level Interdependencies and Feedback Loops
- Mapping relationships, feedbacks and interdependencies between different actors/sectors
- Evaluating cross-scale and cross-sector impacts of organizational activities and strategies
- Highlighting reinforcing and balancing feedback loops that can amplify or dampen impacts
- Assessing vulnerability/exposure of supply chains to systemic disruptions and spill-overs
Resilience Metrics and Scenario Analysis
- Developing metrics to measure an entity’s exposure to risks, buffering capacity, adaptive
capacity, transformation potential etc.
- Linking financial performance metrics to sustainability of critical capital stocks over time
- Using scenario analysis and modelling to evaluate resilience under different plausible
futures
- Undertaking regular stress testing and contingency planning exercises
These elements aim to overcome the limitations of traditional accounting by explicitly
accounting for dynamic complexity, uncertainty and system-level interconnectedness
inherent to socio-ecological domains. Integrating them can help make accounting standards,
reports and decisions more robust.
Stocks and Flows Accounting for Dynamic Complexity
Traditional accounting focusses primarily on tracking financial and physical flows over
specific time periods through income statements, cash flow statements etc. However, it pays
little attention to changes in the underlying asset bases or critical capital stocks that generate
these flows. This neglects the dynamic complexity arising from interlinkages between
different asset classes and nonlinear feedbacks between their rates of depletion/renewal over
time (Bebbington et al., 2014).
A stocks and flows based resilience accounting would require clearly identifying and
monitoring changes in all important capital stocks - manufactured/produced capital (tools,
infrastructure etc.), natural capital (resources, ecosystems), human capital (skills, health) and
social capital (institutions, relationships) (UN, 2014). It would recognize the differences
between renewable and non-renewable resource endowments, regenerative and linear
material flows, and track how depletion/replenishment of different stocks impact each other
(Franks, 2012).
For example, depletion of groundwater stocks might initially increase crop yields and profits.
But reduced natural capital stock can undermine long term replenishment of aquifers
affecting future water security and crop productivity. Such dynamics and trade-offs between
different stocks over time are difficult to capture using flow-based accounting alone.
Resilience-based accounting would value and report ecological assets using new frameworks
like Natural Capital Protocols that assign economic value to ecosystem services and factors
like biodiversity and carbon sequestration (Natural Capital Coalition, 2016). It would track
changes in stocks of other intangible capitals like skills, knowledge and partnerships critical
for long term viability. By clearly distinguishing between consumption of renewable vs. non
renewable stocks, entities can ensure critical asset bases are maintained to ensure future
resilience and long term value creation (Fujihara & Kazmierczak, 2017).
Thresholds, Tipping Points and Uncertainty Accounting
Traditional financial reports are based on assumptions of known probabilities and linear
extrapolations of past trends. However, real world systems display thresholds, nonlinear
change and potential for low probability high impact events. Concepts like ‘unknown
unknowns’ challenge modeling predictability. Resilience accounting must account for such
dynamic complexities and uncertainties.
Integrating resilience involves identifying potential tipping points where small perturbations
cause disproportionate system changes (Biggs et al., 2015). Early warning signs and
indicators around critical thresholds should be monitored through techniques like Bayesian
belief networks (Fath et al., 2015). Scenario methods going beyond single predictions can be
used to understand impacts of plausible, but low probability events.
Explicit disclosure of uncertainties arising from internal system dynamics and lack of
historical precedence is needed rather than presenting reports as definitive (Bebbington et al.,
2014). Sensitivity analysis should evaluate resilience under changing conditions.
Contingency planning and adaptive strategies rather than optimization under stable
assumptions become important (Franks, 2012).
Stress testing methods involve modeling responses to severe but plausible shocks to evaluate
robustness of different strategies (Caballero et al., 2008). Scenario techniques enable
understanding system-level impacts of cross-scale interactions and spill-overs across
dependent domains, which are hard to anticipate using past correlations alone (Biggs et al.,
2015). Risk registries should record and rank vulnerabilities including at supply chain and
portfolio levels (Franks, 2012).
Such enhancements can enable resilience-based reporting and strategy to incorporate
thresholds, contingencies and uncertainties in a more transparent manner than traditional
single forecast approaches. This promotes agility to respond to surprises in a changing risk
landscape.
System-level Interdependencies and Feedback Loops
While financial statements of individual entities provide useful information, they fail to
capture cross-scale interdependencies that influence systemic resilience. Traditional
accounting treats different sectors as independent domains, but real world systems display
complex interactions, feedbacks and spillovers across scales (Bebbington et al., 2014).
Resilience accounting attempts to map relationships and feedbacks between stakeholders,
sectors and scales to understand cross- impacts of organization-level activities. It evaluates
how actions of individual entities transmit impacts onto the broader social-ecological system
and vice versa through mechanisms like feedbacks, lock-ins and path dependencies arising
from complementary assets/investments (Perrings, 2006).
For example, unsustainable agricultural practices like groundwater depletion can compromise
water security across a region by altering hydrological feedbacks over the long term. Loss of
biodiversity across landscapes impacts future resilience of individual farms through reduced
pollination services. Failure of infrastructure during extreme events like flooding might arise
from maladaptive development across broader regions.
By mapping cross-scale dependencies and visualizing potential reinforcing and balancing
feedback loops, resilience reports aim to provide a system-level perspective on how actions
of individual entities impacts overall sustainability and vulnerability of coupled human-
environment systems over the long term (Biggs et al., 2015). This ensures tailored strategies
addressing root causes rather than symptoms alone.
Resilience Metrics and Scenario Analysis
In order to monitor changes in resilience over time and evaluate strategy options, relevant
metrics need to be tracked along with narratives. A range of potential metrics proposed in
literature aim to quantify different dimensions of resilience thinking (Rodriguez-Labajos et
al., 2019):
- Exposure/Vulnerability metrics measure risks/sensitivity from stresses based on
characteristics like asset concentration, dependency on single markets etc.
- Buffering capacity metrics indicate ability to withstand disturbance, quantified through
metrics of reserves, substitutability, redundancy etc.
- Adaptive capacity metrics focus on learning, flexibility, innovation to enable
environmental/social adjustment.
- Transformability metrics evaluate potential and governance conditions for major regime
shifts if faced with large perturbations.
Metrics need to be tailored to specific organizational and system contexts. Multiple leading
sustainability indicators should complement quantified measures in resilience reports (Folke,
2006). Scenario analysis remains critical to evaluate diverse outcomes under alternative
plausible assumptions (Biggs et al., 2015). Sensitivity analysis of metrics under shifting
conditions further enhances robustness.
Metrics help quantify resilience dimensions, benchmark performance longitudinally and
inform strategic priorities. Scenario techniques allow evaluating how choices made today
may impact long term resilience and sustainability of human-environment systems in a
changing, uncertain future.
Barriers and Challenges to Implementation
While the case for integrating resilience thinking into accounting is strong conceptually,
several practical challenges exist in real world implementation:
Data and measurement challenges: Resilience attributes are complex and multi-dimensional,
posing difficulties in consistent measurement. Lack of long term historical data on some
capitals like ecosystems further complicates benchmarking.
Conflicts with shareholders’ short term interests: Resilience focus on long term viability may
conflict with pressures of quarterly reporting and short term profit maximization mindsets.
Lack of definitional clarity: Key resilience concepts like adaptability and transformability
remain open to interpretation, posing difficulties in standardizing metrics and criteria.
Trade-offs with other attributes: Prioritizing resilience sometimes involves short term costs
affecting metrics of productivity or efficiency that markets currently value more.
Static standards and mindsets: Changing entrenched accounting standards and moving away
from assumptions of predictability involves major reform challenges within the regulatory
environment.
Implementation requires substantive changes across accounting standards, business school
education, financial/legal practices and regulatory/policy frameworks that currently
emphasize stability over dynamism. Piloting initiatives, demonstration projects and
stakeholder engagement will be important to gradually build momentum. Continued refining
of conceptual frameworks is also imperative.
Recommendations and Conclusion
Mainstreaming resilience in accounting and mainstream finance requires sustained, multi-
pronged efforts across research, policy, business and civil society over the long term. Some
recommendations include:
- Pilot resilience reporting initiatives within frontrunner organizations to iteratively refine
accounting practices
- Stakeholder engagement forums to build consensus around core resilience concepts,
metrics, narratives
- Educational reform within accounting, finance and business schools to incorporate
resilience thinking
- New financial products/instruments incentivizing long term stability over quarterly returns
- Revision of accounting standards/guidelines by national/international bodies to include
resilience attributes
- Policy measures to internalize social and environmental costs, make markets price long term
risks better
- Business strategies factoring in dependencies between different capitals and alternative
futures
While challenges remain, building resilience into accounting is crucial for transparent
evaluation and strengthening long term viability of linked human and natural systems. Small-
scale pilots can catalyze gradual mindset shifts by demonstrating practical benefits. with
sustained efforts across multiple domains, resilience accounting can revamp practices to
handle complex realities of the 21st century.
There is an increasing realization that the current system of financial accounting and
reporting is inadequate for handling risks and uncertainties posed by complex socio-
ecological systems. Traditional accounting standards are built on simplistic assumptions of
stability, predictability and controllability which do not reflect the dynamics and complexity
of real-world systems (Bebbington et al., 2014). This has led to calls for integrating concepts
from resilience theory into accounting in order to make financial statements and decision-
making more robust to surprises and uncertainty (Franks, 2012; Fujihara & Kazmierczak,
2017).
Resilience, in its simplest terms, refers to the ability of a system to withstand disturbances
and reorganize itself while undergoing change so as to still retain essentially the same
function, structure, identity and feedbacks (Walker et al., 2004). Applying resilience concepts
to accounting would require accounting for nonlinear dynamics, thresholds, uncertainty and
system-level interdependencies which traditional accounting has so far struggled with. A
resilience-based approach could help make accounting standards and financial reports more
robust to shocks and enable anticipatory decision making.
This paper argues for the need to integrate resilience theory more explicitly into accounting
standards, financial reporting and strategic decision making processes. It outlines some of the
key elements that need to be incorporated based on insights from resilience thinking. The
paper is organized as follows:
- Resilience theory and its relevance for accounting
- Key elements of resilience accounting
- Stocks and flows accounting for dynamic complexity
- Thresholds, tipping points and uncertainty accounting
- System-level interdependencies and feedback loops
- Resilience metrics and scenario analysis
- Barriers and challenges to implementation
- Recommendations and conclusions
Resilience Theory and its Relevance for Accounting
Traditional accounting is based on basic assumptions of system predictability, controllability
and rational expectations (Bebbington et al., 2014). However, real world socio-ecological
systems display dynamic complexity arising from thresholds, feedbacks, interlinkages and
evolutionary unpredictability (Folke, 2006). Resilience theory provides an alternative
conceptual framework for understanding such complex adaptive systems.
Key insights from resilience thinking relevant for accounting include (Franks, 2012; Fujihara
& Kazmierczak, 2017):
- Recognition of nonlinear change, feedbacks and thresholds rather than linear causal
relationships assumed in accounting standards
- Emphasis on dynamic stability, adaptability and transformability rather than static
optimization or predictions of growth/decline
- Accounting for uncertainty arising endogenously from complex system structures and
dynamics rather than exogenous risks and uncertainties alone
- Viewing social and ecological systems as coupled rather than independent domains seen in
financial reports
- Focusing on sustaining key ecosystem services and functions rather than single-attribute
optimization of economic outputs
- Evaluating system-level impacts and trade-offs rather than impacts of individual actors in
isolation
- Adopting an anticipatory rather than retrospective approach to decision making
These insights highlight the limitations of traditional accounting frameworks for
understanding and managing resilience of socio-ecological systems. Integration of resilience
thinking can help make accounting standards, financial reports and business decisions more
robust to uncertainty and adaptive to change.
Key Elements of Resilience Accounting
Based on the principles of resilience theory, some of the key elements that need to be
incorporated in accounting standards and practices include (Bebbington et al., 2014; Franks,
2012):
Stocks and Flows Accounting for Dynamic Complexity
- Tracking changes in critical capital stocks (natural, social, physical, human etc.) over time
rather than flows alone
- Distinguishing regenerative from non-regenerative flows and setting thresholds on
consumption/depletion of different stocks
- Assessing interlinkages and trade-offs between different types of capital stocks
- Valuing ecosystem services from natural capital using revised valuation approaches
Thresholds, Tipping Points and Uncertainty Accounting
- Identifying potential thresholds and tipping points in social-ecological system dynamics
- Assessing tail risks and impacts of low probability high consequence events
- Employing scenario-based approaches and stress testing rather than single forecasts
- Accounting for unpredictable ecological surprises and ‘unknown unknowns’
- Disclosing uncertainties explicitly rather than presenting definitive predictions
System-level Interdependencies and Feedback Loops
- Mapping relationships, feedbacks and interdependencies between different actors/sectors
- Evaluating cross-scale and cross-sector impacts of organizational activities and strategies
- Highlighting reinforcing and balancing feedback loops that can amplify or dampen impacts
- Assessing vulnerability/exposure of supply chains to systemic disruptions and spill-overs
Resilience Metrics and Scenario Analysis
- Developing metrics to measure an entity’s exposure to risks, buffering capacity, adaptive
capacity, transformation potential etc.
- Linking financial performance metrics to sustainability of critical capital stocks over time
- Using scenario analysis and modelling to evaluate resilience under different plausible
futures
- Undertaking regular stress testing and contingency planning exercises
These elements aim to overcome the limitations of traditional accounting by explicitly
accounting for dynamic complexity, uncertainty and system-level interconnectedness
inherent to socio-ecological domains. Integrating them can help make accounting standards,
reports and decisions more robust.
Stocks and Flows Accounting for Dynamic Complexity
Traditional accounting focusses primarily on tracking financial and physical flows over
specific time periods through income statements, cash flow statements etc. However, it pays
little attention to changes in the underlying asset bases or critical capital stocks that generate
these flows. This neglects the dynamic complexity arising from interlinkages between
different asset classes and nonlinear feedbacks between their rates of depletion/renewal over
time (Bebbington et al., 2014).
A stocks and flows based resilience accounting would require clearly identifying and
monitoring changes in all important capital stocks - manufactured/produced capital (tools,
infrastructure etc.), natural capital (resources, ecosystems), human capital (skills, health) and
social capital (institutions, relationships) (UN, 2014). It would recognize the differences
between renewable and non-renewable resource endowments, regenerative and linear
material flows, and track how depletion/replenishment of different stocks impact each other
(Franks, 2012).
For example, depletion of groundwater stocks might initially increase crop yields and profits.
But reduced natural capital stock can undermine long term replenishment of aquifers
affecting future water security and crop productivity. Such dynamics and trade-offs between
different stocks over time are difficult to capture using flow-based accounting alone.
Resilience-based accounting would value and report ecological assets using new frameworks
like Natural Capital Protocols that assign economic value to ecosystem services and factors
like biodiversity and carbon sequestration (Natural Capital Coalition, 2016). It would track
changes in stocks of other intangible capitals like skills, knowledge and partnerships critical
for long term viability. By clearly distinguishing between consumption of renewable vs. non
renewable stocks, entities can ensure critical asset bases are maintained to ensure future
resilience and long term value creation (Fujihara & Kazmierczak, 2017).
Thresholds, Tipping Points and Uncertainty Accounting
Traditional financial reports are based on assumptions of known probabilities and linear
extrapolations of past trends. However, real world systems display thresholds, nonlinear
change and potential for low probability high impact events. Concepts like ‘unknown
unknowns’ challenge modeling predictability. Resilience accounting must account for such
dynamic complexities and uncertainties.
Integrating resilience involves identifying potential tipping points where small perturbations
cause disproportionate system changes (Biggs et al., 2015). Early warning signs and
indicators around critical thresholds should be monitored through techniques like Bayesian
belief networks (Fath et al., 2015). Scenario methods going beyond single predictions can be
used to understand impacts of plausible, but low probability events.
Explicit disclosure of uncertainties arising from internal system dynamics and lack of
historical precedence is needed rather than presenting reports as definitive (Bebbington et al.,
2014). Sensitivity analysis should evaluate resilience under changing conditions.
Contingency planning and adaptive strategies rather than optimization under stable
assumptions become important (Franks, 2012).
Stress testing methods involve modeling responses to severe but plausible shocks to evaluate
robustness of different strategies (Caballero et al., 2008). Scenario techniques enable
understanding system-level impacts of cross-scale interactions and spill-overs across
dependent domains, which are hard to anticipate using past correlations alone (Biggs et al.,
2015). Risk registries should record and rank vulnerabilities including at supply chain and
portfolio levels (Franks, 2012).
Such enhancements can enable resilience-based reporting and strategy to incorporate
thresholds, contingencies and uncertainties in a more transparent manner than traditional
single forecast approaches. This promotes agility to respond to surprises in a changing risk
landscape.
System-level Interdependencies and Feedback Loops
While financial statements of individual entities provide useful information, they fail to
capture cross-scale interdependencies that influence systemic resilience. Traditional
accounting treats different sectors as independent domains, but real world systems display
complex interactions, feedbacks and spillovers across scales (Bebbington et al., 2014).
Resilience accounting attempts to map relationships and feedbacks between stakeholders,
sectors and scales to understand cross- impacts of organization-level activities. It evaluates
how actions of individual entities transmit impacts onto the broader social-ecological system
and vice versa through mechanisms like feedbacks, lock-ins and path dependencies arising
from complementary assets/investments (Perrings, 2006).
For example, unsustainable agricultural practices like groundwater depletion can compromise
water security across a region by altering hydrological feedbacks over the long term. Loss of
biodiversity across landscapes impacts future resilience of individual farms through reduced
pollination services. Failure of infrastructure during extreme events like flooding might arise
from maladaptive development across broader regions.
By mapping cross-scale dependencies and visualizing potential reinforcing and balancing
feedback loops, resilience reports aim to provide a system-level perspective on how actions
of individual entities impacts overall sustainability and vulnerability of coupled human-
environment systems over the long term (Biggs et al., 2015). This ensures tailored strategies
addressing root causes rather than symptoms alone.
Resilience Metrics and Scenario Analysis
In order to monitor changes in resilience over time and evaluate strategy options, relevant
metrics need to be tracked along with narratives. A range of potential metrics proposed in
literature aim to quantify different dimensions of resilience thinking (Rodriguez-Labajos et
al., 2019):
- Exposure/Vulnerability metrics measure risks/sensitivity from stresses based on
characteristics like asset concentration, dependency on single markets etc.
- Buffering capacity metrics indicate ability to withstand disturbance, quantified through
metrics of reserves, substitutability, redundancy etc.
- Adaptive capacity metrics focus on learning, flexibility, innovation to enable
environmental/social adjustment.
- Transformability metrics evaluate potential and governance conditions for major regime
shifts if faced with large perturbations.
Metrics need to be tailored to specific organizational and system contexts. Multiple leading
sustainability indicators should complement quantified measures in resilience reports (Folke,
2006). Scenario analysis remains critical to evaluate diverse outcomes under alternative
plausible assumptions (Biggs et al., 2015). Sensitivity analysis of metrics under shifting
conditions further enhances robustness.
Metrics help quantify resilience dimensions, benchmark performance longitudinally and
inform strategic priorities. Scenario techniques allow evaluating how choices made today
may impact long term resilience and sustainability of human-environment systems in a
changing, uncertain future.
Barriers and Challenges to Implementation
While the case for integrating resilience thinking into accounting is strong conceptually,
several practical challenges exist in real world implementation:
Data and measurement challenges: Resilience attributes are complex and multi-dimensional,
posing difficulties in consistent measurement. Lack of long term historical data on some
capitals like ecosystems further complicates benchmarking.
Conflicts with shareholders’ short term interests: Resilience focus on long term viability may
conflict with pressures of quarterly reporting and short term profit maximization mindsets.
Lack of definitional clarity: Key resilience concepts like adaptability and transformability
remain open to interpretation, posing difficulties in standardizing metrics and criteria.
Trade-offs with other attributes: Prioritizing resilience sometimes involves short term costs
affecting metrics of productivity or efficiency that markets currently value more.
Static standards and mindsets: Changing entrenched accounting standards and moving away
from assumptions of predictability involves major reform challenges within the regulatory
environment.
Implementation requires substantive changes across accounting standards, business school
education, financial/legal practices and regulatory/policy frameworks that currently
emphasize stability over dynamism. Piloting initiatives, demonstration projects and
stakeholder engagement will be important to gradually build momentum. Continued refining
of conceptual frameworks is also imperative.
Recommendations and Conclusion
Mainstreaming resilience in accounting and mainstream finance requires sustained, multi-
pronged efforts across research, policy, business and civil society over the long term. Some
recommendations include:
- Pilot resilience reporting initiatives within frontrunner organizations to iteratively refine
accounting practices
- Stakeholder engagement forums to build consensus around core resilience concepts,
metrics, narratives
- Educational reform within accounting, finance and business schools to incorporate
resilience thinking
- New financial products/instruments incentivizing long term stability over quarterly returns
- Revision of accounting standards/guidelines by national/international bodies to include
resilience attributes
- Policy measures to internalize social and environmental costs, make markets price long term
risks better
- Business strategies factoring in dependencies between different capitals and alternative
futures
While challenges remain, building resilience into accounting is crucial for transparent
evaluation and strengthening long term viability of linked human and natural systems. Small-
scale pilots can catalyze gradual mindset shifts by demonstrating practical benefits. with
sustained efforts across multiple domains, resilience accounting can revamp practices to
handle complex realities of the 21st century.
There is an increasing realization that the current system of financial accounting and
reporting is inadequate for handling risks and uncertainties posed by complex socio-
ecological systems. Traditional accounting standards are built on simplistic assumptions of
stability, predictability and controllability which do not reflect the dynamics and complexity
of real-world systems (Bebbington et al., 2014). This has led to calls for integrating concepts
from resilience theory into accounting in order to make financial statements and decision-
making more robust to surprises and uncertainty (Franks, 2012; Fujihara & Kazmierczak,
2017).
Resilience, in its simplest terms, refers to the ability of a system to withstand disturbances
and reorganize itself while undergoing change so as to still retain essentially the same
function, structure, identity and feedbacks (Walker et al., 2004). Applying resilience concepts
to accounting would require accounting for nonlinear dynamics, thresholds, uncertainty and
system-level interdependencies which traditional accounting has so far struggled with. A
resilience-based approach could help make accounting standards and financial reports more
robust to shocks and enable anticipatory decision making.
This paper argues for the need to integrate resilience theory more explicitly into accounting
standards, financial reporting and strategic decision making processes. It outlines some of the
key elements that need to be incorporated based on insights from resilience thinking. The
paper is organized as follows:
- Resilience theory and its relevance for accounting
- Key elements of resilience accounting
- Stocks and flows accounting for dynamic complexity
- Thresholds, tipping points and uncertainty accounting
- System-level interdependencies and feedback loops
- Resilience metrics and scenario analysis
- Barriers and challenges to implementation
- Recommendations and conclusions
Resilience Theory and its Relevance for Accounting
Traditional accounting is based on basic assumptions of system predictability, controllability
and rational expectations (Bebbington et al., 2014). However, real world socio-ecological
systems display dynamic complexity arising from thresholds, feedbacks, interlinkages and
evolutionary unpredictability (Folke, 2006). Resilience theory provides an alternative
conceptual framework for understanding such complex adaptive systems.
Key insights from resilience thinking relevant for accounting include (Franks, 2012; Fujihara
& Kazmierczak, 2017):
- Recognition of nonlinear change, feedbacks and thresholds rather than linear causal
relationships assumed in accounting standards
- Emphasis on dynamic stability, adaptability and transformability rather than static
optimization or predictions of growth/decline
- Accounting for uncertainty arising endogenously from complex system structures and
dynamics rather than exogenous risks and uncertainties alone
- Viewing social and ecological systems as coupled rather than independent domains seen in
financial reports
- Focusing on sustaining key ecosystem services and functions rather than single-attribute
optimization of economic outputs
- Evaluating system-level impacts and trade-offs rather than impacts of individual actors in
isolation
- Adopting an anticipatory rather than retrospective approach to decision making
These insights highlight the limitations of traditional accounting frameworks for
understanding and managing resilience of socio-ecological systems. Integration of resilience
thinking can help make accounting standards, financial reports and business decisions more
robust to uncertainty and adaptive to change.
Key Elements of Resilience Accounting
Based on the principles of resilience theory, some of the key elements that need to be
incorporated in accounting standards and practices include (Bebbington et al., 2014; Franks,
2012):
Stocks and Flows Accounting for Dynamic Complexity
- Tracking changes in critical capital stocks (natural, social, physical, human etc.) over time
rather than flows alone
- Distinguishing regenerative from non-regenerative flows and setting thresholds on
consumption/depletion of different stocks
- Assessing interlinkages and trade-offs between different types of capital stocks
- Valuing ecosystem services from natural capital using revised valuation approaches
Thresholds, Tipping Points and Uncertainty Accounting
- Identifying potential thresholds and tipping points in social-ecological system dynamics
- Assessing tail risks and impacts of low probability high consequence events
- Employing scenario-based approaches and stress testing rather than single forecasts
- Accounting for unpredictable ecological surprises and ‘unknown unknowns’
- Disclosing uncertainties explicitly rather than presenting definitive predictions
System-level Interdependencies and Feedback Loops
- Mapping relationships, feedbacks and interdependencies between different actors/sectors
- Evaluating cross-scale and cross-sector impacts of organizational activities and strategies
- Highlighting reinforcing and balancing feedback loops that can amplify or dampen impacts
- Assessing vulnerability/exposure of supply chains to systemic disruptions and spill-overs
Resilience Metrics and Scenario Analysis
- Developing metrics to measure an entity’s exposure to risks, buffering capacity, adaptive
capacity, transformation potential etc.
- Linking financial performance metrics to sustainability of critical capital stocks over time
- Using scenario analysis and modelling to evaluate resilience under different plausible
futures
- Undertaking regular stress testing and contingency planning exercises
These elements aim to overcome the limitations of traditional accounting by explicitly
accounting for dynamic complexity, uncertainty and system-level interconnectedness
inherent to socio-ecological domains. Integrating them can help make accounting standards,
reports and decisions more robust.
Stocks and Flows Accounting for Dynamic Complexity
Traditional accounting focusses primarily on tracking financial and physical flows over
specific time periods through income statements, cash flow statements etc. However, it pays
little attention to changes in the underlying asset bases or critical capital stocks that generate
these flows. This neglects the dynamic complexity arising from interlinkages between
different asset classes and nonlinear feedbacks between their rates of depletion/renewal over
time (Bebbington et al., 2014).
A stocks and flows based resilience accounting would require clearly identifying and
monitoring changes in all important capital stocks - manufactured/produced capital (tools,
infrastructure etc.), natural capital (resources, ecosystems), human capital (skills, health) and
social capital (institutions, relationships) (UN, 2014). It would recognize the differences
between renewable and non-renewable resource endowments, regenerative and linear
material flows, and track how depletion/replenishment of different stocks impact each other
(Franks, 2012).
For example, depletion of groundwater stocks might initially increase crop yields and profits.
But reduced natural capital stock can undermine long term replenishment of aquifers
affecting future water security and crop productivity. Such dynamics and trade-offs between
different stocks over time are difficult to capture using flow-based accounting alone.
Resilience-based accounting would value and report ecological assets using new frameworks
like Natural Capital Protocols that assign economic value to ecosystem services and factors
like biodiversity and carbon sequestration (Natural Capital Coalition, 2016). It would track
changes in stocks of other intangible capitals like skills, knowledge and partnerships critical
for long term viability. By clearly distinguishing between consumption of renewable vs. non
renewable stocks, entities can ensure critical asset bases are maintained to ensure future
resilience and long term value creation (Fujihara & Kazmierczak, 2017).
Thresholds, Tipping Points and Uncertainty Accounting
Traditional financial reports are based on assumptions of known probabilities and linear
extrapolations of past trends. However, real world systems display thresholds, nonlinear
change and potential for low probability high impact events. Concepts like ‘unknown
unknowns’ challenge modeling predictability. Resilience accounting must account for such
dynamic complexities and uncertainties.
Integrating resilience involves identifying potential tipping points where small perturbations
cause disproportionate system changes (Biggs et al., 2015). Early warning signs and
indicators around critical thresholds should be monitored through techniques like Bayesian
belief networks (Fath et al., 2015). Scenario methods going beyond single predictions can be
used to understand impacts of plausible, but low probability events.
Explicit disclosure of uncertainties arising from internal system dynamics and lack of
historical precedence is needed rather than presenting reports as definitive (Bebbington et al.,
2014). Sensitivity analysis should evaluate resilience under changing conditions.
Contingency planning and adaptive strategies rather than optimization under stable
assumptions become important (Franks, 2012).
Stress testing methods involve modeling responses to severe but plausible shocks to evaluate
robustness of different strategies (Caballero et al., 2008). Scenario techniques enable
understanding system-level impacts of cross-scale interactions and spill-overs across
dependent domains, which are hard to anticipate using past correlations alone (Biggs et al.,
2015). Risk registries should record and rank vulnerabilities including at supply chain and
portfolio levels (Franks, 2012).
Such enhancements can enable resilience-based reporting and strategy to incorporate
thresholds, contingencies and uncertainties in a more transparent manner than traditional
single forecast approaches. This promotes agility to respond to surprises in a changing risk
landscape.
System-level Interdependencies and Feedback Loops
While financial statements of individual entities provide useful information, they fail to
capture cross-scale interdependencies that influence systemic resilience. Traditional
accounting treats different sectors as independent domains, but real world systems display
complex interactions, feedbacks and spillovers across scales (Bebbington et al., 2014).
Resilience accounting attempts to map relationships and feedbacks between stakeholders,
sectors and scales to understand cross- impacts of organization-level activities. It evaluates
how actions of individual entities transmit impacts onto the broader social-ecological system
and vice versa through mechanisms like feedbacks, lock-ins and path dependencies arising
from complementary assets/investments (Perrings, 2006).
For example, unsustainable agricultural practices like groundwater depletion can compromise
water security across a region by altering hydrological feedbacks over the long term. Loss of
biodiversity across landscapes impacts future resilience of individual farms through reduced
pollination services. Failure of infrastructure during extreme events like flooding might arise
from maladaptive development across broader regions.
By mapping cross-scale dependencies and visualizing potential reinforcing and balancing
feedback loops, resilience reports aim to provide a system-level perspective on how actions
of individual entities impacts overall sustainability and vulnerability of coupled human-
environment systems over the long term (Biggs et al., 2015). This ensures tailored strategies
addressing root causes rather than symptoms alone.
Resilience Metrics and Scenario Analysis
In order to monitor changes in resilience over time and evaluate strategy options, relevant
metrics need to be tracked along with narratives. A range of potential metrics proposed in
literature aim to quantify different dimensions of resilience thinking (Rodriguez-Labajos et
al., 2019):
- Exposure/Vulnerability metrics measure risks/sensitivity from stresses based on
characteristics like asset concentration, dependency on single markets etc.
- Buffering capacity metrics indicate ability to withstand disturbance, quantified through
metrics of reserves, substitutability, redundancy etc.
- Adaptive capacity metrics focus on learning, flexibility, innovation to enable
environmental/social adjustment.
- Transformability metrics evaluate potential and governance conditions for major regime
shifts if faced with large perturbations.
Metrics need to be tailored to specific organizational and system contexts. Multiple leading
sustainability indicators should complement quantified measures in resilience reports (Folke,
2006). Scenario analysis remains critical to evaluate diverse outcomes under alternative
plausible assumptions (Biggs et al., 2015). Sensitivity analysis of metrics under shifting
conditions further enhances robustness.
Metrics help quantify resilience dimensions, benchmark performance longitudinally and
inform strategic priorities. Scenario techniques allow evaluating how choices made today
may impact long term resilience and sustainability of human-environment systems in a
changing, uncertain future.
Barriers and Challenges to Implementation
While the case for integrating resilience thinking into accounting is strong conceptually,
several practical challenges exist in real world implementation:
Data and measurement challenges: Resilience attributes are complex and multi-dimensional,
posing difficulties in consistent measurement. Lack of long term historical data on some
capitals like ecosystems further complicates benchmarking.
Conflicts with shareholders’ short term interests: Resilience focus on long term viability may
conflict with pressures of quarterly reporting and short term profit maximization mindsets.
Lack of definitional clarity: Key resilience concepts like adaptability and transformability
remain open to interpretation, posing difficulties in standardizing metrics and criteria.
Trade-offs with other attributes: Prioritizing resilience sometimes involves short term costs
affecting metrics of productivity or efficiency that markets currently value more.
Static standards and mindsets: Changing entrenched accounting standards and moving away
from assumptions of predictability involves major reform challenges within the regulatory
environment.
Implementation requires substantive changes across accounting standards, business school
education, financial/legal practices and regulatory/policy frameworks that currently
emphasize stability over dynamism. Piloting initiatives, demonstration projects and
stakeholder engagement will be important to gradually build momentum. Continued refining
of conceptual frameworks is also imperative.
Recommendations and Conclusion
Mainstreaming resilience in accounting and mainstream finance requires sustained, multi-
pronged efforts across research, policy, business and civil society over the long term. Some
recommendations include:
- Pilot resilience reporting initiatives within frontrunner organizations to iteratively refine
accounting practices
- Stakeholder engagement forums to build consensus around core resilience concepts,
metrics, narratives
- Educational reform within accounting, finance and business schools to incorporate
resilience thinking
- New financial products/instruments incentivizing long term stability over quarterly returns
- Revision of accounting standards/guidelines by national/international bodies to include
resilience attributes
- Policy measures to internalize social and environmental costs, make markets price long term
risks better
- Business strategies factoring in dependencies between different capitals and alternative
futures
While challenges remain, building resilience into accounting is crucial for transparent
evaluation and strengthening long term viability of linked human and natural systems. Small-
scale pilots can catalyze gradual mindset shifts by demonstrating practical benefits. with
sustained efforts across multiple domains, resilience accounting can revamp practices to
handle complex realities of the 21st century.
There is an increasing realization that the current system of financial accounting and
reporting is inadequate for handling risks and uncertainties posed by complex socio-
ecological systems. Traditional accounting standards are built on simplistic assumptions of
stability, predictability and controllability which do not reflect the dynamics and complexity
of real-world systems (Bebbington et al., 2014). This has led to calls for integrating concepts
from resilience theory into accounting in order to make financial statements and decision-
making more robust to surprises and uncertainty (Franks, 2012; Fujihara & Kazmierczak,
2017).
Resilience, in its simplest terms, refers to the ability of a system to withstand disturbances
and reorganize itself while undergoing change so as to still retain essentially the same
function, structure, identity and feedbacks (Walker et al., 2004). Applying resilience concepts
to accounting would require accounting for nonlinear dynamics, thresholds, uncertainty and
system-level interdependencies which traditional accounting has so far struggled with. A
resilience-based approach could help make accounting standards and financial reports more
robust to shocks and enable anticipatory decision making.
This paper argues for the need to integrate resilience theory more explicitly into accounting
standards, financial reporting and strategic decision making processes. It outlines some of the
key elements that need to be incorporated based on insights from resilience thinking. The
paper is organized as follows:
- Resilience theory and its relevance for accounting
- Key elements of resilience accounting
- Stocks and flows accounting for dynamic complexity
- Thresholds, tipping points and uncertainty accounting
- System-level interdependencies and feedback loops
- Resilience metrics and scenario analysis
- Barriers and challenges to implementation
- Recommendations and conclusions
Resilience Theory and its Relevance for Accounting
Traditional accounting is based on basic assumptions of system predictability, controllability
and rational expectations (Bebbington et al., 2014). However, real world socio-ecological
systems display dynamic complexity arising from thresholds, feedbacks, interlinkages and
evolutionary unpredictability (Folke, 2006). Resilience theory provides an alternative
conceptual framework for understanding such complex adaptive systems.
Key insights from resilience thinking relevant for accounting include (Franks, 2012; Fujihara
& Kazmierczak, 2017):
- Recognition of nonlinear change, feedbacks and thresholds rather than linear causal
relationships assumed in accounting standards
- Emphasis on dynamic stability, adaptability and transformability rather than static
optimization or predictions of growth/decline
- Accounting for uncertainty arising endogenously from complex system structures and
dynamics rather than exogenous risks and uncertainties alone
- Viewing social and ecological systems as coupled rather than independent domains seen in
financial reports
- Focusing on sustaining key ecosystem services and functions rather than single-attribute
optimization of economic outputs
- Evaluating system-level impacts and trade-offs rather than impacts of individual actors in
isolation
- Adopting an anticipatory rather than retrospective approach to decision making
These insights highlight the limitations of traditional accounting frameworks for
understanding and managing resilience of socio-ecological systems. Integration of resilience
thinking can help make accounting standards, financial reports and business decisions more
robust to uncertainty and adaptive to change.
Key Elements of Resilience Accounting
Based on the principles of resilience theory, some of the key elements that need to be
incorporated in accounting standards and practices include (Bebbington et al., 2014; Franks,
2012):
Stocks and Flows Accounting for Dynamic Complexity
- Tracking changes in critical capital stocks (natural, social, physical, human etc.) over time
rather than flows alone
- Distinguishing regenerative from non-regenerative flows and setting thresholds on
consumption/depletion of different stocks
- Assessing interlinkages and trade-offs between different types of capital stocks
- Valuing ecosystem services from natural capital using revised valuation approaches
Thresholds, Tipping Points and Uncertainty Accounting
- Identifying potential thresholds and tipping points in social-ecological system dynamics
- Assessing tail risks and impacts of low probability high consequence events
- Employing scenario-based approaches and stress testing rather than single forecasts
- Accounting for unpredictable ecological surprises and ‘unknown unknowns’
- Disclosing uncertainties explicitly rather than presenting definitive predictions
System-level Interdependencies and Feedback Loops
- Mapping relationships, feedbacks and interdependencies between different actors/sectors
- Evaluating cross-scale and cross-sector impacts of organizational activities and strategies
- Highlighting reinforcing and balancing feedback loops that can amplify or dampen impacts
- Assessing vulnerability/exposure of supply chains to systemic disruptions and spill-overs
Resilience Metrics and Scenario Analysis
- Developing metrics to measure an entity’s exposure to risks, buffering capacity, adaptive
capacity, transformation potential etc.
- Linking financial performance metrics to sustainability of critical capital stocks over time
- Using scenario analysis and modelling to evaluate resilience under different plausible
futures
- Undertaking regular stress testing and contingency planning exercises
These elements aim to overcome the limitations of traditional accounting by explicitly
accounting for dynamic complexity, uncertainty and system-level interconnectedness
inherent to socio-ecological domains. Integrating them can help make accounting standards,
reports and decisions more robust.
Stocks and Flows Accounting for Dynamic Complexity
Traditional accounting focusses primarily on tracking financial and physical flows over
specific time periods through income statements, cash flow statements etc. However, it pays
little attention to changes in the underlying asset bases or critical capital stocks that generate
these flows. This neglects the dynamic complexity arising from interlinkages between
different asset classes and nonlinear feedbacks between their rates of depletion/renewal over
time (Bebbington et al., 2014).
A stocks and flows based resilience accounting would require clearly identifying and
monitoring changes in all important capital stocks - manufactured/produced capital (tools,
infrastructure etc.), natural capital (resources, ecosystems), human capital (skills, health) and
social capital (institutions, relationships) (UN, 2014). It would recognize the differences
between renewable and non-renewable resource endowments, regenerative and linear
material flows, and track how depletion/replenishment of different stocks impact each other
(Franks, 2012).
For example, depletion of groundwater stocks might initially increase crop yields and profits.
But reduced natural capital stock can undermine long term replenishment of aquifers
affecting future water security and crop productivity. Such dynamics and trade-offs between
different stocks over time are difficult to capture using flow-based accounting alone.
Resilience-based accounting would value and report ecological assets using new frameworks
like Natural Capital Protocols that assign economic value to ecosystem services and factors
like biodiversity and carbon sequestration (Natural Capital Coalition, 2016). It would track
changes in stocks of other intangible capitals like skills, knowledge and partnerships critical
for long term viability. By clearly distinguishing between consumption of renewable vs. non
renewable stocks, entities can ensure critical asset bases are maintained to ensure future
resilience and long term value creation (Fujihara & Kazmierczak, 2017).
Thresholds, Tipping Points and Uncertainty Accounting
Traditional financial reports are based on assumptions of known probabilities and linear
extrapolations of past trends. However, real world systems display thresholds, nonlinear
change and potential for low probability high impact events. Concepts like ‘unknown
unknowns’ challenge modeling predictability. Resilience accounting must account for such
dynamic complexities and uncertainties.
Integrating resilience involves identifying potential tipping points where small perturbations
cause disproportionate system changes (Biggs et al., 2015). Early warning signs and
indicators around critical thresholds should be monitored through techniques like Bayesian
belief networks (Fath et al., 2015). Scenario methods going beyond single predictions can be
used to understand impacts of plausible, but low probability events.
Explicit disclosure of uncertainties arising from internal system dynamics and lack of
historical precedence is needed rather than presenting reports as definitive (Bebbington et al.,
2014). Sensitivity analysis should evaluate resilience under changing conditions.
Contingency planning and adaptive strategies rather than optimization under stable
assumptions become important (Franks, 2012).
Stress testing methods involve modeling responses to severe but plausible shocks to evaluate
robustness of different strategies (Caballero et al., 2008). Scenario techniques enable
understanding system-level impacts of cross-scale interactions and spill-overs across
dependent domains, which are hard to anticipate using past correlations alone (Biggs et al.,
2015). Risk registries should record and rank vulnerabilities including at supply chain and
portfolio levels (Franks, 2012).
Such enhancements can enable resilience-based reporting and strategy to incorporate
thresholds, contingencies and uncertainties in a more transparent manner than traditional
single forecast approaches. This promotes agility to respond to surprises in a changing risk
landscape.
System-level Interdependencies and Feedback Loops
While financial statements of individual entities provide useful information, they fail to
capture cross-scale interdependencies that influence systemic resilience. Traditional
accounting treats different sectors as independent domains, but real world systems display
complex interactions, feedbacks and spillovers across scales (Bebbington et al., 2014).
Resilience accounting attempts to map relationships and feedbacks between stakeholders,
sectors and scales to understand cross- impacts of organization-level activities. It evaluates
how actions of individual entities transmit impacts onto the broader social-ecological system
and vice versa through mechanisms like feedbacks, lock-ins and path dependencies arising
from complementary assets/investments (Perrings, 2006).
For example, unsustainable agricultural practices like groundwater depletion can compromise
water security across a region by altering hydrological feedbacks over the long term. Loss of
biodiversity across landscapes impacts future resilience of individual farms through reduced
pollination services. Failure of infrastructure during extreme events like flooding might arise
from maladaptive development across broader regions.
By mapping cross-scale dependencies and visualizing potential reinforcing and balancing
feedback loops, resilience reports aim to provide a system-level perspective on how actions
of individual entities impacts overall sustainability and vulnerability of coupled human-
environment systems over the long term (Biggs et al., 2015). This ensures tailored strategies
addressing root causes rather than symptoms alone.
Resilience Metrics and Scenario Analysis
In order to monitor changes in resilience over time and evaluate strategy options, relevant
metrics need to be tracked along with narratives. A range of potential metrics proposed in
literature aim to quantify different dimensions of resilience thinking (Rodriguez-Labajos et
al., 2019):
- Exposure/Vulnerability metrics measure risks/sensitivity from stresses based on
characteristics like asset concentration, dependency on single markets etc.
- Buffering capacity metrics indicate ability to withstand disturbance, quantified through
metrics of reserves, substitutability, redundancy etc.
- Adaptive capacity metrics focus on learning, flexibility, innovation to enable
environmental/social adjustment.
- Transformability metrics evaluate potential and governance conditions for major regime
shifts if faced with large perturbations.
Metrics need to be tailored to specific organizational and system contexts. Multiple leading
sustainability indicators should complement quantified measures in resilience reports (Folke,
2006). Scenario analysis remains critical to evaluate diverse outcomes under alternative
plausible assumptions (Biggs et al., 2015). Sensitivity analysis of metrics under shifting
conditions further enhances robustness.
Metrics help quantify resilience dimensions, benchmark performance longitudinally and
inform strategic priorities. Scenario techniques allow evaluating how choices made today
may impact long term resilience and sustainability of human-environment systems in a
changing, uncertain future.
Barriers and Challenges to Implementation
While the case for integrating resilience thinking into accounting is strong conceptually,
several practical challenges exist in real world implementation:
Data and measurement challenges: Resilience attributes are complex and multi-dimensional,
posing difficulties in consistent measurement. Lack of long term historical data on some
capitals like ecosystems further complicates benchmarking.
Conflicts with shareholders’ short term interests: Resilience focus on long term viability may
conflict with pressures of quarterly reporting and short term profit maximization mindsets.
Lack of definitional clarity: Key resilience concepts like adaptability and transformability
remain open to interpretation, posing difficulties in standardizing metrics and criteria.
Trade-offs with other attributes: Prioritizing resilience sometimes involves short term costs
affecting metrics of productivity or efficiency that markets currently value more.
Static standards and mindsets: Changing entrenched accounting standards and moving away
from assumptions of predictability involves major reform challenges within the regulatory
environment.
Implementation requires substantive changes across accounting standards, business school
education, financial/legal practices and regulatory/policy frameworks that currently
emphasize stability over dynamism. Piloting initiatives, demonstration projects and
stakeholder engagement will be important to gradually build momentum. Continued refining
of conceptual frameworks is also imperative.
Recommendations and Conclusion
Mainstreaming resilience in accounting and mainstream finance requires sustained, multi-
pronged efforts across research, policy, business and civil society over the long term. Some
recommendations include:
- Pilot resilience reporting initiatives within frontrunner organizations to iteratively refine
accounting practices
- Stakeholder engagement forums to build consensus around core resilience concepts,
metrics, narratives
- Educational reform within accounting, finance and business schools to incorporate
resilience thinking
- New financial products/instruments incentivizing long term stability over quarterly returns
- Revision of accounting standards/guidelines by national/international bodies to include
resilience attributes
- Policy measures to internalize social and environmental costs, make markets price long term
risks better
- Business strategies factoring in dependencies between different capitals and alternative
futures
While challenges remain, building resilience into accounting is crucial for transparent
evaluation and strengthening long term viability of linked human and natural systems. Small-
scale pilots can catalyze gradual mindset shifts by demonstrating practical benefits. with
sustained efforts across multiple domains, resilience accounting can revamp practices to
handle complex realities of the 21st century.
There is an increasing realization that the current system of financial accounting and
reporting is inadequate for handling risks and uncertainties posed by complex socio-
ecological systems. Traditional accounting standards are built on simplistic assumptions of
stability, predictability and controllability which do not reflect the dynamics and complexity
of real-world systems (Bebbington et al., 2014). This has led to calls for integrating concepts
from resilience theory into accounting in order to make financial statements and decision-
making more robust to surprises and uncertainty (Franks, 2012; Fujihara & Kazmierczak,
2017).
Resilience, in its simplest terms, refers to the ability of a system to withstand disturbances
and reorganize itself while undergoing change so as to still retain essentially the same
function, structure, identity and feedbacks (Walker et al., 2004). Applying resilience concepts
to accounting would require accounting for nonlinear dynamics, thresholds, uncertainty and
system-level interdependencies which traditional accounting has so far struggled with. A
resilience-based approach could help make accounting standards and financial reports more
robust to shocks and enable anticipatory decision making.
This paper argues for the need to integrate resilience theory more explicitly into accounting
standards, financial reporting and strategic decision making processes. It outlines some of the
key elements that need to be incorporated based on insights from resilience thinking. The
paper is organized as follows:
- Resilience theory and its relevance for accounting
- Key elements of resilience accounting
- Stocks and flows accounting for dynamic complexity
- Thresholds, tipping points and uncertainty accounting
- System-level interdependencies and feedback loops
- Resilience metrics and scenario analysis
- Barriers and challenges to implementation
- Recommendations and conclusions
Resilience Theory and its Relevance for Accounting
Traditional accounting is based on basic assumptions of system predictability, controllability
and rational expectations (Bebbington et al., 2014). However, real world socio-ecological
systems display dynamic complexity arising from thresholds, feedbacks, interlinkages and
evolutionary unpredictability (Folke, 2006). Resilience theory provides an alternative
conceptual framework for understanding such complex adaptive systems.
Key insights from resilience thinking relevant for accounting include (Franks, 2012; Fujihara
& Kazmierczak, 2017):
- Recognition of nonlinear change, feedbacks and thresholds rather than linear causal
relationships assumed in accounting standards
- Emphasis on dynamic stability, adaptability and transformability rather than static
optimization or predictions of growth/decline
- Accounting for uncertainty arising endogenously from complex system structures and
dynamics rather than exogenous risks and uncertainties alone
- Viewing social and ecological systems as coupled rather than independent domains seen in
financial reports
- Focusing on sustaining key ecosystem services and functions rather than single-attribute
optimization of economic outputs
- Evaluating system-level impacts and trade-offs rather than impacts of individual actors in
isolation
- Adopting an anticipatory rather than retrospective approach to decision making
These insights highlight the limitations of traditional accounting frameworks for
understanding and managing resilience of socio-ecological systems. Integration of resilience
thinking can help make accounting standards, financial reports and business decisions more
robust to uncertainty and adaptive to change.
Key Elements of Resilience Accounting
Based on the principles of resilience theory, some of the key elements that need to be
incorporated in accounting standards and practices include (Bebbington et al., 2014; Franks,
2012):
Stocks and Flows Accounting for Dynamic Complexity
- Tracking changes in critical capital stocks (natural, social, physical, human etc.) over time
rather than flows alone
- Distinguishing regenerative from non-regenerative flows and setting thresholds on
consumption/depletion of different stocks
- Assessing interlinkages and trade-offs between different types of capital stocks
- Valuing ecosystem services from natural capital using revised valuation approaches
Thresholds, Tipping Points and Uncertainty Accounting
- Identifying potential thresholds and tipping points in social-ecological system dynamics
- Assessing tail risks and impacts of low probability high consequence events
- Employing scenario-based approaches and stress testing rather than single forecasts
- Accounting for unpredictable ecological surprises and ‘unknown unknowns’
- Disclosing uncertainties explicitly rather than presenting definitive predictions
System-level Interdependencies and Feedback Loops
- Mapping relationships, feedbacks and interdependencies between different actors/sectors
- Evaluating cross-scale and cross-sector impacts of organizational activities and strategies
- Highlighting reinforcing and balancing feedback loops that can amplify or dampen impacts
- Assessing vulnerability/exposure of supply chains to systemic disruptions and spill-overs
Resilience Metrics and Scenario Analysis
- Developing metrics to measure an entity’s exposure to risks, buffering capacity, adaptive
capacity, transformation potential etc.
- Linking financial performance metrics to sustainability of critical capital stocks over time
- Using scenario analysis and modelling to evaluate resilience under different plausible
futures
- Undertaking regular stress testing and contingency planning exercises
These elements aim to overcome the limitations of traditional accounting by explicitly
accounting for dynamic complexity, uncertainty and system-level interconnectedness
inherent to socio-ecological domains. Integrating them can help make accounting standards,
reports and decisions more robust.
Stocks and Flows Accounting for Dynamic Complexity
Traditional accounting focusses primarily on tracking financial and physical flows over
specific time periods through income statements, cash flow statements etc. However, it pays
little attention to changes in the underlying asset bases or critical capital stocks that generate
these flows. This neglects the dynamic complexity arising from interlinkages between
different asset classes and nonlinear feedbacks between their rates of depletion/renewal over
time (Bebbington et al., 2014).
A stocks and flows based resilience accounting would require clearly identifying and
monitoring changes in all important capital stocks - manufactured/produced capital (tools,
infrastructure etc.), natural capital (resources, ecosystems), human capital (skills, health) and
social capital (institutions, relationships) (UN, 2014). It would recognize the differences
between renewable and non-renewable resource endowments, regenerative and linear
material flows, and track how depletion/replenishment of different stocks impact each other
(Franks, 2012).
For example, depletion of groundwater stocks might initially increase crop yields and profits.
But reduced natural capital stock can undermine long term replenishment of aquifers
affecting future water security and crop productivity. Such dynamics and trade-offs between
different stocks over time are difficult to capture using flow-based accounting alone.
Resilience-based accounting would value and report ecological assets using new frameworks
like Natural Capital Protocols that assign economic value to ecosystem services and factors
like biodiversity and carbon sequestration (Natural Capital Coalition, 2016). It would track
changes in stocks of other intangible capitals like skills, knowledge and partnerships critical
for long term viability. By clearly distinguishing between consumption of renewable vs. non
renewable stocks, entities can ensure critical asset bases are maintained to ensure future
resilience and long term value creation (Fujihara & Kazmierczak, 2017).
Thresholds, Tipping Points and Uncertainty Accounting
Traditional financial reports are based on assumptions of known probabilities and linear
extrapolations of past trends. However, real world systems display thresholds, nonlinear
change and potential for low probability high impact events. Concepts like ‘unknown
unknowns’ challenge modeling predictability. Resilience accounting must account for such
dynamic complexities and uncertainties.
Integrating resilience involves identifying potential tipping points where small perturbations
cause disproportionate system changes (Biggs et al., 2015). Early warning signs and
indicators around critical thresholds should be monitored through techniques like Bayesian
belief networks (Fath et al., 2015). Scenario methods going beyond single predictions can be
used to understand impacts of plausible, but low probability events.
Explicit disclosure of uncertainties arising from internal system dynamics and lack of
historical precedence is needed rather than presenting reports as definitive (Bebbington et al.,
2014). Sensitivity analysis should evaluate resilience under changing conditions.
Contingency planning and adaptive strategies rather than optimization under stable
assumptions become important (Franks, 2012).
Stress testing methods involve modeling responses to severe but plausible shocks to evaluate
robustness of different strategies (Caballero et al., 2008). Scenario techniques enable
understanding system-level impacts of cross-scale interactions and spill-overs across
dependent domains, which are hard to anticipate using past correlations alone (Biggs et al.,
2015). Risk registries should record and rank vulnerabilities including at supply chain and
portfolio levels (Franks, 2012).
Such enhancements can enable resilience-based reporting and strategy to incorporate
thresholds, contingencies and uncertainties in a more transparent manner than traditional
single forecast approaches. This promotes agility to respond to surprises in a changing risk
landscape.
System-level Interdependencies and Feedback Loops
While financial statements of individual entities provide useful information, they fail to
capture cross-scale interdependencies that influence systemic resilience. Traditional
accounting treats different sectors as independent domains, but real world systems display
complex interactions, feedbacks and spillovers across scales (Bebbington et al., 2014).
Resilience accounting attempts to map relationships and feedbacks between stakeholders,
sectors and scales to understand cross- impacts of organization-level activities. It evaluates
how actions of individual entities transmit impacts onto the broader social-ecological system
and vice versa through mechanisms like feedbacks, lock-ins and path dependencies arising
from complementary assets/investments (Perrings, 2006).
For example, unsustainable agricultural practices like groundwater depletion can compromise
water security across a region by altering hydrological feedbacks over the long term. Loss of
biodiversity across landscapes impacts future resilience of individual farms through reduced
pollination services. Failure of infrastructure during extreme events like flooding might arise
from maladaptive development across broader regions.
By mapping cross-scale dependencies and visualizing potential reinforcing and balancing
feedback loops, resilience reports aim to provide a system-level perspective on how actions
of individual entities impacts overall sustainability and vulnerability of coupled human-
environment systems over the long term (Biggs et al., 2015). This ensures tailored strategies
addressing root causes rather than symptoms alone.
Resilience Metrics and Scenario Analysis
In order to monitor changes in resilience over time and evaluate strategy options, relevant
metrics need to be tracked along with narratives. A range of potential metrics proposed in
literature aim to quantify different dimensions of resilience thinking (Rodriguez-Labajos et
al., 2019):
- Exposure/Vulnerability metrics measure risks/sensitivity from stresses based on
characteristics like asset concentration, dependency on single markets etc.
- Buffering capacity metrics indicate ability to withstand disturbance, quantified through
metrics of reserves, substitutability, redundancy etc.
- Adaptive capacity metrics focus on learning, flexibility, innovation to enable
environmental/social adjustment.
- Transformability metrics evaluate potential and governance conditions for major regime
shifts if faced with large perturbations.
Metrics need to be tailored to specific organizational and system contexts. Multiple leading
sustainability indicators should complement quantified measures in resilience reports (Folke,
2006). Scenario analysis remains critical to evaluate diverse outcomes under alternative
plausible assumptions (Biggs et al., 2015). Sensitivity analysis of metrics under shifting
conditions further enhances robustness.
Metrics help quantify resilience dimensions, benchmark performance longitudinally and
inform strategic priorities. Scenario techniques allow evaluating how choices made today
may impact long term resilience and sustainability of human-environment systems in a
changing, uncertain future.
Barriers and Challenges to Implementation
While the case for integrating resilience thinking into accounting is strong conceptually,
several practical challenges exist in real world implementation:
Data and measurement challenges: Resilience attributes are complex and multi-dimensional,
posing difficulties in consistent measurement. Lack of long term historical data on some
capitals like ecosystems further complicates benchmarking.
Conflicts with shareholders’ short term interests: Resilience focus on long term viability may
conflict with pressures of quarterly reporting and short term profit maximization mindsets.
Lack of definitional clarity: Key resilience concepts like adaptability and transformability
remain open to interpretation, posing difficulties in standardizing metrics and criteria.
Trade-offs with other attributes: Prioritizing resilience sometimes involves short term costs
affecting metrics of productivity or efficiency that markets currently value more.
Static standards and mindsets: Changing entrenched accounting standards and moving away
from assumptions of predictability involves major reform challenges within the regulatory
environment.
Implementation requires substantive changes across accounting standards, business school
education, financial/legal practices and regulatory/policy frameworks that currently
emphasize stability over dynamism. Piloting initiatives, demonstration projects and
stakeholder engagement will be important to gradually build momentum. Continued refining
of conceptual frameworks is also imperative.
Recommendations and Conclusion
Mainstreaming resilience in accounting and mainstream finance requires sustained, multi-
pronged efforts across research, policy, business and civil society over the long term. Some
recommendations include:
- Pilot resilience reporting initiatives within frontrunner organizations to iteratively refine
accounting practices
- Stakeholder engagement forums to build consensus around core resilience concepts,
metrics, narratives
- Educational reform within accounting, finance and business schools to incorporate
resilience thinking
- New financial products/instruments incentivizing long term stability over quarterly returns
- Revision of accounting standards/guidelines by national/international bodies to include
resilience attributes
- Policy measures to internalize social and environmental costs, make markets price long term
risks better
- Business strategies factoring in dependencies between different capitals and alternative
futures
While challenges remain, building resilience into accounting is crucial for transparent
evaluation and strengthening long term viability of linked human and natural systems. Small-
scale pilots can catalyze gradual mindset shifts by demonstrating practical benefits. with
sustained efforts across multiple domains, resilience accounting can revamp practices to
handle complex realities of the 21st century.
There is an increasing realization that the current system of financial accounting and
reporting is inadequate for handling risks and uncertainties posed by complex socio-
ecological systems. Traditional accounting standards are built on simplistic assumptions of
stability, predictability and controllability which do not reflect the dynamics and complexity
of real-world systems (Bebbington et al., 2014). This has led to calls for integrating concepts
from resilience theory into accounting in order to make financial statements and decision-
making more robust to surprises and uncertainty (Franks, 2012; Fujihara & Kazmierczak,
2017).
Resilience, in its simplest terms, refers to the ability of a system to withstand disturbances
and reorganize itself while undergoing change so as to still retain essentially the same
function, structure, identity and feedbacks (Walker et al., 2004). Applying resilience concepts
to accounting would require accounting for nonlinear dynamics, thresholds, uncertainty and
system-level interdependencies which traditional accounting has so far struggled with. A
resilience-based approach could help make accounting standards and financial reports more
robust to shocks and enable anticipatory decision making.
This paper argues for the need to integrate resilience theory more explicitly into accounting
standards, financial reporting and strategic decision making processes. It outlines some of the
key elements that need to be incorporated based on insights from resilience thinking. The
paper is organized as follows:
- Resilience theory and its relevance for accounting
- Key elements of resilience accounting
- Stocks and flows accounting for dynamic complexity
- Thresholds, tipping points and uncertainty accounting
- System-level interdependencies and feedback loops
- Resilience metrics and scenario analysis
- Barriers and challenges to implementation
- Recommendations and conclusions
Resilience Theory and its Relevance for Accounting
Traditional accounting is based on basic assumptions of system predictability, controllability
and rational expectations (Bebbington et al., 2014). However, real world socio-ecological
systems display dynamic complexity arising from thresholds, feedbacks, interlinkages and
evolutionary unpredictability (Folke, 2006). Resilience theory provides an alternative
conceptual framework for understanding such complex adaptive systems.
Key insights from resilience thinking relevant for accounting include (Franks, 2012; Fujihara
& Kazmierczak, 2017):
- Recognition of nonlinear change, feedbacks and thresholds rather than linear causal
relationships assumed in accounting standards
- Emphasis on dynamic stability, adaptability and transformability rather than static
optimization or predictions of growth/decline
- Accounting for uncertainty arising endogenously from complex system structures and
dynamics rather than exogenous risks and uncertainties alone
- Viewing social and ecological systems as coupled rather than independent domains seen in
financial reports
- Focusing on sustaining key ecosystem services and functions rather than single-attribute
optimization of economic outputs
- Evaluating system-level impacts and trade-offs rather than impacts of individual actors in
isolation
- Adopting an anticipatory rather than retrospective approach to decision making
These insights highlight the limitations of traditional accounting frameworks for
understanding and managing resilience of socio-ecological systems. Integration of resilience
thinking can help make accounting standards, financial reports and business decisions more
robust to uncertainty and adaptive to change.
Key Elements of Resilience Accounting
Based on the principles of resilience theory, some of the key elements that need to be
incorporated in accounting standards and practices include (Bebbington et al., 2014; Franks,
2012):
Stocks and Flows Accounting for Dynamic Complexity
- Tracking changes in critical capital stocks (natural, social, physical, human etc.) over time
rather than flows alone
- Distinguishing regenerative from non-regenerative flows and setting thresholds on
consumption/depletion of different stocks
- Assessing interlinkages and trade-offs between different types of capital stocks
- Valuing ecosystem services from natural capital using revised valuation approaches
Thresholds, Tipping Points and Uncertainty Accounting
- Identifying potential thresholds and tipping points in social-ecological system dynamics
- Assessing tail risks and impacts of low probability high consequence events
- Employing scenario-based approaches and stress testing rather than single forecasts
- Accounting for unpredictable ecological surprises and ‘unknown unknowns’
- Disclosing uncertainties explicitly rather than presenting definitive predictions
System-level Interdependencies and Feedback Loops
- Mapping relationships, feedbacks and interdependencies between different actors/sectors
- Evaluating cross-scale and cross-sector impacts of organizational activities and strategies
- Highlighting reinforcing and balancing feedback loops that can amplify or dampen impacts
- Assessing vulnerability/exposure of supply chains to systemic disruptions and spill-overs
Resilience Metrics and Scenario Analysis
- Developing metrics to measure an entity’s exposure to risks, buffering capacity, adaptive
capacity, transformation potential etc.
- Linking financial performance metrics to sustainability of critical capital stocks over time
- Using scenario analysis and modelling to evaluate resilience under different plausible
futures
- Undertaking regular stress testing and contingency planning exercises
These elements aim to overcome the limitations of traditional accounting by explicitly
accounting for dynamic complexity, uncertainty and system-level interconnectedness
inherent to socio-ecological domains. Integrating them can help make accounting standards,
reports and decisions more robust.
Stocks and Flows Accounting for Dynamic Complexity
Traditional accounting focusses primarily on tracking financial and physical flows over
specific time periods through income statements, cash flow statements etc. However, it pays
little attention to changes in the underlying asset bases or critical capital stocks that generate
these flows. This neglects the dynamic complexity arising from interlinkages between
different asset classes and nonlinear feedbacks between their rates of depletion/renewal over
time (Bebbington et al., 2014).
A stocks and flows based resilience accounting would require clearly identifying and
monitoring changes in all important capital stocks - manufactured/produced capital (tools,
infrastructure etc.), natural capital (resources, ecosystems), human capital (skills, health) and
social capital (institutions, relationships) (UN, 2014). It would recognize the differences
between renewable and non-renewable resource endowments, regenerative and linear
material flows, and track how depletion/replenishment of different stocks impact each other
(Franks, 2012).
For example, depletion of groundwater stocks might initially increase crop yields and profits.
But reduced natural capital stock can undermine long term replenishment of aquifers
affecting future water security and crop productivity. Such dynamics and trade-offs between
different stocks over time are difficult to capture using flow-based accounting alone.
Resilience-based accounting would value and report ecological assets using new frameworks
like Natural Capital Protocols that assign economic value to ecosystem services and factors
like biodiversity and carbon sequestration (Natural Capital Coalition, 2016). It would track
changes in stocks of other intangible capitals like skills, knowledge and partnerships critical
for long term viability. By clearly distinguishing between consumption of renewable vs. non
renewable stocks, entities can ensure critical asset bases are maintained to ensure future
resilience and long term value creation (Fujihara & Kazmierczak, 2017).
Thresholds, Tipping Points and Uncertainty Accounting
Traditional financial reports are based on assumptions of known probabilities and linear
extrapolations of past trends. However, real world systems display thresholds, nonlinear
change and potential for low probability high impact events. Concepts like ‘unknown
unknowns’ challenge modeling predictability. Resilience accounting must account for such
dynamic complexities and uncertainties.
Integrating resilience involves identifying potential tipping points where small perturbations
cause disproportionate system changes (Biggs et al., 2015). Early warning signs and
indicators around critical thresholds should be monitored through techniques like Bayesian
belief networks (Fath et al., 2015). Scenario methods going beyond single predictions can be
used to understand impacts of plausible, but low probability events.
Explicit disclosure of uncertainties arising from internal system dynamics and lack of
historical precedence is needed rather than presenting reports as definitive (Bebbington et al.,
2014). Sensitivity analysis should evaluate resilience under changing conditions.
Contingency planning and adaptive strategies rather than optimization under stable
assumptions become important (Franks, 2012).
Stress testing methods involve modeling responses to severe but plausible shocks to evaluate
robustness of different strategies (Caballero et al., 2008). Scenario techniques enable
understanding system-level impacts of cross-scale interactions and spill-overs across
dependent domains, which are hard to anticipate using past correlations alone (Biggs et al.,
2015). Risk registries should record and rank vulnerabilities including at supply chain and
portfolio levels (Franks, 2012).
Such enhancements can enable resilience-based reporting and strategy to incorporate
thresholds, contingencies and uncertainties in a more transparent manner than traditional
single forecast approaches. This promotes agility to respond to surprises in a changing risk
landscape.
System-level Interdependencies and Feedback Loops
While financial statements of individual entities provide useful information, they fail to
capture cross-scale interdependencies that influence systemic resilience. Traditional
accounting treats different sectors as independent domains, but real world systems display
complex interactions, feedbacks and spillovers across scales (Bebbington et al., 2014).
Resilience accounting attempts to map relationships and feedbacks between stakeholders,
sectors and scales to understand cross- impacts of organization-level activities. It evaluates
how actions of individual entities transmit impacts onto the broader social-ecological system
and vice versa through mechanisms like feedbacks, lock-ins and path dependencies arising
from complementary assets/investments (Perrings, 2006).
For example, unsustainable agricultural practices like groundwater depletion can compromise
water security across a region by altering hydrological feedbacks over the long term. Loss of
biodiversity across landscapes impacts future resilience of individual farms through reduced
pollination services. Failure of infrastructure during extreme events like flooding might arise
from maladaptive development across broader regions.
By mapping cross-scale dependencies and visualizing potential reinforcing and balancing
feedback loops, resilience reports aim to provide a system-level perspective on how actions
of individual entities impacts overall sustainability and vulnerability of coupled human-
environment systems over the long term (Biggs et al., 2015). This ensures tailored strategies
addressing root causes rather than symptoms alone.
Resilience Metrics and Scenario Analysis
In order to monitor changes in resilience over time and evaluate strategy options, relevant
metrics need to be tracked along with narratives. A range of potential metrics proposed in
literature aim to quantify different dimensions of resilience thinking (Rodriguez-Labajos et
al., 2019):
- Exposure/Vulnerability metrics measure risks/sensitivity from stresses based on
characteristics like asset concentration, dependency on single markets etc.
- Buffering capacity metrics indicate ability to withstand disturbance, quantified through
metrics of reserves, substitutability, redundancy etc.
- Adaptive capacity metrics focus on learning, flexibility, innovation to enable
environmental/social adjustment.
- Transformability metrics evaluate potential and governance conditions for major regime
shifts if faced with large perturbations.
Metrics need to be tailored to specific organizational and system contexts. Multiple leading
sustainability indicators should complement quantified measures in resilience reports (Folke,
2006). Scenario analysis remains critical to evaluate diverse outcomes under alternative
plausible assumptions (Biggs et al., 2015). Sensitivity analysis of metrics under shifting
conditions further enhances robustness.
Metrics help quantify resilience dimensions, benchmark performance longitudinally and
inform strategic priorities. Scenario techniques allow evaluating how choices made today
may impact long term resilience and sustainability of human-environment systems in a
changing, uncertain future.
Barriers and Challenges to Implementation
While the case for integrating resilience thinking into accounting is strong conceptually,
several practical challenges exist in real world implementation:
Data and measurement challenges: Resilience attributes are complex and multi-dimensional,
posing difficulties in consistent measurement. Lack of long term historical data on some
capitals like ecosystems further complicates benchmarking.
Conflicts with shareholders’ short term interests: Resilience focus on long term viability may
conflict with pressures of quarterly reporting and short term profit maximization mindsets.
Lack of definitional clarity: Key resilience concepts like adaptability and transformability
remain open to interpretation, posing difficulties in standardizing metrics and criteria.
Trade-offs with other attributes: Prioritizing resilience sometimes involves short term costs
affecting metrics of productivity or efficiency that markets currently value more.
Static standards and mindsets: Changing entrenched accounting standards and moving away
from assumptions of predictability involves major reform challenges within the regulatory
environment.
Implementation requires substantive changes across accounting standards, business school
education, financial/legal practices and regulatory/policy frameworks that currently
emphasize stability over dynamism. Piloting initiatives, demonstration projects and
stakeholder engagement will be important to gradually build momentum. Continued refining
of conceptual frameworks is also imperative.
Recommendations and Conclusion
Mainstreaming resilience in accounting and mainstream finance requires sustained, multi-
pronged efforts across research, policy, business and civil society over the long term. Some
recommendations include:
- Pilot resilience reporting initiatives within frontrunner organizations to iteratively refine
accounting practices
- Stakeholder engagement forums to build consensus around core resilience concepts,
metrics, narratives
- Educational reform within accounting, finance and business schools to incorporate
resilience thinking
- New financial products/instruments incentivizing long term stability over quarterly returns
- Revision of accounting standards/guidelines by national/international bodies to include
resilience attributes
- Policy measures to internalize social and environmental costs, make markets price long term
risks better
- Business strategies factoring in dependencies between different capitals and alternative
futures
While challenges remain, building resilience into accounting is crucial for transparent
evaluation and strengthening long term viability of linked human and natural systems. Small-
scale pilots can catalyze gradual mindset shifts by demonstrating practical benefits. with
sustained efforts across multiple domains, resilience accounting can revamp practices to
handle complex realities of the 21st century.
