Constrained by Accounting: Examining How Current Accounting Practice is Constraining the Net Zero Transition

Abstract

In February 2020, BP made a commitment to become carbon neutral by 2050, creating an obligation to society and investors. We explore how accounting practice constrains BP’s transition plans. While BP can achieve much of its net zero obligation through technical innovation, these investments will typically be expensed through the income statement, whereas capital expenditures on hydrocarbon projects would tend toward capitalization and slow depreciation through the income statement. And whereas internally-generated innovation will be expensed, intangibles acquired in M&A will be capitalized. Accounting's logic must support BP's net zero obligation as a social imperative and reward its acceleration. Normative accounting for intangibles provides a promising solution to overcome these challenges and restore accounting for net zero decision-making and reporting.