Externalities accounting hexalogy. Multi-entry mechanism model for adjusted integrated reporting

The Holocene epoch has given way to the Anthropocene, an era in which human activities have become the dominant force shaping the planet. The planetary boundaries framework (Rockström et al., 2009) outlines critical global limits to navigate this new reality. Addressing externalities – the spillover effects of an organisation's activities, impacting third parties without direct compensation (Bebbington and Jeffrey, 2018; Schaltegger and Wagner, 2011) – is essential for a sustainable future (Rockström et al., 2009; Rockström et al., 2023; University of Cambridge Institute for Sustainability Leadership (CISL), 2019). In this context, access to reliable, high-resolution information about the nature and scale of externalities has become a critical requirement for effective governance and informed decision-making.

Traditional financial reporting focuses on internal financial performance, often overlooking external environmental and social impacts. Non-financial reporting (NFR) incorporates broader sustainability-related information into organisation disclosures to address this gap. However, externalities – unpriced social and environmental costs – are generally excluded from market prices and often go undisclosed. In particular, a subset of externalities, known as the commons (Ostrom, 1990), includes resources that both are non-excludable and provoke competition for their consumption, such as air, water, and biodiversity (Hopwood et al., 2010; Unerman et al., 2018).

This leads to a persistent paradox for policymakers and organisations. While detailed and transparent data on externalities are essential for managing risks, shaping behaviour, and aligning with sustainability goals, generating such data is costly and often lacks direct financial return. Moreover, profit-oriented intermediaries may be unwilling to absorb these costs, especially if doing so undermines their competitive position. As a result, many externalities remain unrecorded, underreported, or misrepresented. There is therefore an urgent need for a reporting infrastructure that is consistent, cost-effective, scalable, and accessible—while also robust against manipulation and strategic obfuscation.

Externalities accounting aims to capture the social and environmental impacts of organisational actions. Numerous sustainability frameworks address externalities, each with its specific focus. NFR offers a broad overview, while frameworks like the GRI Standards and the Carbon Disclosure Project provide detailed guidance on environmental, social, and governance (ESG) factors. The United Nations' Sustainable Development Goals (SDGs) provide a global framework, corporate social responsibility (CSR) disclosure focuses on mapping externalities, and integrated reporting (IR) connects externalities with long-term value creation. However, Barker and Mayer (2024) highlight a critical gap: while environmental impact disclosures are common, a structured “externality accounting”, similar to financial accounting, is absent, hindering clear financial representation of environmental costs.

This study aims to bridge the gap between financial and NFR by analysing an organisation's externalities profile. This responds to Unerman et al.’s (2018, p. 499) call to “develop insights into accounting for, and reporting of, externalities”. We seek to answer “how accounting for externalities can help bridge this gap between information missing from financial reporting, but that is currently partially provided in sustainability reporting” (2018, p. 514).

The “value gap” ^[1] between financial metrics and societal impacts grows when externalities and planetary boundaries are ignored, leading to an incomplete assessment of an organisation's true impact (Flower, 2015). The transboundary and often long-term nature of externalities complicates responsibility attribution, but integrating these impacts into reporting is crucial despite obstacles related to communication and short-term profit orientation. As Hopwood (2009) notes, politicians and corporates “see their short-term economic and political imperatives above the longer-term interests of the human race” (2009, p. 433).

Deferring externality recognition in reporting can lead to resource misallocation due to information asymmetry and time lags ^[2]. Integrating SDGs through NFR and financial reporting is challenging due to measurement inconsistencies and differing goals. Financial reporting prioritises shareholder value, assuming negative externalities are typically internalised through taxes, while NFR captures the index-measured distance to SDGs.

We build on the framework of Bebbington et al. (2001) to examine the challenges of implementing strategies to internalise externalities. We introduce the multi-entry mechanism (MEM) model, informed by CSR and IR critiques, to deepen this analysis. Ultimately, we advocate rethinking how transactions are described.

Combining financial and externality values into a single metric can be misleading, since these values represent distinct types of information. Instead, this study proposes separating the externality value (E-value) – representing the monetary cost required to neutralise the transaction's material impacts on the SDGs – from financial value (F-value). Disclosing E-values at the invoice level can stimulate market-driven externality optimisation by increasing customer ^[3] pressure on the organisation to reduce externality costs.

Given the above, this study contributes to theoretical discussions on externalities accounting and IR critique in two main ways. First, it advances discussion by introducing the hexalogy, a framework with six propositions:

1. A parallel social market values externalities;

2. Disclosure of E-values;

3. Partitioning E-values into external and internal components based on asset utilisation;

4. Granting non-commercial entities the right to claim corporate externalities;

5. Adopting a triple-materiality approach and

6. Equitable presentation of UN goals.

Second, the MEM model separates F- and E-values to address accountability tensions between shareholders and stakeholders (Karunakaran et al., 2022). Providing E-values at the transaction level (on invoices) enables corrective feedback through consumer choice, allowing customers to consider E-value data in decisions. Consequently, E-values tied to financial data streamline reporting, allow for comparison, and reduce subjective bias. This approach leverages market mechanisms to optimise financial gains and externality costs. We contribute to the discussion (Frame and O'Connor, 2011, p. 4; Unerman et al., 2018, p. 514) by marking “the boundary between analytical rigour and narrative clarity, between quantitative measurement and metaphor.” Additionally, as Barker and Mayer (2024) suggest, we contribute to the broader effort to advance the existing externalities accounting framework. With the MEM proposal, we respond to earlier critiques of IR by Brown and Dillard (2014), Cheng et al. (2014), Flower (2015, 2020), Thomson (2015), De Villiers et al. (2020), Adams (2022), De Villiers and Dimes (2022), and more recent perspectives (O'Dwyer et al., 2024; Parfitt, 2024; Rodrigue et al., 2024; Tweedie, 2024) that highlight the need to balance inclusion and meaning, the importance of imagination and ethical capital, and the necessity of dismantling hidden political agendas.

The remainder of this paper reviews existing critiques and develops a model for externalities accounting. Subsequently, we assess the model's implications and conclude with recommendations for future research.

Initially, we examined the IR model and identified three key characteristics:

1. It combined monetary and non-monetary components.

2. It focused on commercial transactions, employing double-entry accounting for financial data but omitting externalities.

3. It excluded non-commercial perspectives from transactions.

Subsequently, we mapped issues in the scientific discussion using Bebbington et al.’s (2001) conceptual framework (Figure 1), which outlines four key approaches for externality internalisation:

Disclosure: The accountability approach enhances organisational transparency via NFR, increasingly facilitating the identification of externalities and raising questions about effective reporting strategies.

Rights: Private property rights incentivise the internalisation of externalities by eliminating areas subject to external impacts.

Mix: The mix approach combines regulations, taxes, subsidies, and reporting to address externalities through prohibition, economic incentives, and information disclosure.

Shadow pricing: This approach seeks to quantify externalities by estimating the costs that would be incurred if the organisation operated sustainably. It provides valuable insights for decision-making by producers, affected parties, and regulators.

Thereafter, we linked practice and framework to prior critiques of environmental, sustainability, and IR, as well as of externalities accounting, to identify key issues and arguments concerning externalities. Drawing on the foundational works of Gray (1992), Bebbington and Gray (2001), Hopwood (2009), and Gray (2011), we explore perspectives that extend beyond the scope of commercial transactions. Building upon Vitolla et al. (2019) and O'Dwyer et al. (2024), we incorporated Brown and Dillard's (2014) critique of the business-case framing in IR. We considered Cheng et al.’s (2014) concerns about information overload, alongside Flower's (2015) argument on the abandonment of sustainability accounting and Thomson's (2015) discussion of the shifting concept of capital. These critiques were synthesised and expanded upon in The Routledge Handbook of IR (De Villiers et al., 2020) through contributions by Deegan (2020), Flower (2020), Brown et al. (2020), Barker and Teixeira (2020), and Dumay (2020), forming the foundation of the MEM model.

Focusing specifically on externalities, we drew upon the insights of Unerman et al., 2018 and Antheaume and Bebbington (2021) into value contextualisation and sought out nuanced arguments from the recent literature, culminating in the work of Rodrigue et al. (2024). We address Barker and Mayer's (2024) concern about extending current accounting practice. Additional issues were identified through conferences and expert feedback, including Antheaume's (2004) concepts of value volatility and infinite regress. These insights were distilled into six aggregated issues (I1–I6), which serve to guide the development and evaluation of the MEM model.

Disclosure requires addressing fundamental questions: Who discloses? What is disclosed? How does disclosure occur? And how credible is it?

Externalities pose completeness and credibility challenges (Deegan, 2020), as transaction contexts are frequently absent (Unerman et al., 2018; Gray, 2011). These issues also obscure distinctions between capital forms, including ethical capital (Parfitt, 2024).

Integrating non-financial information into organisational reporting is hindered by persistent issues of relevance, credibility, and comparability (Flower, 2015; Bebbington and Gray, 2001). By definition, externalities are not reflected in market prices, incentivising selective disclosure and the underestimation of negative impacts (Beder, 1997; Gray, 2006; Henriques and Richardson, 2013; Milne et al., 2006; Tettamanzi et al., 2022). These dynamics raise significant concerns about the completeness and reliability of externality disclosures.

• I1:

  Completeness – Transactions and their reporting should convey all material information without bias, ensuring relevance to key stakeholders and broader society.

Completeness is inherently tied to auditability (Power, 2021). While financial reporting benefits from a clear and established audit trail, NFR often lacks this due to sustainability's inherent complexities and multiple narratives (Gray, 2011).

Cheng et al. (2014) and Lu (2022) underscore the challenge of excessive information disclosure in IR. Integrating financial reporting and NFR through IR significantly increases the volume of disclosed information. However, the abundance of narratives does not necessarily guarantee stakeholder understanding. Instead, it can contribute to greenwashing, selective reporting (cherry-picking), and cognitive overload (e.g. Talpur et al., 2023). Furthermore, alternative monetisation strategies may inadvertently reinforce business-as-usual practices (Brown and Dillard, 2014, p. 11). All in all, this leads to a dilution of the audit process, which is why we formulate a second issue, namely:

• I2:

  Inherent validity – The framework should guarantee the audit trail of externalities.

Developing an assurance framework that can effectively address these complexities and ensure comprehensive transaction identification emerges as a critical challenge.

The concept of rights assumes that there is an authority capable of allocating them to organisations. Assigning ownership to resources like air, water, or corporate culture poses significant challenges, though partial solutions, such as carbon trading, have been proposed. Nevertheless, as Hopwood (2009) warns, market mechanisms are vulnerable to fraud, manipulation, and the displacement of emissions.

The effective internalisation of rights depends on the enforcement mechanisms. Allocating rights to individuals implies a capacity for citizen enforcement, a condition often absent in non-democratic systems. While these macro-level dynamics shape organisation-level discussions, the primary focus remains on corporate accountability to shareholders, frequently marginalising relationships with stakeholders and non-commercial partners. This prioritisation perpetuates organisational discrimination (Brown and Dillard, 2014, p. 17).

Organisation reporting built upon commercial transactions typically omits non-commercial perspectives, failing to incorporate sufficient social pressure (Brown and Dillard, 2014, p. 16). The lack of dialogic accounting (Brown et al., 2020) results in a biased emphasis on financial capital (Thomson, 2015, p. 2). Ultimately, the system grapples with the gap between willingness and ability to act (O'Dwyer et al., 2024). This brings us to the next issue:

• I3:

  Alignment and engagement between stakeholders and society – The democratisation of rights and the consideration of diverse actors' needs.

Mix refers to a portfolio of three tools: reporting requirements (overlapping with disclosure), limiting or eliminating externalities (e.g. bans), and policy stimulation or discouragement through subsidies and taxes.

Effective stimulation and discouragement depend on a robust feedback mechanism to inform policymakers. At the macro level, general statistics may suffice, but within the organisational space, clear instrumentalisation of complex constructs like the SDGs is required. This necessitates reconciling reporting practices to meet diverse user needs, prompting calls for pluralistic accounting (Brown and Dillard, 2014).

Firstly, to what extent should organisations assume accountability for planetary boundaries, given that maximising shareholder wealth remains the primary business goal (Roberts et al., 2022 show mixed evidence)? Secondly, even if organisations assume accountability for the planetary boundaries, how should natural ^[4] and human-originated capital ^[5] be treated – can they truly serve as substitutes?

Flower (2015) and Brown and Dillard (2014) have questioned the link between capital and sustainability, highlighting the mismatch between organisational and societal goals. Flower (2015), aligning with Bebbington and Gray (2001) and Gray (2011), emphasises the challenges of gathering data and disclosing negative environmental impacts in IR. He argues that IR prioritises accounting principles over sustainability, neglecting externalities and narrowing its focus to production-related capital (Flower, 2020).

While Thomson (2015) acknowledges IR's potential to align organisational and societal goals ^[6], Flower (2020) critiques its shareholder-centric approach, advocating for a stakeholder-oriented perspective, as do Cheng et al. (2014). Flower further questions IR's capital aggregation, including its duplication of financial capital, and warns that trade-offs between types of capital – such as environmental degradation offset by financial gain – are unsustainable (Flower, 2015). In sum, this discussion remains inconclusive, leading us to the next issue:

• I4:

  Planetary agency – The organisation's capacity to respond to impacts on planetary boundaries.

Unveiling the “shadow” (or hidden) costs of social and environmental interactions presents significant challenges. Efforts to do so require changes of perception and attitude from organisations, overlapping with the considerations in Section 2.1 (Bebbington et al., 2001). Commercial transactions are typically measured using monetary metrics, but incorporating externalities requires subjective price adjustments to the equilibrium price (Atkinson, 2000). However, assuming externalities can be monetised at the inception of a transaction contradicts both the concept of externality and accounting practices, particularly transaction-recognition rules for journal entry.

Asset conversion into final products or services is recognised in standard accounting because financial costs are independent of the utilisation context. This principle does not apply to externalities, where the value is split into pre- and post-utilisation effects, creating an illusion of objectivity (Unerman et al., 2018, p. 508) ^[7]. How assets are used can generate an infinite chain of consequences, leading to an infinite regress problem with the valuation of externalities. (Frame and O'Connor, 2011).

Even if the infinite regress problem is solved, monetising externalities faces the commensuration problem – aggregating individual effects from the transaction to reporting and the planetary level. Accurate valuation in physical units (e.g. joules, emissions, or water consumption) is context-dependent ^[8]. Inherently designed at the ecosystem level, sustainability is characterised by non-linear dynamics. Attempting to impose linearity and downsizing it to the transaction level reaches the monetisation frontier (Frame and O'Connor, 2011).

Sustainability fundamentally embodies a long-term perspective, bridging operational gaps and opposing the myopic focus on business transactions and accountability (Cheng et al., 2014). Converting externalities into monetary metrics requires significant capital investment for identification and valuation, effectively transferring monitoring costs from society to private entities – this approach contradicts corporate commercial goals (Flower, 2015, p. 6). Valuation is a challenge due to the vast array of available techniques (Milne, 1991).

Empirical attempts to implement full-cost accounting have historically failed (Bebbington and Gray, 2001; Herbohn, 2005), primarily due to concerns about the volatility of values stemming from contextual assumptions (Antheaume, 2004; Antheaume and Bebbington, 2021). In an early implementation of IR, Adams et al. (2016) noted a “variation in the nature and extent of change in reporting over time” (p. 285).

NFR measures the distance to sustainability targets but lacks propagation at the transaction level, limiting the information and influence available to consumers. At the same time, IR's dual approach – monetary and distance metrics – creates internal inconsistencies and can mislead stakeholders (Flower, 2015, p. 6). Consequently, both approaches suffer from the “illusion of impact”, as the true costs of externalities remain elusive (Antheaume, 2004; Frame and O'Connor, 2011), leaving customer choices largely unaffected.

Thus, two critical issues arise:

• I5:

  Value aggregation and measurement – From a multidimensional perspective, a value matrix must effectively aggregate and compare the effects of externalities.

• I6:

  Timeliness – The time lag in internalising externalities.

We use these issues together (I1–I6) as a basis to assess the model.

We start with a simplified model, and then we enhance it.

We propose an externality-reporting model grounded in transaction-level data. Each transaction has a financial value (F-value) and an externality value (E-value). F-values are determined according to established accounting and financial reporting standards, while E-values represent the monetary costs required to neutralise the transaction's SDG material impacts. Externality transactions include all internal and external organisational activities with quantifiable externality effects. For externality effects that cannot be quantified in monetary terms, the symbol ∞ is displayed on the invoice, accompanied by a narrative description in the reporting. Figure 2.

The E-value consists of three components: E-_input, E-_throughput, and E_-output.

1. E-_input represents the E-value associated with raw materials and services acquired.

2. E-_throughput reflects the E-value added by the organisation's specific resource use.

3. E-_output is the average unit E-value of the final product or service, incorporating the total unit E-value.

The difference between total E-_output and total E-_input represents the organisation's externality-added value, constituting a social deficit. Externality monetisation (F-values) could reduce this deficit.

When monetary valuation is impractical, a narrative description accompanies quantifiable values. This hybrid approach, symbolised by denoting an E-_output value with the infinity symbol (∞), provides a more comprehensive assessment of externalities.

The organisation reports combined F- and E-values in adjusted integrated reporting (AIR) and documents both F- and E-values on invoices. Input transactions and E-_input values are recorded, E-_throughput values are calculated internally, and the combined value is allocated to output units. Individual unit E-_output values are communicated to customers, while total and incremental E-values are reported in AIR.

The closed economy model (one country) assumes uniform regulations and transaction-level E-values. However, we introduce a C-value representing local neutralisation costs for an open economy. The model uses whichever is higher out of the E− or C-value as input to prevent arbitrage.

We assume that management tends to disclose positive externalities while underestimating negative ones. C-values mitigate this asymmetry by being independently determined and audited without incurring costs to shareholders.

Figure 3 presents an information flow within the MEM for a closed economy.

Corporate information is protected (solid line), while external pressures from activists (dashed double-dotted line) and customers (dashed line) drive externality disclosure. Management discretion (MD) determines the E-_input inclusion in E-_output. The publicly available open-access E-register enables public and activist scrutiny of the completeness of AIR. Transaction E-invoices include monetary externalities and unmeasured impacts ($/∞ convention). The system is grounded in a triple-materiality reporting threshold (see Section 3.2.7). Financial transactions contribute to the organisation's competitive advantage and are treated as private data (solid-line rectangle). At the same time, externality data relate to public goods and are excluded from the confidentiality regime (dashed double-dotted-line rectangle). The C-value and externalities market value (EMV – see Section 3.2.4) set the minimum value threshold for an open economy. For externality debit/credit (EDr./ECr.), see Section 3.2.3 discussion.

The organisation conducts assessments to identify the SDGs it materially impacts. The resulting SDG policy provides context for the E-value generated during the conversion of resources into the final product or service.

In addition to the financial value of the transaction, the system requires the E-value to account for impacts across all 17 SDGs, if material. The combination of F- and E-values represents an SDG-neutral transaction ^[9].

A transaction may have a positive or negative net impact on the SDGs, with each goal (G1–G17) potentially exhibiting a mix of positive, negative, and neutral effects. Figure 4 illustrates a hypothetical business transaction.

This transaction would be recorded with an F-value of $200 and a net E-value of -$30. It negatively impacts the SDGs, requiring an additional $30 to achieve zero impact across all seventeen goals.

The transaction positively contributes to Good Health and Well-Being (G3) to a value of $10. However, it negatively affects Responsible Consumption and Production (G12) to a value of $40 due to the substantial use of plastic in the machine's production process. The net SDG impact is negative, as the negative impact on Responsible Consumption and Production (G12) outweighs the positive effect on Good Health and Well-Being (G3).

The double-entry system records the economic transaction value while providing an arithmetic basis to ensure the completeness of the recording. For the transaction described in Figure 4, the journal entry would be as follows:

The device accounts for the net SDG cost of $30, reflecting the impacts on SDG 3 (Good Health and Well-Being) and SDG 12 (Responsible Consumption and Production). The transaction is recorded in the journal using E-entries in EDr. and ECr., as follows:

By combining entries (1) and (2), we arrive at the multi-entry journal record for the machine purchase:

All transactions from the integrated journal are posted to an integrated general ledger and synthesised in the integrated trial balance. Assuming this is the only transaction and shareholder capital amounts to $500 paid in cash, Figure 5 presents a simplified report of the financial value and net E-value.

The following formula gives a translation of the E-_input value into the E-_output value:

Where k represents the index of transaction T contributing to the final product (service) S, E-_input and E-_throughput represent the input and throughput externality value of transaction T, and j represents the index of E-_throughput transaction contributing to product (service) S. Q represents the quantity of the product (service) generated during a given measurement period, and EMV is the (externality) market monetary value of services to eliminate one unit of the product's SDG impact.

The E_-output value is calculated using formula (4), where the E-_input and E-_throughput externalities of a transaction contribute to the final product or service. E-_output is a conditional average of E-_input and E-_throughput, subject to whichever is higher out of a policymaker-defined C-value and the market value for SDG neutralisation. Unlike traditional accounting, MEM relaxes the assumption of fixed service and material values (at conversion to finished goods), allowing for context-dependent externality valuation subject to reasonable control.

The C-value prevents cross-country arbitrage of SDGs by ensuring E-liability is valued at the cost of reversing transaction effects in the local market rather than the original invoice value ^[10]. This addresses the issue of ecological footprints being left in overseas economies (or “E-value dumping”).

An externality transaction (E-transaction) is any transaction undertaken by an organisation that generates externalities extending beyond the immediate parties involved. These externalities can be positive or negative and can impact individuals, communities, or the environment.

Key features of E-transactions include:

1. Measurability: The E-value can be determined using current scientific knowledge.

2. Documentation: Formal documentation, such as an E-invoice, is required.

3. E-invoice: This provides details, including the E-value, SDG impact, transaction nature, date, and organisation control. It represents the E-_throughput value.

The organisation must record each E-invoice in the externalities register ^[11] (E-register). This open-access register, which is auditable by the public, maintains a comprehensive record of all E-transactions and management decisions regarding their transactions in the E-journal (which is not publicly accessible).

Any organisation can register as an E-invoice issuer, provided it meets minimum public disclosure requirements. Management is responsible for recognising E-transactions in the E-journal and ensuring the accuracy of timing, existence, valuation, control, and the absence of double counting.

In contrast to the double-materiality concept (Barker and Mayer, 2024; Baumüller and Sopp, 2022), our framework employs 3M to assess E-value.

1. Customer decision-making: Materiality is defined by the impact of E-value error on purchasing behaviour.

2. Local community impact: Materiality is assessed using similar criteria, focusing on effects at the community level.

3. Planetary level: Materiality is determined by the proximity of E-equity to planetary boundaries, expressed as a fraction of global GDP.

Introducing a planetary trigger aligns the linear MEM model with a non-linear sustainability framework, positioning MEM as a foundational metric for macro-level models analogous to the role of book value in corporate valuation.

The MEM defines the monetisation boundary by valuing the elimination of negative externalities across all SDG components, using 3M to assess impacts from transactional to planetary levels.

In full-cost accounting, infinite regress arises when externalities' impacts are traced through increasingly remote supply chain layers, with each step introducing additional indirect externalities. When this leads to a non-summable accumulation, MEM denotes the input E-value with the infinity symbol (∞), and discloses the nature of the regress in the AIR notes. This value is then transferred from the input to the output invoice, allowing customers to recognise the scale of the externalities' impact. When both infinite (non-summable) and finite (summable) effects occur, MEM processes them in parallel, reporting both the calculated cost ($) and the ∞ symbol on the output invoice. To prevent regulatory arbitrage and E-value dumping in open economies, MEM introduces the C-value, which reflects the cost required to neutralise externalities' impacts within the local pricing level.

Table 1 compares the issues identified in the literature (I1–I6) with the propositions developed in the MEM framework.

The following subsections discuss how these propositions address the identified issues.

Figure 6 outlines the MEM's completeness mechanism based on the social market.

The introduction of the E-invoice system initiates dual pressures on organisations regarding recognition of externalities. Management faces growing demands from activists to account for all organisational activities, both commercial and those involving only externalities. Simultaneously, consumers receiving E-invoices put pressure on the organisation to reduce the E-value disclosed in the E-invoices.

Although management retains discretion over accepting the E-invoice, this decision must be disclosed in the publicly accessible E-register (compare Figure 3 – MD), enabling external verification. Confidentiality is waived, as the data relates to public goods, fostering transparency. Consequently, organisations must disclose how they mitigate externalities, including in policy statements and notes to the AIR. This open reporting system enables collective learning, informs market behaviour, and supports the long-term stabilisation of externality-management practices. Thus, we arrive at the first proposition:

MEM extends IR by incorporating E-transactions and E-invoices, enabling third-party E-value claims. This approach aligns with critiques of IR's focus on transactions, and challenges the traditional assumption of independent entity (Deegan, 2020). MEM addresses missing externalities and market failures by restoring accountability.

Unlike full-cost accounting, which primarily supports “internal management decision-making” (Unerman et al., 2018, p. 503), MEM adopts a broader external perspective by involving the social market. This approach directly responds to Flower's (2015) critique of IR, which noted its lack of obligation to report damage caused by the organisation unless such damage is internalised. MEM requires the E-value to be recorded at the outset, regardless of whether it is later internalised into the F-value.

Existing reporting models often rely on single-entry narratives, omitting the double-entry assurance fundamental to financial transactions (F-value). MEM reintroduces double-entry principles for E-transactions, creating intrinsic assurance mechanisms. Key features include:

1. Mandatory E-value consideration for financial transactions;

2. An open E-register for feedback; and

3. Audited transfers from the E-register to the E-journal to reduce information asymmetry.

By incorporating these features, MEM effectively addresses sustainability reporting challenges identified by Brown and Dillard (2014).

In a corporate setting, transactions are confidential to preserve a competitive edge. Contrary to this, the MEM framework excludes E-values from this confidentiality, as externalities pertain to societal goods. This leads to our second proposition:

Commons are not assigned to any specific organisation; thus, their use and conversion should be treated as a public good. Access to nature and methods for converting externalities into output price should remain unrestricted to fuel the social market mechanism with critical information, thereby stimulating the convergence of approaches and reducing uncertainty caused by the contextualisation of E-_throughput.

Removing E-value confidentiality holds management accountable for customers' and activists' claims, addressing issues related to commensuration, the illusion of objectivity, and the monetisation frontier (Frame and O'Connor, 2011; Unerman et al., 2018). Management's reasoning serves as a public good, enabling market adaptation by other organisations and fostering iterative verification of best practices. Over time, this process leads to equilibrium and reduced volatility caused by diverse valuation methods applied in specific contexts (Antheaume, 2004; Antheaume and Bebbington, 2021).

To mitigate volatility, we decompose the E-value output fluctuation into context-independent and context-dependent components. The context-independent component is valued independently, while the context-dependent component's valuation is subject to social market feedback. The latter aligns with counter-accounting practices that verify externality reports using external data on economic, environmental, and social impacts (Adams, 2004; Boiral, 2013; Flower, 2015; O'Dwyer, 2005). The context-independent element is valued based on E-_input, while the dependent element's valuation is subject to social market feedback (E-_throughput). This leads to our third proposition:

Since the material context is disclosed in the SDG policy, the AIR achieves vertical comparability across organisations operating under asset-utilisation contexts. This approach mitigates the value volatility problem. By splitting the E-value and holding the organisation accountable for decisions within its control, MEM makes the implementation burden less severe than the challenges reported by Bebbington and Gray (2001).

Granting rights to non-trading actors, for example to issue an E-invoice, aligns with social pressure (Brown and Dillard, 2014, p. 16), dialogic accounting (Brown et al., 2020), the financial capital bias (Thomson, 2015, p. 2), and the gap between willingness and ability (O'Dwyer et al., 2024). Under this framework, organisational management becomes accountable not only to shareholders but also to non-commercial parties.

MEM highlights conflicts between societal and organisational goals, integrating capitalist and stakeholder theories into AIR. This pluralistic accounting approach reopens the dialogic accounting channels through the E-register. MEM addresses Brown and Dillard's (2014, p. 3) critique that IR's business-case framing limits its potential as a catalyst for diverse societal actors in sustainability initiatives, instead favouring shareholder interests by introducing dual values (F-values and E-values). By doing so, it establishes a clear distinction between owner and stakeholder perspectives.

The lack of E-value recognition for a given transaction is subject to public scrutiny through the E-register, reducing risks of impression management, stimulating social pressure, and addressing Flower's (2015, p. 12) critique of underreporting. This mechanism mobilises third parties to ensure the completeness of E-register claims.

Cheng et al. (2014, p. 93) distinguish IR from financial reporting based on time horizons, noting that IR aligns with long-term perspectives. MEM addresses the conflict between the myopia of financial reporting and the forward-looking approach needed for externalities by differentiating the timing of recognition for externalities.

By deferring the F-value conversion to cash and implementing Proposition 3 on E-_throughput contextualisation, MEM estimates the magnitude of externality transactions. Separating E-value and F-value in AIR prevents contamination of the two recorded streams and preserves the velocity of the F-value flows, enabling the quantification of anticipated externality impacts.

Unlike delayed, lump-sum recognition of societal claims in financial accounting, MEM requires immediate E-value recognition at transaction inception. This approach integrates diverse monetary E-values and promptly communicates transaction impacts on SDGs.

Section 3.2.7 illustrates the monetisation boundary within MEM, encompassing transaction, local market, and planetary levels. Single- or double-materiality concepts fail to effectively link customers, activists, and organisations to planetary boundaries. Hence, we propose the following:

3M connects materiality at the transaction, local market, and planetary levels by referencing customers, stakeholders, and society. It provides a toolkit to manage valuation challenges such as the infinite regress problem and E-value additivity. Additionally, it establishes triggers to reconcile AIR's linear baseline model with the non-linear macro model, which, while more accurate, faces challenges in aggregating transactions.

This framework addresses the mismatch between societal and organisational goals (Flower, 2015; Brown and Dillard, 2014) and tackles data collection and reconciliation concerns (Bebbington and Gray, 2001; Gray, 2011). 3M advances Barker and Mayer's (2024) “environmental materiality”, delineating three dimensions: transactional, operational (natural capital under organisational control), and planetary. However, MEM does not allocate the globalised impacts across organisations, as illustrated by “carbon sequestration” (Luisetti et al., 2020). MEM focuses primarily on reconciling internally generated E-values with externally imposed C-values.

MEM supports three-way reporting: financial reporting for shareholders and stakeholders, transactional reporting for suppliers and customers, and externality reporting for society and non-commercial activists. Each group brings its perspective on the importance of reported matters, justifying separate fairness perspectives.

By enhancing data quality at the transaction level, MEM centres the assurance process and stimulates counter-accounting practices (Brown and Dillard, 2014, p. 16). Public access to the management decision to include a claimed transaction from the E-register into the E-journal fosters dialogue between society and organisations, reducing inefficiencies in the assurance process. This approach helps address the inconclusiveness noted by Cheng et al. (2014, p. 99), who observed “no consensus around what a “true and fair” integrated report is”.

The MEM framework is limited in addressing the unequal distribution of environmental costs and benefits. While it incorporates non-financial aspects, its reliance on the SDG framework may not fully capture externalities.

Although the C-value mitigates arbitrage, it introduces additional complexities. The MEM template for accounting policy and transaction-specific entry techniques requires further development. The model also cannot fully internalise historical environmental damages, such as species extinction, which limits its scope in achieving sustainability (Antheaume and Bebbington, 2021; Bebbington and Gray, 2001; O'Dwyer et al., 2024; Rinaldi et al., 2018).

As a thought experiment, MEM lacks empirical validation and faces challenges like those encountered by previous “full-cost accounting” attempts.

This paper develops the MEM framework based on prior critiques of sustainability, non-financial, and IR. MEM introduces a correction at the transaction level by capturing both financial and externality values. These values are recorded in separate registers, journals, and ledgers to produce AIR, distinguishing financial values from externalities while linking them through individual transactions. By doing so, MEM enables the distinct communication of values to different stakeholder groups.

Additionally, MEM grants third parties the right to challenge the externality values of transactions recognised by organisations. This promotes dialogic accounting, mobilises stakeholder activism, embraces the plurality of accounting perspectives, and democratises the use of the commons.

MEM does not replace current NFR but supplements it. By capturing externalities unlikely to be included in financial reporting at the moment of transaction recognition, MEM reduces the need for excessive narratives in NFR, enhancing consistency while limiting opportunities for impression management. MEM does not prescribe a specific method for externality internalisation; it functions as a meta-integrated solution that benefits from all available approaches. Its primary focus is on addressing the needs of non-commercial parties, setting it apart from full-cost accounting discussions.

The proposed MEM model offers a cost-effective and scalable approach for integrating externality reporting into existing accounting systems. Its flexibility makes it suitable for organisations of all sizes—from micro to large enterprises. At its simplest, MEM allows organisations to self-assign an E-input value to the resources they use, until such time as the other organisations implement MEM. Instead of measuring impacts against each SDG separately, MEM enables a streamlined assessment through a single net E-value, reducing the initial reporting effort.

As more organisations adopt MEM and common practices for E-input valuation emerge, the cost and complexity of implementation are expected to decline. This will allow organisations to shift resources toward more detailed assessments aligned with specific SDGs, improving both internal management and external reporting. MEM also builds on the triple materiality evolve as adoption grows and valuation methods become more standardised.

From a practical perspective, MEM requires only a marginal adjustment to transaction recording practices by including externality disclosure. This adjustment can induce behavioural shifts among stakeholders and society by fostering ongoing awareness of the magnitude of externalities associated with daily transactions. By integrating externality information into transaction records, MEM eliminates the timing lag from deferring externality values into financial value, which often creates a considerable time gap in recognition of the original transaction.

However, this assertion is not a claim that accounting alone can save the planet. We share Flower's scepticism that such an ambitious goal is overly demanding. Over the years, externalities accounting has become trapped in a cycle of complexity, measurement challenges, and a kind of Stockholm syndrome paralysis. This paper proposes a six-part framework to rejuvenate this field. While precise measurement may remain elusive, abandoning the pursuit of a sustainable future is not an option. This pursuit lies at the heart of research.

Conceptualization (PS-Piotr Staszkiewicz, PL-Paulo Lustosa) Methodology (PS) Formal analysis, Resources ((PS, PL) Writing - Original Draft (PS) Writing - Review & Editing (PL, PS) Visualization, Supervision (PS, PL) Project administration (PS) Funding acquisition (PS, PL) Author’s equally contributed to the final text.

The authors acknowledge O. Kyriacou and anonymous reviewers for their comments; J. Bebbington (Co-speaker), P. Fukofuka (Chair), A.K. Shah, T. Kunkel and an anonymous participant (proposition idea) (2024 IPA); J. Tingey-Holyoak (Chair), C. Higgin and M. Milne (scope enhancement) (2024 AF); CCAAR 2024 participants (discussion); W. Maroun (APIRA online) (framework direction); N.S. Cooray, K. Jayasinghe, S. Uddin and audience (25th Workshop on Accounting and Finance in Emerging Economies); EURAM 2024 participants (discussion); C. de Villiers and participants (Meditari Accountancy Research Conference 2023); lOth Accounting & Governance Conference (Brazil 2024), University of Brasilia (externalities research stay) and SGH Warsaw School of Economics, ADOP/RID24/25:Z3.P3.