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All Capitals Are Unequal, But Some Are More Unequal Than Others

“Price is what you pay, value is what you get”Warren BuffettMoving beyond one-dimensional capitalism“All capitals are unequal, but some are more unequal than others.”This was a thought that popped into my mind after a number of real-life and online conversations about the concept of multiple capitals. This notion proposes that there is a range of sources of value (capitals) that give rise to economic and social benefits, but that current accounting and economic approaches recognise only one — financial capital.

“Price is what you pay, value is what you get”

Warren Buffett

Moving beyond one-dimensional capitalism

All capitals are unequal, but some are more unequal than others.

This was a thought that popped into my mind after a number of real-life and online conversations about the concept of multiple capitals. This notion proposes that there is a range of sources of value (capitals) that give rise to economic and social benefits, but that current accounting and economic approaches recognise only one — financial capital.

The number of “additional” capitals vary according to the model. For instance, Professor Paul Ekins (et al) suggested Four Capitals, Forum for the Future focuses upon five, Jane Gleeson-White suggests six in her recent book, Six Capitals: The revolution capitalism has to have — or can accountants save the planet?, though others consider there might be more — up to eight!

Given such diversity, the exact name and nature of the capitals proposed also vary, though most approaches feature the following capitals: natural, social, manufactured, human and financial.

However, all such approaches seek to achieve the same thing — to broaden our conception and consideration of what is valuable for delivering economic, social and ecological utility. In addition, they call for these wider aspects to be placed at the heart of economics, accounting, corporate planning and decision-making.

Whilst not a new idea, the multi-capitals concept has been gaining ground in recent years. It has been particularly strongly grasped by the accountancy profession, to an extent by policy makers (building upon the idea of “Natural Capital Accounting”) and by initiatives seeking to relate such wider concepts of value to the activities of business, notably the Natural Capital Coalition (formerly known as the TEEB for Business Coalition).

This post represents a personal take on the concept and a number of issues that it raises, not a comprehensive overview of the capitals concept, which contains more nuance and strategic thinking than is reflected within a subjective blog post.

A metaphor or a financial procedure?

Perhaps the most critical aspect of the concept is whether it is best understood as a metaphor, rather than as a concrete approach to accounting, useful to reinforce the fact that a sustainable world requires us to recognise a number of categories of value rather than a reductionist focus upon one — financial capital.

The danger of metaphors is that they don’t always travel well; they run the risk of not roaming very far before they are interpreted as a fact, not the reference to a fact. This was (somewhat depressingly) illustrated to me a few years back in a UK Parliamentary discussion of Natural Capital Accounting when an environment minister rebutted voiced concerns about the ability to reduce natural capital into a financial figure by saying (mildly paraphrased): “You don’t understand how useful it is to translate natural capital into a comparable metric (money). Once we do that we can use that figure to decide what the cost-benefit of a given action is.

The trouble with this understanding is that, firstly it ignores the fact that natural capital is a metaphor for understanding value, not a mechanism for determining price; and secondly (and more importantly), price cannot be used to assess trade-offs when the trade-offs are between aspects of value with fundamental dependency relationships at their heart.

“There is no wealth but life.”

John Ruskin

Fundamental dependencies — ceteris non paribus

When one capital depends upon another — such as in the case of financial capital (and all others) deriving from natural capital — then reducing each to a number for the purposes of assessing trade-offs ignores the fact they are not equal — that one can only exist with the continued presence and health of the other.

Fundamental dependencies indicate a value hierarchy. Using a comparable metric like money as a way to put things on a level playing field makes sense, but only up to a point. Such an approach would be fine if the things we were comparing were truly comparable. However, the environment is something we can’t do without. There is a dependency relationship. Put simply, there is no money without human beings capable of inventing and using it. There are no human beings without food, air and water.

The concept in practice

Are companies telling the story well yet….?

The multiple capitals concept is already at the heart of a number of approaches seeking to support organisations in reflecting their total impacts in a more three dimensional way than current accounting practice does at present. Most significant of which is the multi capitals structure within the International Integrated Reporting Council’s (IIRC) Integrated Reporting Framework.

This approach is undoubtedly valuable, yet that value is yet (in my opinion) to be realised. Early adopters have often failed to understand either the meaning or implications of the Framework, as evidenced by some recent work we undertook to assess the entries to’s CRRA 15 Reporting Awards. Of the integrated reports using the IIRC Framework, a number merely saw the capitals as ‘labels’ for existing thinking rather than calling for more fundamental analysis of the impacts and dependencies of their business. The most egregious examples of this problem were shown by a number of companies reporting against natural capital only in terms of efforts to minimise direct operational impacts — entirely ignoring the impacts of core business.

In addition, there is the challenge of communicating with investors. Many companies still struggle to communicate their approach to sustainability in a manner that has meaning to mainstream investors — as strategic issues that relate to the company’s ability to create or protect value.

In order to do this, companies need to understand how to translate their sustainability activities into their implications for the measures that mainstream investors use to evaluate company performance and intent when making investment decisions.

Sustainability has clear financial and risk benefits, likely to lie somewhere in the following areas:

  • Direct impacts upon the performance of capital — where sustainability increases efficiency and reduces costs.
  • Impacts upon equity risk profile — where effective risk improves the likelihood of share price stability and growth.
  • Influence upon the assessment of drivers of shareholder value — analysis undertaken by investors of the management of risks likely to affect the company’s ability to create shareholder value.
  • Intangible value — representing a significant proportion of overall company value, these refer to ’soft‘ issues that do not feature upon company balance sheets such as leadership, transparency, intellectual capital, human capital, workplace organization and culture. Sustainability has a significant role in intangible value in terms of reputation, brand value, trust and stakeholder relations.

…and who is listening?

Investors barely acknowledge the existence of a number of environmental and social externalities as relevant factors in investment decisions. They certainly do not (at present) recognise that a company’s treatment of the multiple capitals upon which they depend has strategic relevance for the long-term success of that company (and therefore their investment decision).

Even if they do, the individual, rational decisions of a given investor are swamped by the mass effect of the market — which at present prioritises market movement over longevity, stability and the potential longevity of any given company. This issue is explored in greater detail here.

Navigating the capitals

There remain significant conceptual and structural challenges to overcome before a multicapitals approach can be effective — driving a balanced and sustainable world.

Given the fundamental challenges posed by dependencies between capitals, a key approach to addressing this issue would require a focus upon valuing interdependence.

Valuing interdependence

The route to a sustainable future lies in recognising and valuing the dimensions of interdependence we have with each other and with the natural world:

  • Ecological interdependence — the natural environment is the foundation of human existence, the bedrock of social stability and the basis of all financial value. Humans are fundamentally dependent upon the Earth as our (so far) only home.
  • Financial interdependence — our markets are massively complex and interdependent. Resource and logistics systems are global and the rise and fall of market actors can mean success, failure, feast or famine across the world. The narrow financial success of one party must not continue to come at the common expense of many.
  • Social interdependence — nothing happens in our modern world without the involvement of others. We need to recognise and re-balance this interdependence so that our quality of life is not bought at the expense of others and is not at risk if those we depend upon decide to withdraw their subsidy.

This thinking is explored further here.

Peter Burgess of True Value Metrics has published a number of useful and interesting pieces on the use and evolution of capitalism and a capitals approach, see here for more detail.

Can accountants save the world?

Putting aside for a moment that it is not the world that needs saving (it will persist with or without us — notwithstanding the range of eschatological threats — for potentially another 4.8 billion years, when the sun burns all its hydrogen) the question of whether accountants can play a significant role in saving our world (the one of massively interdependent global capitalism) is an interesting one.

The question is a topic explored in a fascinating, informative and balanced discussion on the blog of Jane Gleeson-White. In my opinion, accountants have a vital role, to be in the vanguard of saving our world — they are the custodians of value, and accounting approaches are at the heart of defining, in social terms, what is valuable.

The challenge that they (and all of us) face is that a recognition of value is nothing without the means for translation into useful action, and our current systems of value are proving mighty hard to evolve.

Can the capitals thrive without more fundamental change?

Overshadowing all of the issues noted above is a much bigger question: Can the capitals concept really be useful without wider change and reform of economics and capitalism?

This is a question that is increasingly being asked and increasingly not just by anti-capitalists and revolutionary thinkers but by also economists and financial professionals. A notable example is John Fullerton of the Capital Institute, whose Regenerative Economy is a suggested model for a different operating system for our economic activity.

Surely if we are to truly use the mechanisms of capital markets and international trading to deliver environmental and social good then those markets need to be fundamentally reformed, such that they are capable of truly valuing a common future as more valuable than a private present.

Economics and markets must have both the incentive and capability to deliver the required strategic outcomes. They must rise to the challenge of valuing activities and behaviour that pay off over the long term, to compound rather than discount the value of a more sustainable future and to start valuing decisions that allow the growth and stability of ecosystems and societies as an outcome of advantage to the market as a whole.

Were this to be possible, sustainable decisions and behaviours would be inherently valued and prioritised rather than considered as an afterthought.

Truly sustainable economies and markets — those dedicated to the discovery, trading and distribution of truly sustainable value — would therefore be:

  • Thermodynamically optimised — their use of energy and materials would be in alignment with the physical characteristics and limits of the planet with a focus upon ‘entropic efficiency.’
  • Value abundance rather than scarcity — prioritising technologies and behaviours that deliver either natural (e.g. biologically based) or managed (e.g. through closed-loop stewardship) abundance.
  • Enhance natural vitality — valuing technologies and processes that make use of the planet’s natural rejuvenative and productive abilities, learning from and utilising natural production techniques as the basis for their technological and industrial models.
  • Balance their interdependence — recognising and balancing the web of social interdependencies they exist within, seeking mutual equity within all relationships.

More information on these concepts in the context of enterprise can be found here.

The multiple capitals approach — as yet a journey not a destination

The value of multiple capital approaches will only be realised when we have economic approaches (and consequent markets) that are founded on the understanding that maintaining and growing the fabric of the place that we do business (our planet) is a precondition rather than an afterthought.

They will only become useful when we have companies truly able to understand and integrate their meaning into the way they prioritise and manage their relationships with the capitals and are capable of translating these into the value conversations that they undertake with investors.

We are perhaps at the start of our journey to reform concepts of value. The capitals approach presents a vital topographical guide to the territory we must traverse. However, the route we will take remains uncertain and our ability to successfully reach a sustainable destination, in the time we might have available, also remains in question.