New Metrics
Follow-Up to SB'13:
Bob Willard on the Emergence of Capitalism 2.0

Bob Willard is an expert on quantifying and selling the business value of corporate sustainability strategies. He serves on the advisory boards of The Natural Step Canada and Forum for the Future US, and his fourth book, The New Sustainability Advantage was published in 2012.

Currently he is working with the Global Initiative for Sustainability Ratings (GISR) to develop a Gold Standard for sustainable enterprises. At Sustainable Brands ’13 in San Diego, he was a busy man, leading a half-day workshop, presenting on the plenary stage and moderating a panel discussion. I caught up with him for a few follow-up questions.

You subtitled your plenary presentation: The Perfect Storm in True Cost Accounting. What conditions were you pointing to?

Historically, the major focus of accounting has been to keep track of financial capital. While that will remain important, there’s good work beginning to happen to track other kinds of capitals that are becoming more and more important to companies. For instance, credible monetized metrics developed by firms like Trucost are allowing us to track natural capital. When Puma gave themselves a bill last year for $195 million dollars of damage done in this area by their operations in 2011, they were essentially sending a signal that deeper accountability by companies is becoming the new normal. It’s a virtual bill, but it still acknowledged the fact that they and their supply chains need to start cleaning up their act.

Accountants are also pretty good at tracking manufactured capital. Human and social capital are more difficult to track, but efforts are underway to put long-overdue metrics on those as well. That’s what we’re currently working towards with GISR, and accountants, economists and social scientists all have important contributions to make. For companies to become more sustainable, they need to be able to keep track of how they’re doing on these other types of capital.

You refer to these non-financial capitals as the bottom of the iceberg. What do you mean by that?

The iceberg metaphor is nice because what is above the waterline symbolizes what’s easy to touch, and that’s what accountants help us keep track of on the financial side. But the bottom of the iceberg below the waterline illustrates the importance of the things that are more challenging to measure. Twenty or thirty years ago it wasn’t a big deal that the so-called “non-financials” or “intangibles” did not receive much attention, because they didn’t account for much of a company’s market capitalization. But now, on average, intangibles account for about 80 percent of a company’s market capitalization. Natural capital, human capital, social capital — these are in the bottom portion of the iceberg, out of sight below the water level. From a stock-market perspective, a company’s worth is very much dependent on their strength, since market capitalization includes both the top and the bottom of the iceberg.

Are investors recognizing the importance of these other capitals?

They’re important to other stakeholders, and as a result, they’re at least indirectly important to investors. The word “materiality” comes into the conversation very quickly. Historically, the term referred to risks and opportunities that might influence the decisions of an informed and reasonable investor. If the environmental and social dimensions of a company’s operations or impacts are important to customers, communities, governments or lenders, then they have an impact on the success of the business, and anything that has an impact on the success of the business is material to investors. So while some of these things may not be directly of interest to investors, if they matter to other important stakeholders, by definition they are material to the investor. Essentially, we have a chain of materiality, or domino effect, going on.

So is that why you say stakeholders' concerns are becoming more “personal” for companies?

Yes. A lot of the things we think of as environmental or social concerns have always been treated by companies as someone else’s problem — or interesting, but not really relevant to their business model. But many of these issues are coming home to roost now; they are getting severe enough to actually affect companies operations. Things like climate change, which were never the purview of for-profit companies, are starting to boomerang on organizations. They’re being hit with severe weather events, or their suppliers are, or their customers are.

Severe social unrest has similar effects in countries where companies are making or selling their goods, or where they have suppliers. Material shortages and access to fossil fuels are other concerns that are becoming extremely relevant to the risk management disciplines used by organizations. When that happens, it’s personal for companies.

You have a list of characteristics defining what you call Capitalism 2.0. They include (among others) maximizing stakeholder value instead of shareholder value; new participatory sources of financial capital; internalization of impacts; a shift to circular business models; and increased transparency. You also note a shift from global to local. What does this mean for multinational companies and brands?

Global is certainly going to remain a reality for a long time to come. So I should clarify that the trend is towards “more local” as opposed to “local.” That said, there’s an effort by a lot of communities around the world to become more resilient and more self-sufficient regarding food, water, supply chain and business. This buffers them from events taking place in other parts of the world and helps them avoid some of the negative impacts some companies are experiencing today. The Business Alliance for Local Living Economies (BALLE) is one example that’s beginning to get a lot of traction in North America. Transition Towns is another movement that started in the UK focused on weaning communities from fossil fuels and is gaining momentum in North America.

Shortening supply chains in order to be less susceptible to disruptions is just good business sense. Plus, companies avoid the bad press that results when parts of supply chains take advantage of dismal working conditions in other jurisdictions to produce goods more cheaply, despite social and human costs.

What are the pressure points that you see accelerating this next-generation capitalism?

The big pressure point is customer preferences. But another that has me excited is the capital markets. If lenders and investors start to get a little twitchy about the way in which some of these global sustainability mega-forces might impact a company that is approaching them for a loan or investment, then they’re going to start asking questions about what the company is doing to mitigate those risks or capture those opportunities. And when capital markets start asking those questions, magic happens. If they ask the same question that someone from Greenpeace would ask, they get a very, very different reaction and response. It’s not the question — it’s the questioner that’s important. Capital markets — lenders and investors — are extremely important to senior executives and boards. They are a huge pressure point in the system.