New Metrics
With King IV, Multicapitalism Goes Mainstream

Last week, the Institute of Directors South Africa (IoDSA) released the King IV Report on Corporate Governance, the long-awaited update to King III, published in 2009. As most readers here will know, South Africa has been a leader in corporate sustainability reporting, having mandated such reporting for listed companies since early 2010. King III also led the charge in defining and advocating for integrated reporting in the run up to the launch of the International Integrated Reporting Council (IIRC) that same year.

Now comes the IoDSA once again, this time with King IV, in which it more or less ratifies, or seals the deal, on the establishment of what I and many others are referring to as multicapitalism. King IV’s embrace of multicapitalism, or what it alternatively refers to as inclusive capitalism, is striking. For anyone not yet convinced or even aware of the extent to which this compelling new perspective on performance measurement and accounting has taken hold, the evidence of its arrival and influence is now undeniable. Consider the following history:

• There is a long tradition in the sustainability and economics literatures of assessing the performance of organizations and other human collectives (e.g., nations, regions, etc.) in terms of their impacts on vital capitals. In economics, of course, the primary capital of interest has been financial or economic; in sustainability and CSR, it has been natural and other non-financial capitals (i.e., human, social, intellectual, etc). The roots of this can be traced to the early part of the twentieth century.

• The leap from theory to practice in terms of when capital-based performance accounting was first broadened from financial performance alone to include non-financial performance arguably took place in the mid-nineties, when Mathis Wackernagel and Bill Rees created the Ecological Footprint Method. Their work was of course limited to impacts on natural capital alone and was mainly applied at the level of whole nations or regions. Application at the level of organizations was much less common.

• Next in the evolution of multicapitalism as a basis for assessing organizational performance came the Global Reporting Initiative (GRI), which in its 2002 edition proclaimed that “Sustainability reporting helps sharpen management’s ability to assess the organization’s contribution to natural, human, and social capital. This assessment enlarges the perspective provided by conventional financial accounts to create a more complete picture of long-term prospects … Such measurement is central to maintaining and strengthening the ‘license to operate’.” For reasons that are not entirely clear, GRI saw fit to drop this language in all subsequent editions of its Guidelines, including the latest version, released last month.

• In 2005, I undertook an effort to apply the same kind of thinking Wackernagel and Rees had applied to natural capital to the other non-financial capitals, resulting in my development of the Social Footprint Method. Along the way, I formulated an integrated approach to the subject known as Context-Based Sustainability (CBS). This incorporated one of GRI’s most fundamental reporting principles, Sustainability Context, which is the idea that social thresholds and ecological limits really do need to be taken explicitly into account when attempting to assess the sustainability performance of organizations. Setting goals and reporting performance in purely incremental terms is not enough. In any case, all of this was shot through with capital-based thinking.

• In 2011, I had the good fortune to hook up with Martin Thomas, an ex-Unilever finance exec whom I met at a conference on social and environmental accounting in St. Andrews, Scotland. Martin took an immediate interest in CBS and proposed that we join forces to more or less finish the job by adding context-based economic reporting to the social and environmental aspects already included in my work. That led to the development of the MultiCapital Scorecard (MCS), the world’s first context- and capital-based triple bottom line measurement, management and reporting system. The MCS is an open-source creation of ours, the substance of which has now been disclosed in a new book by the same title that as of this week is shipping (The MultiCapital Scorecard, Chelsea Green Publishing, 2016). So far it has been piloted at Ben & Jerry’s, Cabot Creamery Cooperative and elsewhere, the status of which at Ben & Jerry’s will be the subject a talk I and Rob Michalak will be giving at New Metrics '16 next week in Boston (see Figure 1).

Next, of course, came the IIRC, which in 2013 released its own integrated reporting standard that featured the now-infamous “octopus” diagram in which six categories of capitals were depicted relative to their interactions with organizations’ business models (see Figure 2).

As the IIRC explained in the text of its Integrated Reporting standard, “An integrated report should provide insight into the organization’s strategy, and how it relates to the organization’s ability to create value in the short, medium and long term, and to its use of and effects on the capitals.”

• Soon after the IIRC’s standard was released, another standards organization, the Global Initiative for Sustainability Ratings (GISR), issued its own standards (in January 2014) for how best to rate and rank the performance of companies in the capital markets. One of its foundational principles, the Completeness principle, read as follows: “Rating one or more aspects of sustainability performance should systematically assess for impacts on human, intellectual, natural, and social capital.”
• Not surprisingly, the next chapter in the story came in the form of a story itself about what was happening here. In her groundbreaking book, Six Capitals, or Can Accountants Save the Planet? (W.W. Norton & Co., 2015), Australian accounting scholar Jane Gleeson-White provides an excellent account of the evolution and emergence of multiple capital accounting. She writes: “Only the second revolution in accounting since double-entry bookkeeping began, it is of seismic proportions … The changes it will wreak are profound and far-reaching and not only will transform the way the world does business but will also alter the nature of capitalism.” I agree. Indeed, it will change capitalism from its prevailing monocapitalistic form to multicapitalism, a form of capitalism in which performance is seen as a function of impacts on all vital capitals and not just one of them.
• As if all of this wasn’t enough, next came no less than the United Nations itself and a report issued by UNEP in October 2015 entitled, Raising the Bar – Advancing Environmental Disclosure in Sustainability Reporting, in which the following statement was made: “All companies should apply a context-based approach to sustainability reporting, allocating their fair share impacts on common capital resources within the thresholds of their carrying capacities.”

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And so here we are now in late 2016, and out comes King IV with its full-throated embrace of multicapitalism, multiple capital accounting, inclusive capitalism, or whatever one wants to call it. Among the many statements made in King IV about the importance of assessing performance relative to impacts on all vital capitals are the following:

“There is now general acceptance that the employment, transformation and provision of financial capital represent only a fraction of an organisation’s activities. Instead, inclusive capitalism takes account of the employment, transformation and provision of all sources of capital – the six capitals – in order to reposition capitalism as the engine of shared prosperity. It gives parity to the sources of value creation.” (p. 4)

“The traditional financial reporting system was a revolutionary development when it was instituted. It has since had to respond to market regulators, standards boards, ever more complex legislation and the regulation of accounting and corporate reporting. It is accepted that, while fully compliant and duly audited financial statements are critical, they are insufficient to discharge the duty of accountability. Similarly, a sustainability report is critical but insufficient. The reality is that the resources or capitals used by organisations constantly interconnect and interrelate. The organisation’s reporting should reflect this interconnectedness, and indicate how its activities affect, and are affected by, the six capitals it uses and the triple context in which it operates [social, economic and environmental].” (p. 5)

What’s so striking about the IoDSA’s embrace of multicapitalism is the manner in which it largely dominates King IV and yet was virtually absent in King III only seven short years ago. In King IV, the word “capital” appears 83 times; in King III, it appears only 8 times. In the former (King IV), the term is almost always used in the broader multi-capital sense; in the latter, the reverse is true – it is mainly used to refer only to financial or economic capital.

To sum up, there can be little doubt, I think, that multiple capital accounting or multicapitalism is becoming mainstream. What’s not mainstream yet, however, are methodologies and best practices for how to do it. That is a contribution Martin Thomas and I are hoping to make with the open-source MultiCapital Scorecard, the world’s first context- and capital-based triple bottom line accounting system. Other such methods will no doubt come forward and we very much hope they do. As the King IV report, UNEP, the IIRC, GISR, and Jane Gleeson-White’s book all make clear, this is an idea whose time has come!