There are more effective measures of business resilience, value and efficiency, than financial capital alone.
There is a growing drive to incorporate other forms of capital, including natural, social and intellectual, into mainstream corporate reporting.
The interactions between these capitals, and flows to and from, are not visible in most accounting systems despite being drawn on to generate business value. In the case of natural capital, including biodiversity, minerals, forests, clean air and water provision, resources and capacity are being eroded at alarming rates, despite underpinning all human and economic activity.
ICAEW (The Institute of Chartered Accountants in England and Wales) hosted an excellent conference last week on exploring the different forms of ‘capital’ and their interactions. http://www.icaew.com/en/technical/sustainability/accounting-for-nature/rethinking-capitals-going-beyond-the-financial. This and the stimulating debates included diverse perspectives from experts drawn from business, academia, ecology and ecclesiastics!
Some of the key questions and take-outs from the conference were as follows:
1. Accounting systems must change to reflect these new constraints, considerations and reporting requirements. This is already beginning to happen. The International Integrated Reporting Framework http://www.theiirc.org/international-ir-framework, for example, is starting to be used by a number of companies.
2. Who is this information aimed at? Is it aimed mainly at those investors far sighted enough to appreciate its long-term value, or is it aimed at other stakeholders impacted by the business on the ground? To really work and be useful, the information needs to be aimed at people who have the power to change what is happening in the business, rather than just be consulted on what is happening.
3. Should we value nature and if so, how should we do it? While most people would accept the need to account for our environmental impacts and for the services that nature provides, there is an ongoing philosophical debate as to whether you can, or should put a price on the value of nature.
My own view, in agreement with a number of speakers at the conference, is that the priority for business should be to record relevant environmental data and report on its changes over time. We should only convert data into monetary units when this helps to communicate its value, or when we need to express data in a common unit to help with project based decision making.
4. Separating out and reducing complex issues into different forms of capital has drawbacks as well as advantages. These things, under the concepts of different capitals, don’t have firm boundaries, so it is important that there is also a focus on interactions and connectivity between different forms of capital.
5. The quality of data and methodologies will not be perfect to begin with, but will improve and evolve over time to reflect the body of experience built-up by companies in the market. Integrated reporting of different forms of capital is an ongoing development and we will not come up with a perfect system overnight.
6. Companies need to uncover and report on significant capital dependencies. Taking a broader approach to capitals helps business understand wider risks and opportunities. In the case of natural capital, impacts and reporting should focus on flows and change, rather than the drawing up of environmental balance sheets.