Multiple capitals model

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The concept of multiple ‘capitals’ is an approach to sustainable development theory that extends the notion of capital, in a traditional economics sense, to broader sustainability issues. While the conventional economic definition of capital – essentially the manufactured goods which produce, or facilitate the production of, other goods and services – serves to account for the durable goods which are a means of production for businesses, it ignores the vital inputs garnered from the natural environment and society. The fundamental essence of the concept of capital is that it is a stock or asset that provides a flow of goods and services for the benefit of human wellbeing. However, it is quite clear that the narrow traditional economic definition does not adequately cover all of the sources that businesses gain benefits from and that there are sources of capital beyond simply the manufactured assets of an organisation which facilitate production and economic output.

It is increasingly recognised that capitals such as natural resources, human knowledge and social cohesion are vital stocks/assets which business and the economy in general draw upon for their products and services. As such, a number of models considering multiple capitals have been developed and supported by various bodies in the past few years – the World Bank, the OECD, and DEFRA – aiming to recognise and distinguish these wider stocks and assets. The IIRC are one such significant body who are incorporating the concept of a multiple capital model into their work, and have, through their Discussion Paper ‘Towards Integrated Reporting: Communicating Value in the 21st century’ and subsequent consultation with stakeholders, begun investigating both how the capital model might be applied to corporate reporting, and the boundaries/types of capital it might include.

Indeed, at this stage, the IIRC have proposed 6 categories of capital, each of which interact and interconnect with one another- and consequently are the fundamental resources that organisations rely upon to function and deliver their products and services. The following extract from the IIRC’s discussion paper highlights these different capitals- financial, manufactured, human, intellectual, natural and social- offers a definition of each, and descibes how they might manifest themselves in the context of a business or organisation.

Resources and relationships or “capitals”

All organizations depend on a variety of resources and relationships for their success. The extent to which organizations are running them down or building them up has an important impact on the availability of the resources and the strength of the relationships that support the longterm viability of those organizations. These resources and relationships can be conceived as different forms of “capital”.

The purpose of the following categorization and descriptions, based on various sources and established models, is to help readers understand the concepts underlying this Discussion Paper; it is not intended to be the only way the capitals can be categorized or described. The extent to which different organizations use or impact each of these capitals varies: not all capitals are equally relevant or applicable to all organizations.

Financial capital: The pool of funds that is:

o available to the organization for use in the production of goods or the provision of services, and

o obtained through financing, such as debt, equity or grants, or generated through operations or investments.

Manufactured capital: Manufactured physical objects (as distinct from natural physical objects) that are available to the organization for use in the production of goods or the provision of services, including:

o buildings,

o equipment, and

o infrastructure (such as roads, ports, bridges and waste and water treatment plants).

Human capital: People’s skills and experience, and their motivations to innovate, including their:

o alignment with and support of the organization’s governance framework and ethical values such as its recognition of human rights.

o ability to understand and implement an organization’s strategies, and

o loyalties and motivations for improving processes, goods and services, including their ability to lead and to collaborate.

Intellectual capital: Intangibles that provide competitive advantage, including:

o intellectual property, such as patents, copyrights, software and organizational systems, procedures and protocols, and

o the intangibles that are associated with the brand and reputation that an organization has developed.

Natural capital: Natural capital is an input to the production of goods or the provision of services. An organization’s activities also impact, positively or negatively, on natural capital. It includes:

o water, land, minerals and forests, and

o biodiversity and eco-system health.

Social capital: The institutions and relationships established within and between each community, group of stakeholders and other networks to enhance individual and collective wellbeing. Social capital includes:

o common values and behaviours,

o key relationships, and the trust and loyalty that an organization has developed and strives to build and protect with customers, suppliers and business partners, and

o an organization’s social licence to operate.

The primary purpose of an integrated report is to explain to financial capital providers how an organization creates value over time. The best way to do so is through a combination of quantitative and qualitative information, which is where the six capitals come in.

The capitals are stocks of value that are affected or transformed by the activities and outputs of an organization. The Framework categorises them as financial, manufactured, intellectual, human, social and relationship, and natural. Across these six categories, all the forms of capital an organization uses or affects should be considered.

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