A business’s perceived value no longer resides solely in its assets. The world is changing, and our understanding of value has expanded to include multiple capitals, broadly categorized as Financial, Manufactured, Intellectual, Social, Human, and Natural. Effectively managing and reporting on these capitals is an investment in a business’s reputation and long-term sustainability.
Reporting on multiple capitals is relatively new, and the metrics and narrative that allow meaningful reporting on multiple capitals are developing. Social and natural capitals are not as comprehensively understood as financial or human capitals, for example, and are more likely to be ineffectively managed.
Setting a strategy
“A shared value approach assesses the positive and negative impacts of a business decision, outside of just making a profit,” says Hayden Green, IsoMetrix’s Executive Head: Sustainability. “Creating shared value assesses the impacts your business makes, outside of just turning a profit.”
“To report on shared value across these new capitals, you need to set a strategy that addresses all six capitals, set initiatives to implement that strategy, and monitor the outcomes of each initiative across the six capitals.” explains Hayden. “You cannot do this without a management system.”
A business’s Social and Natural capital value is more difficult to quantify than financial value, and thus more difficult to manage. Their impact and value are not immediately clear and have long term consequences, which directly affect the reputation and long-term sustainability of the business. “Social and Natural capitals, typically, are poorly managed. This is because they do not have effective management systems in place like HR or ERP for example,” says Hayden.
Return on Investment
“Business leaders have always known that short-term profits do not translate into long-term value. This is even more relevant with the inclusion of the other five capitals” explains Hayden.
“Implementing contextual management systems which take into account the six capital model, make sense from a capital expenditure perspective.”
“The better you manage all six capitals, the more investors will entrust their capital with your business. More investment in your business means greater long-term sustainability,” explains Hayden. Implementing decent management systems for the six capitals improves a business’s reputation and leads to greater investment. “This improves a business’s market value and long-term sustainability, creating a positive feedback loop,” explains Hayden. “The better you manage all six capitals; the more investors will entrust your business with their capital. More investment in your business means greater long-term sustainability.”
“By understanding your material risks inherent in all six capitals, you can initiate improvement, and report on your progress,” says Hayden.
“An effective management system should link all the areas that contribute to sustainability into a business’s material risks.” says Hayden. “By examining your material risks from a six-capital perspective, leadership can easily identify these previously intangible risks, enabling your management team to plan, implement and monitor improvement initiatives. Leadership will be able to measure the performance of these initiatives and their impact on the business,” says Hayden.
The six-capital model and integrated reporting are not new but the inclusion of these in GRC management systems is new,” stresses Hayden. Businesses need real-time reporting to manage multiple capital indicators. By the time this information appears in an annual report, it is dated and ineffective “You can’t measure multiple capital outcomes and shared value from conventional ERP and HR management systems. And you need an agile GRC management solution to manage these process, otherwise the business value outside of financial indicator just remains theoretical.”
He concludes: “We are still in the early days of seeing the world in this way. But the momentum is growing and management systems are maturing to the point where executives studying dashboards to understand their performance across the capitals will be as natural as them analyzing their P&L.”