Ever since Adam Smith, capitalism hasn't just been about financial capital. Whether or not people are aware of it, companies deal every day with different kinds of capital. Besides money, we rely on human labor, on land, water, and energy, on machinery, on the community.
We have managed to codify the financial part in language that is now universal: we have globally accepted standards on how to count profits, assets, debts. But mostly we talk about the other kinds of capital in the abstract, even though they may make or break us as easily as the financial.
Where would a manufacturing company be if its water supply ran out? What would happen to a fashion retailer's stock price if it were accused of mistreating animals or children?
Consultant Mark McElroy makes a business out of what he calls "multicapitalism". The term may sound outlandish, but it isn't socialism, or anarchism, or even capitalism: it may just be a clearer, newer definition of the economic system we already live and thrive in, plus a recipe for sustainable growth.
"This is about living within our means," says McElroy. "The regulative ideal is to preserve, produce and maintain vital capitals, to not put them at risk."
Here are the six kinds of capital to focus on, according to McElroy:
- Internal economic capital. This includes financial capital (funds available, including debt and equity finance), and non-financial capital (for example the value of your brand).
- External economic capital. This takes into account the impact an organization has on the financial and non-financial capital of other entities (for example, a new factory may reduce or increase real estate values nearby).
- Natural capital. This includes all natural resources we rely on, as well as ecosystem services such as climate regulation.
- Human capital. This includes knowledge, skills, experience, health, attitudes and motivation of individuals.
- Social and relationship capital. This consists of teams, networks and groups of individuals working together, and includes their shared intellectual capital.
- Constructed capital. This consists of material objects, systems or ecosystems created or cultivated by humans.
The emerging field of corporate sustainability, which translates the ideal of sustainable growth respectful of all stakeholders (including the planet) into pragmatic action points, has been searching for a way to quantify the other forms of capital in the same way we quantify financial capital. Environmental consultancy Trucost, for example, has developed formulas for putting prices on natural capital. Carbon pricing and emissions trading schemes have been evolving over time, and today a movement to fix an internationally agreed upon price on carbon emissions is gathering traction, with important supporters from the business and political elite.
But McElroy wonders whether we are trying to squeeze a square peg into a round hole. He suggests that natural, social and other forms of capital be evaluated not in financial terms, but on their own terms.
McElroy suggests evaluating your breaking points under each form of capital. What are the norms, standards and thresholds that create limits for your business? What is the context? Where is the threshold at which your business's impacts become unsustainable?
He and Martin Thomas, an ex-Unilever finance executive in the UK, created the MultiCapital Scorecard, a measurement and reporting system. Using the scorecard, a company can assess organizational performance in terms of impact on all the types of capital, not just economic. The scorecard assesses performance relative to organization-specific sustainability standards of performance.
The scorecard fits nicely into a cycle of sustainable management McElroy advocates: first you identify your stakeholders and your duties and obligations to them, then you define standards of performance, then you apply context-based metrics to measure yourself against those standards. Once you have a clear assessment of how your company is performing in terms of its obligations to stakeholders, you can identify where there is room for improvement (i.e. better air quality compliance). Next you plan interventions to close those gaps, you implement them, and you measure again. "Negative gaps should inform management of what needs to be done. The point is to continually strive to close the gaps," says McElroy.
This sets the stage for managing sustainable growth, including for profit. It could be a neat way for corporations to make the world a better place.