Accounting for capital: natural, social and human
18 February 2020: informed decision-making results in better outcomes for businesses, and accountancy is key to that process. While the financials are a given, accounting for natural, social and human capital should also be integral to the equation, argues Mark Gough, Chief Executive Officer of the Capitals Coalition.
“Our aim is for every decision to be informed by the value of natural, social and human capital, as well as by financial capital,” says Gough. “We are not trying to assign prices; we’re trying to recognise the value of nature and people to inform better decision-making.”
Gough is careful about the language he uses. “Value is about understanding relative importance or worth,” he says. “Water in a desert has a higher value than in a location that is renowned for rainfall, and so you’ll make different decisions based on an understanding of value in these different contexts.”
He points out that it is only when we understand value that we act around natural, social and human capital. It is not enough to measure a resource; that just gives you a number. It is the value that provides the context that leads to better-informed decisions. “We are working to embed this thinking in accounting systems,” says Gough.
A key premise of the Coalition’s work is that business success is fundamentally underpinned by healthy people and communities, strong and resilient social institutions and thriving natural ecosystems.
If business does not understand its dependencies on nature, people and society, these are more likely to have a negative impact on business, putting success at risk. Recognising the value of these relationships opens the door to triple-win scenarios that deliver benefits across the system.
To help the private sector understand their impacts and dependencies on these different forms of capital, we must use language that resonates with businesses if clear messages are to land and be turned into action.
“Talking in terms of capital assets has given us access to chief financial officers and finance departments more generally,” says Gough. “While many in these positions would like to do the right thing, they need the data to be able to justify these decisions to senior managers and to their boards, and that’s one of the benefits that a capitals approach provides.”
He also points out that while the primary focus of the Capitals Coalition is on using non-financial information to influence better decision-making, and not on reporting, better and more robust disclosure will follow naturally from a more integrated decision-making process.
The Coalition collaborates closely with partners such as the International Integrated Reporting Council (IIRC), the Impact Management Project (IMP) and the Climate Disclosure Standards Board (CBSB), among others, to push the needle on the reporting agenda.
Natural capital approaches began to really enter the conversation at the Rio+20 Summit in 2012, where they were promoted by ICAEW. For Gough, this was a turning point. The Institute pointed out it was time to stop worrying about the method of accounting for natural capital but to focus on outcomes. “That made a lot of sense,” says Gough. “We built a network of people who trusted each other and are able to collaborate but, importantly, there was strong leadership.”
This is when the work began in earnest. “In accounting, you always include assets on your books,” says Gough. “Nature is a shared risk and asset. We need to change the thinking to include in the books things that are not under our direct control, otherwise, your books are not complete.”
Over the years, about 40 different approaches to accounting for natural capital have emerged, with the 40th being written by Gough himself. “Actually, we really just needed one,” he concedes modestly.
Although the Capitals Coalition started its work around nature, by bringing together the Natural Capital Coalition and the Social and Human Capital Coalition, the Capitals Coalition is serving a much broader church. It has helped to move the action on from climate alone to make it easier to address trade flows, supply chains and other areas that involve communities of people for which accountants must account.
The work has culminated, to date, in the Natural Capital Protocol and more recently the Social & Human Capital Protocol. The protocols are internationally accepted and harmonised frameworks which bring together existing tools and methodologies under one roof. They are used by organisations to identify, measure and value their impacts and dependencies on different forms of capital.
“It is all about ‘why’, ‘what’, ‘how’ and ‘what next’,” says Gough. These stages are then broken down into nine steps which contain questions to be answered when integrating natural, social and human capital into organisational processes.
The protocols can be scaled up or down to businesses of all sizes and across all sectors and continents. Importantly, the protocols deliver data for organisations to include in their risk analyses, value chain development and so on.
Policing this approach is not the best thinking, he says, but working towards an auditing process is an ambition. And there are plenty of regulatory mechanisms already on the table, both from the EU and the UK Government.
“We are moving towards standard-setting,” he says. “And we are challenging GDP as a measure of a successful economy. GDP has been a good measure in some respects, but it is not adequate as a measure of the true wealth of a country.”
2020 is lauded to be a "super year" for action on nature and climate. To succeed, we need to see a concerted effort throughout the system to deliver a truly sustainable world. By working collaboratively with their extensive community, and by uniting broader communities working on nature, people and the economy, the Capitals Coalition is playing a vital role to bring the private sector on board and to highlight the business case for action.
ICAEW is at the heart of the Capitals Coalitions’ work. Michael Izza, Chief Executive Officer of ICAEW, is on the board of the Capitals Coalition, and ICAEW also plays host to the organisation itself. “This is the way that accountancy is going,” says Gough.
Gough points to the massive skills gap in this area and urges accountants to upskill. Natural capital is no longer on the fringes of accountancy; in fact, the Capitals Coalition has been invited to bring accounting for the natural world into GAAP principles. That is a massive step change. Social and human capital is sure to follow.
In the final analysis, it boils down to accountants being given the tools to undertake their tasks fully and with the best decision-making across all parameters. Thinking in systems and making decisions that deliver value for nature, people and businesses will result in better outcomes.