What are the 6 capitals of integrated reporting?
Sweco author: Doug Marsh, Asset Management Technical Director
We are all aware of targets and efforts to meet Net Zero. Many of us are also aware of initiatives to achieve natural and societal targets within the scope of sustainability. These efforts all require funding and there is a growing change in focus to attract global as well as local Green and Sustainable Investment Funding by governments, financial institutions, regulators and lenders to meet these needs.
But there are challenges in targeting and prioritising best methods of the ‘How’ and these all need to be taken into account when considering Sustainability in the context of Sustainable Development. So the same bodies are also considering other measures of value than economic measures alone. To meet this challenge, the International Integrated Reporting Commission (IIRC) have developed a framework called 6 Capitals. Integrated reporting using 6 Capitals combines both qualitative and quantitative data to demonstrate, tangibly, how an organisation creates value over time.
The success of Sustainable Development, and meeting all 17 Sustainable Development Goals, lies in balance…not just balance sheets
Doug Marsh Sweco Asset Management Technical Director
With such high focus on the Climate Emergency, it is natural that focus will be on carbon gas (and CO2 equivalents) reduction. We must of course address the causes of climate change, but we also need a framework that industries and sectors can understand and apply in their everyday organisational decision-making processes, so that they can prepare for the inevitable changes already in train as well as provide balance with wider societal and natural needs.
Put another way, while we tend to put fiscal figures on the climate emergency (the Climate Change Committee, in its sixth Carbon budget, estimates that some £50billion extra additional investment is required from 2030 to 2050 to deliver Net Zero, in addition to economy-wide investment of over £400billion), such a narrow lens on value measurement can distract us from controlling the controllables we work within every day.
The 6 Capitals model is a more balanced approach to generating holistic and actionable reports and, when integrated into an organisations investment decision-making processes, provides Sustainable Development as a behaviour as well as an aspirational set of goals.
The Capitals are in effect ‘stocks of value’ that are affected or transformed by the activities and outputs. Distinct, yet entwined, they are:
1. Manufactured capital
The tools, machines, plant, infrastructure and buildings which contribute to the essential services we provide rather than being the product or service derived from equipment and tools.
2. Natural capital
Natural resources, energy and materials used to provide services and products including renewable and non-renewable materials, sinks – that absorb, neutralise or recycle wastes. It is inclusive of climate change processes, air, water, land, forests and minerals as well as biodiversity and ecosystem health.
3. Social & Relationship capital
Values relating to our relationships with other people, society in general and other organisations. It includes trust placed in us by our customers, suppliers, society, and the impacts that we have from everything we do.
4. Human capital
Our people’s health, wellbeing, intellectual engagement, motivation, competence, ability to do their jobs well and fulfil their personal potentials. We buy this service from our people with salaries, benefits and the intrinsic rewards from doing a worthwhile job.
5. Intellectual capital
Things of value not on the balance sheet, but without which we would operate less efficiently or have a less optimal future. It includes data, information and knowledge where it is not financially quantified. It is R&D, Innovation, IP, the sum of everything everybody knows that gives an organisation competitive edge.
6. Financial capital
Arguably, financial capital has no real value other than shares, bonds & banknotes used to trade manufactured, natural, human, social, & intellectual capitals. It is the sum of funds available to an organisation including Cash in Bank, Invested Capital, Liabilities, OPEX, CAPEX, NBV & True Assets Value and Income.
Courtesy of Integrated Reporting
Each Capital is used as an input to derive products and services to customers, who in turn pay for a fair return for their purchase, investments made and added value. Profit can be shared with people in the organisation and investors – and the same applies to ‘soft’ profit that comes with achieving goals, transforming society, protecting and restoring natural values and being part of the change we need in order to achieve our climate imperatives. If done well, outputs will be greater than inputs and outcomes will derive increased Value across all Capitals.
At Sweco we understand circularity as a concept, and that it is fundamental to achieving Sustainable Development – outputs and outcomes feed back into inputs. A Systems Thinking approach. Therefore, if any of the Capitals is not delivered optimally, the overall situation will degrade and become unsustainable. Equally, if done well, balance and incremental improvements are achieved, and Sustainable Development is truly achieved.