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Multicapitalism and the Two Faces of Integrated Reporting

Image credit: The Conversation

If ever there was an auspicious moment in performance measurement and reporting, this is surely it. Multicapitalism has arrived!   Listen to how author Jane Gleeson-White puts it in her terrific new book, Six Capitals, or Can Accountants Save the Planet? (2015):

This is the story of a twenty-first-century revolution being led by the most unlikely of rebels: accountants. Only the second revolution in accounting since double-entry bookkeeping began, it is of seismic proportions, driven by the 2008 financial crash and our ongoing environmental crisis. The changes it will wreak are profound and far-reaching and not only will transform the way the world does business but also will alter the nature of capitalism.

Indeed, the shortcomings of conventional accounting — its inability to account for the full market value of a company or the total cost of its social and environmental impacts — have been readily apparent for years. Signs that (mono)capitalism would give way to multicapitalism have been mounting as well. Hardly a day goes by that we don't at least hear the term “natural capital” or some other reference to non-financial capitals being made.

The arrival of the multicapital paradigm has been heralded by many, including in 2010 by Nobel laureates Joseph Stiglitz and Amartya Sen and their co-author Jean-Paul Fitoussi, in a book they wrote entitled, Mis-Measuring Our Lives. On how best to measure and assess the sustainability performance of human collectives, they said:

In order to measure sustainability, what we need are indicators that tell us the sign of the change in the quantities of the different factors that matter for well-being. Putting the sustainability issue in these terms compels recognition that sustainability requires the simultaneous preservation of or increase in several “stocks”: quantities and qualities not only of natural resources but also of human, social and physical capital. Any approach that focuses on only a part of these items does not offer a comprehensive view of sustainability.

The trouble, of course, is that there has only been one capital featured in Generally Accepted Accounting Principles (GAAP) or in the calculation of a country’s GDP: financial capital. Assessing the performance of organizations and the economies they contribute to has therefore systematically excluded consideration of a company’s or an economy’s impacts on the other, non-financial capitals, not to mention the effects they might be having on others whose well-being depends on them (i.e., non-shareholders).

Integrated Measurement and Reporting

Enter integrated measurement and reporting, a topic I have written about here several times before. Of particular note, of course, is the new standard or Framework for integrated reporting (<IR>) put out by the International Integrated Reporting Council (IIRC) in late 2013, and the extent to which it is deeply grounded in the concept of multiple capitals. But just when it seemed as if the Framework would be leading the charge to usher in multicapital measurement and reporting in the 21st century, the forces behind it threw sustainability under the bus.

To be clear, the original conception of integrated reporting was to actually integrate financial and sustainability reporting. That’s why it’s called integrated. Here, for example, is how the King III report in South Africa put it in 2009 when the issue really started to get legs:

King III supports the notion of sustainability reporting, but makes the case that whereas in the past it was done in addition to financial reporting it now should be integrated with financial reporting …

Sustainability reporting and disclosure should be integrated with the company’s financial reporting …

Integrated Reporting: Means a holistic and integrated representation of the company’s performance in terms of both its finance and its sustainability.

Launched a year later in 2010 in collaboration with the Global Reporting Initiative (GRI) and the Prince’s Accounting for Sustainability Project (A4S), the IIRC went on to develop its Framework in a way that gives priority to providers of financial capital, and which does not in any meaningful way, therefore, address sustainability performance at all. Thus, according to the Framework, the only reason to include mention of a social or environmental impact in an integrated report is if it affects the interests of providers of financial capital in some way. Everyone else’s interests are secondary, if not irrelevant.

Needless to say, this is not authentic integrated reporting, certainly not of the sort envisioned by King III. What we have before us, then, are two faces of integrated reporting: the original authentic one envisioned in King III, and the subsequent adulterated one embodied in the IIRC’s Framework. Why GRI and A4S allowed themselves to go along with this is anyone’s guess, especially given their public and presumably genuine commitments to sustainability.

But wait, the story gets worse. Even the International Federation of Accountants (IFAC) challenged the move away from authentic integrated reporting in a comment they submitted to the IIRC as the Framework itself was being developed:

While the IIRC might conceive that an integrated report should be focused on investors, this is not clearly the case for integrated reporting more generally … A wider stakeholder perspective for the integrated report will allow for a clearer link to sustainable stakeholder value generation in terms of achieving long-term sustainable organizational success as a public interest, or social, outcome for all stakeholders.

And as separately quoted by Gleeson-White in Six Capitals, IFAC also said:

... it remains unclear why the integrated report should be primarily directed to the providers of financial capital and only in the second instance to the providers, or for that matter the receivers, of the other capitals.

Gleeson-White went on to opine:

This illustrates the first of my two key reservations about integrated reporting’s ability to address the bigger questions of “sustainability” … in practice integrated reporting does not value the other capitals as it does financial capital. It addresses them only insofar as they serve a company’s ability to generate profits over the medium and long term.

The Monetization Mistake

Another recent trend in shareholder-centric integrated reporting, if you will, is the trend towards monetization as a solution for how best to bring financial and non-financial performance together. While completely ignoring the sustainability side of integrated reporting – which the <IR> Framework encourages us to do – the monetization solution suggests that the core issue in integrated reporting is how best to put a price on all of the non-financial impacts of a company, so that they can be brought into the financial fold where they allegedly belong.

Under this approach, the problem that integrated reporting must supposedly solve is how best to account for the total value of a firm as reflected in its market capitalization but not in its financials. The answer presumably lies in the net value of its operations on non-financial capitals, all of which need only be monetized, since mainstream accounting tools are, of course, above reproach.

What this approach purportedly does, therefore, is express all impacts on non-financial capitals in financial terms, or so it claims. What it actually does, however, is (a) ignores social and ecological thresholds in the world and thus does not report on sustainability performance at all, and (b) conflates multiple capitals in ways that simply do not hold up to the laws of thermodynamics (e.g., by implying that a company can compensate for, say, polluting its neighbors’ wells by simply increasing the size of its charitable donations). Negative impacts on natural capital are simply not offset by positive impacts on social capital, no matter how much the accounting profession would have us believe otherwise.

Operationalizing Multicapitalism

If we have learned anything from recent developments in integrated reporting, it is that integrated performance should (a) definitely be expressed in terms of impacts on multiple capitals, but (b) not be narrowly interpreted in Orwellian terms, as if some stakeholders can be utterly ignored, and (c) that the solution to an accounting system that isn’t working is not to apply it more broadly! What we need, instead, is a different kind of accounting system, not the dysfunctional one we already have more broadly applied.

The new kind of accounting system I and my colleagues think we need is one that (a) treats all impacts on vital capitals as material in the first instance, regardless of the effects they may or may not have on the financial value of a firm, (b) assesses performance relative to sustainability norms or standards of performance for impacts on vital capitals (just as organizations already do for financial performance), and (c) does not illegitimately conflate impacts on all vital capitals, as if they are all somehow fungible or substitutable for one another when in fact they are not. Our own (open-source!) solution for how best to do this takes the form of the MultiCapital Scorecard.

Questions, comments and early adopters are most welcome!


Mark W. McElroy, Ph.D. is the founder and Executive Director of the Center for Sustainable Organizations and the original developer of the Context-Based Sustainability method. He is also co-founder of Thomas & McElroy LLC, creators of the MultiCapital Scorecard, and… [Read more about Mark McElroy]