The carrying capacities of capitals
Perhaps the single most important feature of the International Integrated Reporting Council’s (IIRC) proposed standard for integrated reporting is that it is capital-based. It is predicated, that is, on the view that organizational performance — both financial and non-financial — is a function of what a company’s impacts on vital capitals are, given the importance of such capitals for human/stakeholder well-being.
Indeed, the fact that performance is a function of impacts on vital capitals is arguably the least controversial claim in the sustainability literature, and is all but taken for granted in financial management. Financial performance, that is, is a function of an organization’s impacts on financial capital, and non-financial performance is a function of its impacts on natural, human, social, constructed (or built) and intellectual capitals. The latter, intellectual capital, is sometimes embedded in the preceding three.
Importantly, another emerging standard, the Global Initiative for Sustainability Ratings (GISR), is also capital-based. It, too, is predicated on the view that sustainability performance is a function of impacts on vital capitals.
Listen to how both the IIRC and the GISR state their positions on this matter:
“An integrated report should answer the following questions: ... Performance: To what extent has the organization achieved its strategic objectives and what are its outcomes in terms of effects on the capitals.” (IIRC Consultation Draft, April 2013)
“As a global, multistakeholder initiative, [GISR’s] vision is to transform the definition of corporate value in the 21st century such that markets reward the preservation and enhancement of all forms of capital – human, financial, intellectual, natural and social.” (GISR Exposure Draft, February 2013)
Both standards deserve to be supported in the strongest possible terms, if only because of their grounding in capital theory. Impacts on capitals — in light of the role they play in human/stakeholder well-being — determine an organization’s real performance. Performance measurement, reporting and rating systems should be constructed accordingly.
The Global Reporting Initiative (GRI), for its part, is woefully behind on this issue, if not willfully dismissive of it. In the recently released update to its sustainability reporting Guidelines (G4), the proposition that GRI add a focus on capital impacts as a requirement for reporting was rejected. Sadly, this portends another five or six years of dubious — yet still GRI-compliant — reporting, because without assessments of impacts on vital capitals, sustainability reporting, per se, cannot be done.
To be clear, neither the IIRC nor the GISR speak in terms of the carrying capacities of vital capitals — not yet, anyway. In principle, though, the inclusion of the idea that capital stocks and flows have carrying capacities is essential to the capital-based view of performance, because the fact that impacts on capitals can increase or decrease the quality or sufficiency of such capitals is precisely what makes them relevant. Indeed, human well-being depends on them.
Image by Vectomart via Shutterstock
It is not enough, then, to simply say that an organization’s operations have had impact on water resources (a type of natural capital); rather, the question must be: Have its impacts diminished the quality or sufficiency of such resources at levels required to ensure human (and non-human) well-being? Assuming we can allocate shares of natural resources to specific organizations – which we can – actual use then can be compared to such allocations as a basis for assessing performance. The concept of carrying capacity provides us with just the kind of measurement model we need to perform such calculations.
Readers already familiar with the concept of carrying capacity may be most accustomed, perhaps, to seeing formulations of the following ecological kind:
“The amount of biomass that can be supported [by an ecosystem] is termed [its] maximum carrying capacity.” (Odum, 1983)
In the sustainability literature, though, the term is sometimes used in an inverted sense (see, for example, Wackernagel and Rees, 1996). Instead of referring to the population size that an environment can support, we can speak of carrying capacity as the size of environment — or capital stock — required to support a population. This points to the idea that some capitals are actually anthropogenic: humans create them and can even create more of them when needed (i.e., they are anthro capitals).
This latter interpretation of carrying capacity makes the concept applicable to non-natural/ecological capitals. A healthcare system, for example — a blend of financial, human, social, constructed and intellectual capitals — will have a carrying capacity measured in terms of the number of health care transactions or patients it can support. The same will be true for schools and students, governments and public services, courts and crimes, etc. Hospitals, schools, governments and judicial systems are all composed of anthro capitals with carrying capacities that we can measure, manage and report.
The point here is that for non-natural capitals, performance can be seen as a function of how well a population fulfills the need to produce capitals, not just conserve or sustain them. Organizations, too, can be assessed in such terms, but only with respect to impacts on vital capitals they ought to have, or not have, in the first place — an important part of determining materiality that capital theory also supports.
It would be best, of course, if standards for measuring, reporting and rating the performance of organizations (i.e., those controlled by IIRC, GISR and GRI) explicitly were expressed in terms of the carrying capacities of capitals; but simply acknowledging impacts on capitals as being germane to the subject will have to do for now. The fact that the very idea of impacts on capitals is about to be formally incorporated in at least two major standards (IIRC and GISR) is, itself, a welcome development. At the very least, it will help make it possible for anyone interested in assessing the true (capital-based) performance of organizations to do so for the very first time.
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Readers interested in learning more about the history and evolution of the idea of carrying capacity will find a fascinating article on the subject written by Nathan Sayre, The Genesis, History and Limits of Carrying Capacity (2008), in which he wrote:
“Carrying capacity may be the most versatile and widely popularized concept in environmental politics today. Like sustainability – which it predates and in many ways anticipates – carrying capacity can be applied to almost any human-environment interaction, at any scale, and it has the additional advantage of conveying a sense of calculability and precision – something that sustainability thus far lacks.”
Information about an approach to sustainability management that does, in fact, take the carrying capacities of capitals explicitly into account can be found here.
Image by Vectomart via Shutterstock.