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In an extract from their book The MultiCapital Scorecard, Martin P Thomas and Mark W McElroy introduce a system that goes beyond the triple bottom line
Many of us have grown up and earned our living in a western world shaped by capitalism. That has traditionally meant generating economic capital, mainly for the benefit of shareholders or other providers of financial capital. There are powerful driving forces that underlie such a purpose, and it’s important to acknowledge the contribution that economic capitalism has made to the industrial revolution, social structures and the development of many of the technologies on which the world has come to depend.
However, it is long past time to recognise the enormity of the environmental footprint our economic growth has left over the past 250 years and the ever-growing disparity between that footprint’s annual demands and the biosphere’s capacity to support them. These ecological (natural capital) issues cannot be resolved without addressing the world’s vital social capitals, including the intergenerational deficit we are creating and the gap that today exists between the world’s wealthiest 2 billion inhabitants and its poorest 2 billion.
It’s time for the world to attend to the quality and sufficiency of all its vital capitals, not just its economic capitals. This is what we callmulticapitalism. It is a doctrine that measures and manages impacts organisations are having on multiple capitals and therefore their own triple bottom lines: their social, environmental, and economic performance.
Although many noteworthy institutions accept the validity of the need to preserve multiple capitals, we have yet to see any principles or practices that enable organisations to enact multicapitalism in a meaningful way. Hence the evaluative process called The MultiCapital Scorecard, which also happens to be the title of our new book.
The principles underpinning this approach to multicapitalism are those of context-based sustainability, which was first outlined in the book Corporate Sustainability Management by Mark McElroy and Jo Van Engelen. That book dealt with non-financial performance and focused on stakeholder engagement. The MultiCapital Scorecard takes that concept some steps further, introducing an advanced triple-bottom-line performance accounting methodology - a context-based, integrated measurement, management, and reporting system that complies with international standards, can be tailored to any organisation’s needs, and monitors performance impacting all capitals, including financial capital. It aims to help management translate the lofty ideals into action in their own organisations.
Corporate Sustainability Management provided pioneering examples of context-based sustainability in practice. Those examples illustrated how groundbreaking projects set thresholds for sustainable performance for social and environmental impacts in their appropriate contexts. In The MultiCapital Scorecard we have adopted the practices set out by McElroy and Van Engelen while extending them to embrace financial and economic capitals as well as many other features to make it a progression measurement process.
The result is a “multiple capitals” approach to management that, for the first time, offers organisations of all sorts a triple bottom line performance measurement model that can indicate how far it is from performing sustainably.
This is not to say that this approach will provide a perfect measurement initially, but it does offer a meaningful learning framework. While the learning proceeds, the MultiCapital Scorecard provides the best method available for measuring performances impacting all capitals, applying identical principles to them all. Performance is reported against context-based sustainability norms, science-based and otherwise. Consequently, organisations of all sorts adopting the MultiCapital Scorecard are able to see for the first time the extent to which their impacts on all vital capitals are sustainable. They can also set trajectory target thresholds and monitor progress toward meeting them.
Indeed, measuring shortfalls and surpluses against sustainability thresholds across multiple capitals is an entirely new concept, and it offers an entirely new way to manage performance. The very act of providing routine scorecard results will initiate paradigm shifts in many of the organisations that adopt it. As they use their historic performance data to improve future performance, the old paradigm of maximising impact on a single capital will gradually give way to recognisingthe need to manage impacts on multiple capitals.
So, how does it work? These are the most crucial features:
Integrated measurement and reporting The MultiCapital Scorecard makes truly integrated (financial, social and environmental) reporting possible by applying a consistent set of criteria to impacts on all capitals. Together with full stakeholder engagement, this delivers a fully operationalised triple bottom line methodology.
Organisation-specific No two organisations are alike and so relevant areas of impact must be defined and specified on a bottom-up, organisation-specific basis. This search brings context into the very heart of the process. Context may be local or global, but it is always crucial to meaningful standard-setting.
Sustainability logic The MultiCapital Scorecard applies the logic of sustainability to all aspects of performance, including economic impacts. This means that thresholds and targets for impacts on vital capitals are specified (with stakeholder engagement), and performance is then measured against them.
Progression scoring Where sustainability norms have not been met, the MultiCapital Scorecard reports performance towards or away from them.
Weighting andprioritisation The MultiCapital Scorecard process allows organisations to attach different weights and priorities to different areas of impact.
Consolidation The MultiCapital Scorecard supports consolidated reporting for organisations with multiple divisions in very different contexts.
Using the MCS model, Ben & Jerry’s identified the company’s various stakeholders and set standards of performance for their impact on each related capital. Eight specific areas of impact (AOIs) were identified: social activism, farmer livelihood, gender parity, company financials, animal welfare, soil health, water quality and climate system. Then, using the implementation process, the company identified and established the performance standards for each AOI.
Beyond the pilot, which is still under way, B&J hopes to add additional AOIs to its scorecard in the future that will address a broad range of social activism campaigns that are meaningful to the company’s stakeholders. This is an important aspect of the MultiCapital Scorecard: it is highly adaptive in the sense that old and new AOIs can be dropped from or added to the scorecard over time as circumstances change. We propose that this should be part of the double-loop review process that occurs every few years.
The promise of MCS at Ben & Jerry’s is that it will make it possible to measure, manage and report the performance of the company relative to thresholds-based sustainability standards of performance and to the company’s own stakeholders and impacts.
Uniquely, the MultiCapital Scorecard helps answer the questions all organisations should be asking: Are we sustainable across all aspects of the multiple bottom line? And, if not, what are the gaps and best steps to address them.
Since the objectives of many stakeholder groups are often in conflict, there will be many cases where directors, governors, owners, and managers will have to decide on allocating scarce resources between competing demands. There is no simple formula for deciding such allocations. But it is always the case that local context and stakeholder engagement are required inputs to any such responsible decision-making process. Our multicapitalism process provides both in an even-handed manner. Strategic decision-makers are presented for the very first time with context-based information about the extent to which their organisations are either fulfilling their duties and obligations or failing to do so.
All the evidence we have seen suggests that most organisations operate in an unsustainable manner. While it might be seen as a source of embarrassment to report unsustainability to stakeholders, the world needs to know the truth (however unpalatable that may be) rather than persisting in willful ignorance of reality. And the call for corporations to be responsible and transparent is growing louder, with rating agencies now rising to this challenge.
Some might argue that in an essentially unsustainable world, it is folly to attempt to assess how an individual organisation can reach sustainability on its own. But the application of “fair shares” of available multiple capital resources, can provide us with very meaningful reference points. Indeed, the basic analysis needed to establish the thresholds of sustainable performance should be a fundamental precursor to any improvement process.
Others might criticise our multicapital performance measurements for imprecision or subjectivity. To these critics, ask the question: “Is it better to be precisely wrong or approximately right?” Today’s world demands us all to ask the right questions and for organisations to provide the best information available. Awaiting perfection is a counsel of despair.
Indeed, humanity has a moral duty to safeguard the quality and sufficiency of all vital capitals, the disregard of which is irresponsible. Hiding unethical practice behind a façade of spuriously objective accuracy, while propagating an endless stream of negative externalities, is inexcusable. This is what is called “precisely wrong”.
This article has been adapted from the forthcoming book The Multi-Capital Scorecard: Rethinking Organizational Performance (Chelsea Green Publishing, 2016) by Martin P Thomas and Mark W McElroy. Portions of it are reprinted with permission of the publisher.