When we think of “capitalizing” on something, we might think of “exploitation.” Another way to use the word is: “to capitalize on something to achieve something.” When used in this sense, we can apply the concept of “capitalizing” to the natural, social, human, and economic capitals of sustainability and better understand why these capital stocks are necessary for a truly sustainable enterprise.
Keep this in mind as you read on:
A truly sustainable organization creates a flow of desired goods and services by using renewable capital stocks without depleting them.
So how do we define the forms of capital referred to in the sustainability lexicon?
Here is a synthesis of a range of definitions for each form of capital:
Natural Capital refers to the value of the world’s stocks of natural assets. This includes air, water, land, energy, matter, and all living things. It is from this natural capital that humans derive a wide range of services, often called “ecosystem services.” This not only allows businesses to produce goods and services, but makes human life possible.
Social Capital is the value an organization derives from human relationships, partnerships, and cooperation. Examples of social capital include communities, businesses, academic institutions, nonprofits, social networks, and families. It also includes social norms, values, and trust.
Human Capital is the knowledge, capabilities, skills, and motivations individuals contribute for productive use. For example, intellectual capital is a key intangible and creator of wealth for businesses. Human capital also involves personal qualities such as thoughtfulness, empathy, and enthusiasm; all of which can be put to positive use.
Economic Capital is the amount of revenue available to secure survival (stay solvent). It takes into account not only expenses, but also the need for reserves to cover worst-case scenarios (risks) and investments, like research and development (opportunities). Economic capital involves analysis of whether a business can generate revenue at a healthy enough rate to secure its future.
All of these forms of capital require an evolving analysis that explores and takes into account both current and future conditions. Think for a minute about each of these individually and collectively. If all were leveraged in such a way to achieve sustainable outcomes just imagine the value created for the environment, society, and economy.
How do businesses capitalize on these forms of capital? How do they use them to create (not destroy) sustainable value?
As sustainability practitioners, we know that most businesses are driven by financial goals. We also know that this means that the desire for profit often trumps development and preservation of these capitals. For example, the impact of business activity on natural capital stocks is often deleterious. Either the existing stock is drawn down when natural resource inputs are used (e.g., forests are harvested for producing wood and paper products). Or the quality of the stock is diminished (e.g., through atmospheric emissions or the disposal of waste). Sometimes short-term profits are taken at the expense of investment in or development of human capital or economic capital. Or community needs are ignored, despite the negative impacts on a business – such as inability to attract talent – of deteriorating social capital.
The paradox is that we need all of these capital stocks to sustain life and productive capacity for the economy and society. The best way to capitalize on these capitals is to properly value each of them. Each should be made comparable, normalized, and examined as part of an integrated whole.
Capitalizing on capital means making use of the same opportunity cost thinking circulated over a hundred years ago in Green’s Pain-Cost and Opportunity-Cost (1894).
Consider this timeless wisdom:
“But, when we once recognize the sacrifice of opportunity as an element in the cost of production, we find that the principle has a very wide application. Not only time and strength, but commodities, capital, and many of the free gifts of nature, such as mineral deposits and the use of fruitful land, must be economized if we are to act reasonably. Before devoting any one of these resources to a particular use, we must consider the other uses from which it will be withheld by our action; and the most advantageous opportunity which we deliberately forego constitutes a sacrifice for which we must expect at least an equivalent return.” (Green 1894, p. 224)
In essence, we need to consider the opportunity cost of using each form of capital. For example, a business that fully values natural capital considers the opportunity cost of its use, such as scarcity and/or harm to or impact on the environment.
As quoted above, these resources “must be economized if we are to act reasonably.” Businesses that reduce their ecological footprint by optimizing resource use (e.g., energy or water) and reducing waste are doing just that. So are businesses that perform life cycle assessment to determine what the true environmental cost is of their products. This includes a full analysis of sourcing raw materials, manufacturing and distribution, and eventual disposal by the end user.
Financial metrics miss much of the value that behaving sustainably delivers to the environment, society, and businesses. Sustainability takes all forms of capital into account. This includes many traditionally unaccounted for benefits such as eco-efficiencies, productivity, talent, brand equity, and reputation. It also includes the costs of negative impacts such as GHG emissions, pollution, waste, unemployment, and poor morale. There are a host of analytical frameworks that can help draw out the interrelated opportunities and constraints on each form of capital. Some of these include Systems Thinking, Cost-Benefit Analysis, and SWOT Analysis.
A sustainable business will maintain, and where possible enhance, these stocks of capital rather than deplete or degrade them. Sustainability valuation goes beyond the assessment of profitability. The true and sustainable bottom line is that the efficient use and maintenance of all capital stocks creates greater wealth and well-being for all.