Hundreds of companies are building the foundations of exemplary corporate climate action. The next decade will witness accelerating efforts to transform the economic system. Humanity requires rapid responses, and in the race against climate change, every fraction of a degree temperature increase counts. Governments and businesses must jointly bring the best they have to win the race.
“It is a code red for humanity,” says UN Secretary-General Antonio Guterres, echoing the findings which are contained in the Intergovernmental Panel on Climate Change’s (IPCC) report launched on August 9th, 2021.
The landmark study warns of extreme heatwaves, droughts and flooding, as a result of the dismissal of the severity of the current situation.
Almost every nation signed up to the goals of the Paris climate agreement in 2015. This accord aims to keep the rise in global temperature well below 2º C this century and to pursue efforts to keep it under 1.5º C. It is still possible to reach these goals, however, the UN chief warns that: “If we combine forces now we can avert climate catastrophe, but there is no time for delay and no room for excuses.”
The sober assessment of our planet’s future has been anticipated by introducing approaches to limit emissions by pricing externalities or adding costs like taxes to cap and trade. Four approaches and policy instruments have been adopted by countries to reduce greenhouse gas emissions, namely taxes, voluntary approaches, trading and interaction of instruments in the policy mix and complementarities, OECD & IEA stated in a joint workshop 2003.
These models are all built on a market paradigm that is intended to change corporates’ behaviour, nevertheless, it seems to ignore that climate change was described as ‘the greatest market failure’ according to economist Sir Nicholas Stern. Much lip service is being paid today to environmental, social and governance (ESG) investment, growing sustainability concerns and the circular economy but the underlying dynamics are showing little sign of change, lack of accountability and action.
The declining climate is not the only side effect of the economic development achieved in the last several decades, as the loss of nature and rising inequality must be addressed as well. Recognising the direct dependency of economies, livelihoods and human wellbeing, the influential Dasgupta Review calls for the adoption of an ‘inclusive wealth’ approach to economic planning and decision making.
The capitals approach
Capitals Coalition, a global collaboration, hails the review as striving to achieve a shift in corporate behaviour to preserve and enhance the value of all forms of capital – natural, social, human and produced capital – as key factors for success. The widely accepted model is a critical framework that can empower the global community to operationalise the recommendations set out in the Dasgupta review.
To achieve this, the Coalition brings together global stakeholders to study and standardise methods for non-financial accounting to enable its valuation and reporting in business. The Coalition has published two international protocols – the Natural Capital Protocols and the Social & Human Capital Protocols – that provides a standardised framework for businesses to identify, measure and value direct and indirect impacts and dependencies on stocks of natural, social, human and produced capital.
This categorisation of capital into four groups is not an exhaustive list of all possible forms of capital, however, it is a common conceptualisation on which the Capitals Coalition bases its work. Some organisations use five categories of capital with ‘Financial’ being the fifth along with those adopted by the Coalition. Another nonprofit organisation, Integrated Reporting framework, uses that five capital approach and a few others adopt different conceptualisation.
However, that is a minor difference in treating categorisation. Louise Amand, Manager of Capital Coalition, says her institution uses produced capital to describe both human-made goods and financial assets. However, some institutions and partners affiliated with the Coalition in the field also recognise financial capital as separate.
When asked about the categorisation, she acknowledges the variety of approaches and her Coalition is in contact with them to build consistency. “In our view, to better allow valuation across all the capitals and understand inter-relation, having only produced capital help to keep the emphasis on including nature, people and social value into decision-making,” Ms Aman says in an email message on 11 August 2021.
The Capitals Coalition, formerly The Economics of Ecosystems & Biodiversity (TEEB) for Business and Enterprise, started as a project hosted by the Institute of Chartered Accountants in England and Wales (ICAEW) in 2012. In January 2020, the Coalition united the Natural Capital Coalition and the Social & Human Capital Coalition. The nonprofit grouping affirms its specialises in natural capital approaches in business, ecosystem and biodiversity valuation and reporting, research on environmental externalities in business sectors, stakeholders engagement on natural capital.
In line with the mounting need for a new paradigm in wealth creation, a vast majority of academics, with core members from the accounting profession and supported by other stakeholders, propose the inclusion of all capitals in the investment process.
Here are a few insights set forth by the Capitals Coalition to redefine value in the wake of the continued deterioration of the Earth:
We are failing to address the global challenges of loss of nature, climate change and rising inequality as our economic systems fail to recognize their dependence on nature, people and society.
We use a capitals approach to enable businesses, finance and governments to identify and measure the value of their dependencies and impacts on natural, social, human and produced capital. This allows them to develop a systemic understanding of the benefit they receive from nature, people and society to inform their decision making.
By working collaboratively with many thousands of global partners and our 370+ Coalition organizations, we accelerate momentum, leverage success, connect powerful and engaged communities, and identify the areas, projects and partnerships where we can collectively drive transformative change.
Our ambition is that by 2030 the majority of business, finance and government will include all capitals in their decision making processes and that this will result in a fairer, just and more sustainable world.
The Coalition’s model of transformative change covers three phases. Preparing the groundwork (2012-19), accelerating the transition (2020-25) and creating a new normal in decision making (2026-30). In the first phase the approach was based around ‘we could’, we are now moving into the ‘we should’ phase which will be followed by the ‘we must’ include the value of all capitals in the decision-making phase.
The Coalition lays out a time frame on how the world shall reach system change. At each phase of transformative change, we curate collaborative action that will help to Change the Math, Change the Conversation, Change the Rules and, ultimately, Change the System.
Phase 1: Preparing the groundwork
In the first phase, the initiators prepared the groundwork through the Natural Capital
Coalition and the Social and Human Capital Coalition. The two Coalitions began to Change the Math by harmonizing the business approach into internationally accepted frameworks with the launching of the Natural, Social & Human Capital Protocols and the formulation of supplementary tools and guidance for application. Both Coalition also formed communities from all parts of the economic system to Change the Conversation and design and support the application of a capitals approach.
Phase 2: Accelerating the transition
They are now entering into the second phase by merging into the Capitals Coalition.
Their Operational Plan sets out activities that will help to accelerate the transition. To Change the Math, they aim to standardise how they account for value, moving from ‘you could’ to ‘you should’ and then to ‘you must’. This will be achieved through the development of Generally Accepted Accounting Principles that include nature and then people. They will also build and strengthen and Change the Conversation by growing the community to over 1,000 organizations at the core and evolving local, national and regional platforms. They will also begin to set out the route towards the third phase by exploring the rules that govern decision making.
Phase 3: Creating the new normal
By the third phase, the Coalition aims to be starting to Change the Rules by focusing on how to transform the incentives offered by investors, governments, shareholders, regulators, rating agencies and others to better reflect natural, social and human capitals. They will also smooth the flow of data between collators, providers and users. They will seek the introduction of mandatory risk reviews and the disclosure of impacts and dependencies on nature and people, transforming the way that decisions are made and ultimately Changing the System.
Now is the time
As several global organisations accelerate their efforts to slow down climate increases, companies like Mahindra Group, Unilever and Cemex are making significant progress. These companies are among nearly 700 businesses, collectively employing around 24 million people and representing $13 trillion in market capitalization that is setting a climate pledge, science-based targets and implementing plans to help halve emissions globally by 2030 through the Business Ambition for 1.5°C campaign. Other 110-plus companies are working together to help reach the goals of the Paris Agreement 10 years early through the Climate Pledge, according to the World Economic Forum.
Some of the actions taken thus far include shifting the entire value chains to renewable power generation, making transport fleets all-electric and creating new, lower-carbon ways to manufacture products. By redefining the rules, governments can support businesses to do the best and ensure that together, achieve this monumental task.
Businesses have to start transforming the way decisions are made and ultimately changing their system. All stakeholders including civil societies and universities must strengthen this endeavour to enrich the value of all capitals and help address inequality.