Multiple Capital Accounting: A New Paradigm for Measurement and Reporting

Mark W. McElroy, Ph.D.
Executive Director, Center for Sustainable Organizations
Co-Founding Principal, Thomas & McElroy LLC
Multiple Capital
Accounting
New Metrics ’15
October 6, 2015 – Cambridge, MA

MultiCapital Accounting (MCA)
Copyright © 2015 by Mark W. McElroy, Ph.D.

What is MCA?
•  Arguably the most pervasive principle found in the
100+ year old literature on sustainability
–  That the performance of a society or organization is best
understood in terms of what its impacts on vital capitals
are, and with specific reference to their limits
–  Vital capitals: natural, human, social, constructed,
intellectual and economic
1
“Only the second revolution in
accounting since double-entry
bookkeeping began” and
“of seismic proportions”
Jane Gleeson-White
Six Capitals

MCA now also standards-based
•  International Integrated Reporting Council (IIRC)
•  Sustainability Accounting Standards Board (SASB)
•  Global Initiative for Sustainability Ratings (GISR)
“Integrated thinking is the active consideration by an organization
of the relationships between its various operating and functional
units and the capitals that the organization uses or affects.” (12/13)
“Leading reporting initiatives such as IIRC and SASB include
references to multiple, or ‘vital,’ capitals. GISR embraces the
multiple capitals framework as well.” (12/13)
“Material sustainability issues arise in industries that rely on
common capitals as a source of value creation, beyond financial
or manufactured capital … Common capitals, as used in this
Framework, include natural capital … and human capital.” (10/13)
Copyright © 2015 by Mark W. McElroy, Ph.D. 2

MCA: What does it do for us?
•  Provides us with a theory of performance that
addresses the subject in all of its dimensions in an
integrated way
–  A basis for operationalizing the Triple Bottom Line!
•  Applies common principles to measuring, managing and
reporting financial and non-financial performance, both
•  Makes meaningful Integrated Reporting possible (i.e., per
the IIRC)
–  A basis for quantifying and monetizing intangible asset
elements of market value (now upwards of 80% of market
caps)
•  Treats intangibles as capitals
•  Interprets externalities as impacts on capitals
•  Also provides a basis for making integrated
materiality determinations (stakeholder capitals!)
3Copyright © 2015 by Mark W. McElroy, Ph.D.

What is capital?
A stock of anything that yields a
flow of valuable goods or services
Based upon Fisher, 1906; Boulding, 1949;
Hicks, 1974; El Serafy, 1991; Ekins, 1992;
Costanza and Daly, 1992; Porritt, 2005;
and many others.

What are the capitals?
•  In broad strokes, there are six of them:
–  Natural
–  Human
–  Social (and Relationship)
–  Manufactured (or Constructed or Built)
–  Economic (or Financial)
–  Intellectual
•  Since Intellectual Capital is embedded in many of
the others, 5-capital models are also common
•  How we slice and dice capitals is of less
importance than that our accounting be capital
based in the first instance!

The IIRC’s 6-capital model

Notable 5-capital models
SIGMA (2003) Forum for the Future (2005)

How capitals relate to the TBL
Source: Thomas & McElroy

Available flows of
valuable goods
and services
(carrying
capacity)
Appropriations of
stocks and flows by
stakeholders who
need them
Resulting levels
of stakeholder
well-being
Organizations can, do and/or should have impacts on vital capitals
Stocks of natural capital
Stocks of human capital
Stocks of social capital
Stocks of constructed capital
Stocks of economic capital
What makes MCA relevant?
Organizational impacts
on carrying capacities of
capitals affect
human well-being!
Organizational Performance Affects Them!

How can MCA be done?
•  The standards are principles-based only, so we’re
left to our own devices when it comes to methods
•  There are arguably two schools of thought or broad
approaches as to how MCA should be done:
1.  Market Value (MV)
2.  Triple Bottom Line (TBL)
•  MV school is about measuring and monetizing
intangibles and externalities as a basis for explain-
ing market caps and the ability to create $ value
•  TBL school, by contrast, is about assessing
impacts on vital capitals as a basis for determining
the overall performance of organizations

Are there any MCA methods?
•  Market Value School
–  First, this is arguably the IIRC’s school of thought because
it stresses measurement, management and reporting of
capital impacts primarily for the benefit of shareholders
–  Prominent illustrations of this approach include the EP&L
method (pioneered at Puma); the TIMM method
(proprietary PwC tool); and Ernst & Young’s approach to
Integrated Reporting
–  Forthcoming Natural Capital Protocol may also fit in here
•  Triple Bottom Line School
–  So far only one method extant: the MultiCapital Scorecard*
•  A capital-, context-based and open-source TBL system
•  Early users include Ben & Jerry’s, New Chapter and Cabot
*Source: Thomas & McElroy LLC

The MultiCapital Scorecard
•  A context-based approach to TBL measurement
and reporting (defines company-specific standards
of performance on a bottom-up basis)
•  A three-step process:
1.  Scoping and Materiality – Identify duties and
obligations for what an organization’s impacts on vital
capitals must be in order to be sustainable; results in
identification of related Areas of Impact (AOIs)
2.  AOI Development – Define company-specific goals and
standards of performance for each AOI, context-based
metrics and associated data collection protocols
3.  Scorecard Implementation – Operationalize Scorecard
in order to measure, manage and report performance

Reporting in the MultiCapital Scorecard
•  Performance is reported at 3 levels of analysis:
1.  The individual Area of Impact (AOI) level
2.  The Operating Unit level
3.  The Consolidated Operations level
2019 – Company ABC
B
ottom
Lin
e
A
reas
ofIm
pact/
(Capitals)
P
rogression
Score
W
eigh
t
W
eigh
ted
Score
Fully
Su
stain
able
S
core
G
ap
to
Fu
lly
Sustainable
A
rea
of
Im
p
act
B
ottom
Line
Triple
B
ottom
Lin
e
NotesA B C D
A x B B x 3 D - C C / D
Living Wage (H) 3 1 3 3 0 100%
Workplace Safety
(H,S,C)
3 5 15 15 0 100%
Innovative Capacity
(H,S,C)
1 2 2 6 4 33%
Equity (E:IF) 3 5 15 15 0 100%
Borrowings (E:IF) 2 1 2 3 1 67%
Competitive Practices
(E:EF & ENF)
2 1 2 3 1 67%
Water Supplies (N) 3 3 9 9 0 100%
Solid Wastes (N) 2 2 4 6 2 67%
The Climate System (N) 2 5 10 15 5 67%
62 75 13 83%
Economic 90%
Environmental 77%
Overall
Performance
Social 83%
Notes

Turnover

(millions)

Sizing
Max
Fully

Sustainable

Score
Sized
Fully

Sustainable

Score
ABC 100$

33.3% 75 25
DEF 150$

50.0% 75 37.5
GHI 50$

16.7% 75 12.5
Group 300$

100% 225 75
Bottom
Line Company
Weighted

Score
Fully

Sustainable

Score
Bottom
line
by

company
Sizing
Sized

Weighted

Score
Sized
Fully

Sustainable

Score
Consolidated
Sized

Score
Consolidated

Potential
Score
Consolidated

Bottom
Line
ABC 20 24 83% 33.3% 6.7 8.0
DEF 14 21 67% 50.0% 7.0 10.5
GHI 14 21 67% 16.7% 2.3 3.5
ABC 19 21 90% 33.3% 6.3 7.0
DEF 16 24 67% 50.0% 8.0 12.0
GHI 20 30 67% 16.7% 3.3 5.0
ABC 23 30 77% 33.3% 7.7 10.0
DEF 20 30 67% 50.0% 10.0 15.0
GHI 16 24 67% 16.7% 2.7 4.0
83%
67%
67%
54.00 75.00 72%
Bottom
Line Company
Weighted

Score
Fully

Sustainable

Score
Bottom
line
by

company
Sizing
Sized

Weighted

Score
Sized
Fully

Sustainable

Score
Consolidated
Sized

Score
Consolidated

Potential
Score
Consolidated

Bottom
Line
ABC 15 15 100% 33.3% 5.0 5
DEF 10 15 67% 50.0% 5.0 7.5
GHI 10 15 67% 16.7% 1.7 2.5
ABC 10 15 67% 33.3% 3.3 5
DEF 10 15 67% 50.0% 5.0 7.5
GHI 10 15 67% 16.7% 1.7 2.5
Sizing
2019
-‐
Consolidated
Social 16.0 22.0 73%
Company
Totals
ABC
DEF
GHI
Consolidated
Total
Economic 17.7 24.0 74%
Environmental 20.3 29.0 70%
Centrally

Determined
Areas

of
Impact
Equity 11.7 15.0 78%
The
Climate

System
10.0 15.0 67%
13
Area of Impact Operating Unit Consolidated Operations

Reporting at the Operating Unit Level:
A MultiCapital Scorecard
Capitals:
C = Constructed*
EE = External Economic*
H = Human*
IE = Internal Economic*
N = Natural
S = Social & Relationship*
*Usually includes embedded
Intellectual Capital
2019 – Company ABC
Bottom
Line
Areas
ofIm
pact/
(Capitals)
Progression
Score
W
eight
W
eighted
Score
Fully
Sustainable
Score
G
ap
to
Fully
Sustainable
Area
ofIm
pactBottom
Line
Triple
Bottom
Line
NotesA B C D
A x B B x 3 D - C C / D
Living Wage (H) 3 1 3 3 0 100%
Workplace Safety
(H,S,C)
3 5 15 15 0 100%
Innovative Capacity
(H,S,C)
1 2 2 6 4 33%
Equity (E:IF) 3 5 15 15 0 100%
Borrowings (E:IF) 2 1 2 3 1 67%
Competitive Practices
(E:EF & ENF)
2 1 2 3 1 67%
Water Supplies (N) 3 3 9 9 0 100%
Solid Wastes (N) 2 2 4 6 2 67%
The Climate System (N) 2 5 10 15 5 67%
62 75 13 83%
Economic 90%
Environmental 77%
Overall
Performance
Social 83%
Notes
14
Note:
The Areas of Impact shown
here are purely illustrative
and are otherwise always
company-specific.

The Business Case for MCA
(and CSR)

What’s the business case for MCA?
•  Two schools of thought:
1.  You genuinely want your organization to be sustainable
•  Can’t manage it unless you measure it
•  No better way to do that than by measuring and managing
performance relative to impacts on vital capitals!
2.  You want to reap the economic and business benefits of
operating sustainably in more conventional terms
1.  Lower costs, higher revenue, more effective employee
recruiting and retention, lower risk, etc.) … i.e., operating
benefits
2.  While also reaping the benefits of CSR performance on
market value – a powerful new business case!
–  A convergence of the MV and TBL schools
–  Whereby strong non-financial performance is material
to, and measurably drives, market capitalization

Thank You!
mmcelroy@vermontel.net

1
The economic case for ‘good citizenship, CSR,
ESG, and sustainability’ credentials
... uncovering the tangible side of the intangible
Simon Cole
Founding Partner
October 6th, 2015
© Reputation Dividend

2
Over the next 40 minutes...
1.  The seeds of the opportunity
2.  Why the economic value of
‘corporate reputation’ matters
3.  How we can measure it
4.  How measurement informs better
management...the implications for
sustainability credentials
The tangible side of the intangible

3
...we are an independent consultancy
...we were founded in 2010
...we support corporate brand owners in their
pursuit of more effective messaging
...we work in association with partners in
capital markets advisory, consultancy and
communications
Some words of
introduction

4
Walmart aiming to save $3.5bn by
reducing supplier packaging
DuPont cutting $2bn costs and reducing
greenhouse gas emissions over 10
years by investing in energy efficiency
SRI assets under management c15% of
2015 total1
87% of consumers ‘concerned’ for
environment, 54% ‘willing’ to pay a
premium to act on it2
76% of CEOs consider that strong
sustainability contributes positively to
their business in the long term2
1: IFC/World Bank, The Business Case for Sustainability, 2: McKinsey, The business of sustainability (2011)
The business case is getting stronger and stronger

5
Top 3 reasons that respondents’ organisations address sustainability
2010 2011 2012 2014
Alignment
Align with company’s
business goals, mission,
or values
21%
31% 30%
43%
2010 2011 2012 2014
Reputation
Build, maintain, or improve
corporate reputation
36%
32%
35% 36%
2010 2011 2012 2014
Cost cutting
Improve operational
efficiency and lower costs
19%
33%
36%
26%
Company leaders are rallying to sustainability...it is
(increasingly) seen to matter...the dots are connecting
Source: 2014 global survey on reputation risk

6
Increased efficiency of waste reduction
•  88% of sustainability reporters reported
‘enhanced management decision making’1
Improved access to capital
•  Sustainability reporting linked to fewer capital
constraints2
Meeting employee expectations
•  30%+ reported increased employee
loyalty...with implications for higher retention,
lower turnover, recruitment costs etc3
Better reputation
•  50%+ of sustainability reporters cited
‘improved corporate reputations’4
And the value of reporting is being recognised
1:BlackSun (2012), 2:Social Science Research Network (2011), 3:EY/Green Biz (2011), 4:Boston College Center for Corporate Citizenship/EY (2013)

7
“The sum of all the thoughts, feelings,
associations and impressions that come to
mind when thinking of the corporate entity”
Many and various

8
Leading
Profitable
Trustworthy
Innovative
Over bearing
Caring
Ethical...or not
Measured
Cynical
Nimble
Aggressive
UncaringNurturing
Fast
Adaptable
Unexciting
Domineering
Considerate
Me-too
Led
well
Clinical
Err??
...demanding
measurement to
underpin
management

9
Tangible asset value
as a % of market
capitalization across
the S&P 500
0%
20%
40%
60%
80%
100%
1975 1985 1995 2005 2015
Intangible
value Tangible
value
17%
80%
68%
32%
83%
Why reputation measurement matters
Source: Ocean Tomo/Standard & Poor’s
1)  The relentless rise in the value of intangibles…

10
2)  The rise of the referential consumer

11
... of executives rate
reputation risk as
more important than
other strategic risks.
87% ... of companies that
experienced a negative
reputation event
reported loss ... of
revenue.
41%
Reputation risk is
a board and C-
Suite issue... the
responsibility of:
The CEO – 36%
The CRO – 21%
The board – 12%
The CFO – 11%
3)  The c-suite is recognizing the downside
Source: 2014 global survey on reputation risk

12
“...reputation is now one of the most important factors in
any assessment of a company’s value.
A good or bad reputation will be reflected in any share
forecast we make
Reputation sits at the core of our investment principles.
”
4)  Investors are appreciating the upside
Source: ‘How the people who value companies value reputation’

13
4)  Investors are appreciating the upside
5)  Traditional metrics have come up short
‘Reputation
value’ ...market
confidence in expected
economic returns
‘Brand value’...
turning customer
support into economic
profit
‘Employee brand
value’ ...leveraging
employee engagement for
economic advantage

14
Underpinning
investor confidence
Supporting and
elevating share price –
the Reputation
Contribution
REPUTATION BELIEF
EXPECTATIONS OF FUTURE BEHAVIORS
BASED ON PAST PERFORMANCE
THE AGGREGATE “ANALYSIS”
OF PAST BEHAVIOUR
Reputation builds ‘trust’…and, ultimately,
tangible economic value

"We can afford to lose
money — even a lot of
money. But we can't
afford to lose reputation
— even a shred of
reputation.”
15 © Reputation Dividend

1616
So how do we
measure it?

17
Profitability
Macro forces
Market perceptions
Product brand experience
News flow
Creating
shareholder value

Underpinning
confidence in the
ability to deliver
economic return
Allocation of capital
Commercials e.g. marketing
Industry dynamics and networking
Perceptions of the management
‘reputation’
Investor behavior provides the foundation for
understanding the impact of reputation

18
Ø Proprietary research
Ø What is being said about the company
Ø Mainstream business press
Media
Ø Sourced among ‘professional’ stakeholders
Ø Collected ‘thoughts and feelings’
Ø Raw measures from Most Admired
Companies reports
Reputation
Ø Reported performance
Ø Analysts consensus forecasts
Ø Company and third-party sources
Financial
Three inputs…hard data

19
Stage 1 – The ‘general model’ of investor behaviour:
o  Inputs from three sources – news media, Fortune and Management Today’s
Most Admired Companies research, Factset/Bloomberg etc
o  Regression analysis to test combinations of financial and reputational drivers
of market cap
o  Re-calibrated annually using 700+ of the world’s largest listed companies
o  Trending and modelling data over eight years
…informing a two stage modeling process

20
Stage 1 – The ‘general model’ of investor behaviour:
o  Inputs from three sources – news media, Fortune and Management Today’s
Most Admired Companies research, Factset/Bloomberg etc
o  Regression analysis to test combinations of financial and reputational drivers
of market cap
o  Re-calibrated annually using 700+ of the world’s largest listed companies
o  Trending and modelling data over eight years
Stage 2 – Analysing company performance through the lens of the
general model
o  Isolate the economic contribution of company reputation assets ... as a
whole and for individual components
o  Calculate stock price implications of changes to the reputation profile
•  Value lost through reputation degradation
•  Value gained through reputation enhancement
o  Identify implications for corporate communications and messaging
…informing a two stage modeling process

Statistical analysis of hard data
Informed by financial metrics and
empirical reputation research data
Repeatable and stable
Objective...
21
…to make the link between corporate reputation and
share price

/
22
Company Domicile
Reputation

Contribution
Reputation
Value

(Dec
14/Jan
15)
UK 49.7% $61.3bn
US 49.5% $323.4bn
US 49.4% $78.4bn
US 48.6% $187.7bn
UK 48.4% $35.3bn
UK 48.2% $7.7bn
UK 47.3% $50.4bn
UK 47.3% $5.1bn
US 47.2% $166.9bn
UK 46.3% $4.8bn
Ten of the most potent reputations – US and UK –
$921bn of shareholder value

23
Why measurement informs better management...the
implications for sustainability credentials

24
Reputation Driver Interest
The Return on Reputation Investment
Relativevalueimpact
1.6X
0.8X
0
0.2
0.4
0.6
0.8
1
1.2
1.4
1. Because investor side interest in reputational
characteristics varies from factor to factor

25
Reputation Driver Interest
The Return on Reputation Investment
Relativevalueimpact
1.6X
0.8X
0
0.2
0.4
0.6
0.8
1
1.2
1.4
1. Because investor side interest in reputational
characteristics varies from factor to factor

26
Global competitiveness
Use of corporate assets
Financial soundness
Quality of management
Long term investment potential
People management 16%
14%
13%
13%
11%
1%
$3,329bn of shareholder value at Jan 2015
(17% of the combined market capitalization)
11%
10%
13%
Social responsibility
Innovation
Quality of products/services
2. Because ‘CSR’ credentials are already accounting for
a substantial proportion of reputation value

27
Global competitiveness
Use of corporate assets
Financial soundness
Quality of management
Long term investment potential
People management 16%
14%
13%
13%
11%
1%
$3,329bn of shareholder value at Jan 2015
(17% of the combined market capitalization)
10.7%
10%
ð$356bn
13%
Social responsibility
Innovation
Quality of products/services
2. Because ‘CSR’ credentials are already accounting for
a substantial proportion of reputation value

-‐6%
-‐4%
-‐2%
0%
2%
4%
6%
8%
10%
28
8.9%
8.1%
6.9%
6.7%
6.5%
-5.9%
-5.6%
-5.3%
-4.0%
-5.9%
3. Because generalizations fall short, the average hides
a wide range of winners and losers

-‐
0.04

0.08

0.12

0.16

0% 5% 10% 15% 20%
29
Factor
Contribu-on

Rela-ve
Value
Growth
Poten-al

Value
as
a
long

term

investment

Quality
of

management

Use
of

corporate
assets

Corporate
&

social

responsibility

Global

compe::veness

Quality
of

products
&

services

People

management

Innova:on

Value
Growth
Poten-al

Value
Security

Financial

soundness

4. Because companies need a compass for messaging …
and behavior, to plan for value management

30
1.  There is solid, objective evidence
to be had as to the economic
benefit of reputation credentials
for sustainability
2.  The implications for corporate
strategy are clear and profound
3.  The challenge is to integrate the
case into the communications
strategy
4.  The benefits in terms of RoI can
be substantial
In sum...the business case for sustainability credentials
has just become even stronger

Multiple Capital Accounting: A New Paradigm for Measurement and Reporting

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