Companies can build a fuller understanding of their impacts (and dependencies) on society, including the implications for capital allocation.
Business leaders say they must measure what they seek to manage. In recognition of this basic assumption, companies need to understand new facts about their business: the real rates at which the resources they use, such as water, soil, biodiversity and clean air, are being depleted; the actual risks their business is exposed to from market failures such as climate change; and the true impact of their operations on society. Companies can achieve this by adopting new standards for three major groups of decisions: financial accounting, management accounting and capital allocation.
By working with the accounting community to broaden the use of environmental, social and governance (ESG) reporting, companies can send a clear message to capital markets about their longer term approach to value creation. By accounting for natural capital, companies can develop a clearer appreciation of the true lifetime costs of their goods and services and make informed decisions about how to manage them. Finally, by building a true appreciation of the real costs of capital and lifetime risk profile of an investment, companies can enhance their capital allocation processes.
The transparency resulting from integrated reporting and disclosure by listed companies (as well as large private companies and public institutions) will facilitate a more informed dialogue with stakeholders about the role of business in meeting societal challenges.
What is the net contribution of a company, and how is it handling trade-offs?