2C The capitals ... The stock and flow of capitals
2.10 All organizations depend on various forms of capital for their success. In this Framework, the capitals comprise financial, manufactured, intellectual, human, social and relationship, and
natural, although as discussed in paragraphs 2.17–2.19, organizations preparing an integrated report are not required to adopt this categorization.
2.11 The capitals are stocks of value that are increased, decreased or transformed through the activities and outputs of the organization. For example, an organization’s financial capital is increased when it makes a profit, and the quality of its human capital is improved when employees become better trained.
2.12 The overall stock of capitals is not fixed over time. There is a constant flow between and within the capitals as they are increased, decreased or transformed. For example, when an organization improves its human capital through employee training, the related training costs reduce its financial capital. The effect is that financial capital has been transformed into human capital.Although this example is simple and presented only from the organization’s perspective1, it demonstrates the continuous interaction and transformation between the capitals, albeit with varying rates and outcomes.
2.13 Many activities cause increases, decreases or transformations that are far more complex than the above example and involve a broader mix of capitals or of components within a capital (e.g.,
the use of water to grow crops that are fed to farm animals, all of which are components of natural capital).
2.14 Although organizations aim to create value overall, this can involve the diminution of value stored in some capitals, resulting in a net decrease to the overall stock of capitals. In many cases, whether the net effect is an increase or decrease (or neither, i.e., when value is preserved) will depend on the perspective chosen; as in the above example, employees and employers might value training differently. In this Framework, the term value creation includes instances when the overall stock of capitals is unchanged or decreased (i.e., when value is preserved or diminished).
Categories and descriptions of the capitals
2.15 For the purpose of this Framework, the capitals are categorized and described as follows:
• Financial capital – The pool of funds that is:
o available to an organization for use in the production of goods or the provision of services
o obtained through financing, such as debt, equity or grants, or generated through operations or investments
• Manufactured capital – Manufactured physical objects (as distinct from natural physical objects) that are available to an organization for use in the production of goods or the provision of services, including:
o infrastructure (such as roads, ports, bridges, and waste and water treatment plants)
Manufactured capital is often created by other organizations, but includes assets manufactured by the reporting organization for sale or when they are retained for its own use.
• Intellectual capital – Organizational, knowledge-based intangibles, including:
o intellectual property, such as patents, copyrights, software, rights and licences
o “organizational capital” such as tacit knowledge, systems, procedures and protocols
• Human capital – People’s competencies, capabilities and experience, and their motivations to innovate, including their:
o alignment with and support for an organization’s governance framework, risk management approach, and ethical values
o ability to understand, develop and implement an organization’s strategy o loyalties and motivations for improving processes, goods and services, including their ability to lead, manage and collaborate
• Social and relationship capital – The institutions and the relationships within and between communities, groups of stakeholders and other networks, and the ability to share information to enhance individual and collective well-being. Social and relationship capital includes:
o shared norms, and common values and behaviours
o key stakeholder relationships, and the trust and willingness to engage that an organization has developed and strives to build and protect with external stakeholders
o intangibles associated with the brand and reputation that an organization has developed
o an organization’s social licence to operate
• Natural capital – All renewable and nonrenewable environmental resources and processes that provide goods or services that support the past, current or future prosperity of an organization. It includes:
o air, water, land, minerals and forests
o biodiversity and eco-system health.
2.16 Not all capitals are equally relevant or applicable to all organizations. While most organizations interact with all capitals to some extent, these interactions might be relatively minor or so indirect that they are not sufficiently important to include in the integrated report.
Role of the capitals in the Framework
2.17 This Framework does not require an integrated report to adopt the categories identified above or to be structured along the lines of the capitals. Rather, the primary reasons for including the capitals in this Framework are to serve:
• As part of the theoretical underpinning for the concept of value creation (see Section 2B)
• As a guideline for ensuring organizations consider all the forms of capital they use or affect.
2.18 Organizations may categorize the capitals differently. For example, relationships with external stakeholders and the intangibles associated with brand and reputation (both identified as part of social and relationship capital in paragraph 2.15), might be considered by some organizations to be separate capitals, part of other capitals or cutting across a number of individual capitals. Similarly, some organizations define intellectual capital as comprising what they identify as human, “structural” and “relational” capitals. 2.19 Regardless of how an organization categorizes
the capitals for its own purposes, the categories identified in paragraph 2.15 are to be used as a guideline to ensure the organization does not overlook a capital that it uses or affects.
www.theiirc.org The International Framework 12
1 Other perspectives include the increase to the trainer’s financial capital due to the payment received from the employer, and the increase to social capital that may occur if employees use newly acquired skills to contribute to community organizations (see also paragraph 4.56 regarding complexity, interdependencies and trade-offs). www.theiirc.org The International Framework 11
2. FUNDAMENTAL CONCEPTS CONTINUED
2. FUNDAMENTAL CONCEPTS CON
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