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Date: 2022-07-01 Page is: DBtxt001.php txt00021067

The Socio-Enviro-Economic System
Cambridge

A Cambridge University graphic to describe the Socio-Enviro-Economic System


Burgess COMMENTARY
At its core, this graphic from Cambridge has much of the form that is consistent with TrueValueMetrics (TVM). At the center there are the main components of the system: that is (1) Society (2) Environment (3a) Business (3b) Finance and (3c) Government. For TVM the main components are similar: (1) Society (2) Environment and (3) Economy.

The Cambridge graphic has 'flows' from the Economy (Business, Finance and Government) into Society and Environment. For TVM, understanding and managing 'flows' is a core concept that enables the effectiveness of the TVM approach. More on this later.

In the Cambridge graphic there are further details as follows:

Detail for SOCIAL OUTCOMES
  • Basic needs
    • Food, water, energy, shelter, sanitation, communications, transport, credit and health.
  • Wellbeing
    • Enhanced health, education, justice and equality of opportunity for all
  • Decent Work
    • Secure, socially inclusive jobs and working conditions for all
Detail for ENVIRONMENTAL OUTCOMES
  • Resource Security
    • Preserve stocks of natural resources through efficient and circular use
  • Healthy ecosystems
    • Maintain ecologically sound landscapes and seas for nature and people
  • Climate Stability
    • Limit GHG levels to stabilize global temperature rise to under 2OC
Detail for GOVERNMENT / FINANCE / BUSINESS
  1. Set the right targets and measurements
  2. Correct externalities with fiscal policy
  3. Drive socially useful innovation
  4. Ensure captial acts for the long term
  5. Value the true costs of for the long term
  6. Innovate financial structures
  7. Set a bold ambition and innovate
  8. Broaden measurement and disclosure
  9. Grow capability and incentives
  10. Harness communities for positive change
From a TVM perspective this detail is very weak. Worse, there appears to be little understanding of the way 'cause and effect' operates in the real world. These issues have been addressed in a more comprehensive way in the TVM framing.

As a starting point the TVM framing was guided by basic concepts from engineering thermodynamics as well as conventional financial accountancy

In engineering thermodynamics there are processes that require energy inputs and there are other processes that produce energy ... both may be described using appropriate metrics

In conventional financial accountancy the operating activites are accounted for in the operating accounts (the profit and loss accounts) and show a period profit or loss. At the same time, there are changes in the balance sheet accounts from the beginning of the period to the end of the period. The change from the beginning of the period to the end also show the period profit or loss.

In the early days of modern economics there was some understanding of three factors of production, viz: Land, Labor and Capital. TVM's modern version of this same concept is Environment / Natural Capital, Society / Social Capital, and Economy / Economic Capital.

TVM has worked to combine the metrics that work for economic (financial) activity with similar metrics that work for social impacts and environmental impacts. In addition to reporting on the state of economic (financial) activity, TVM also incorporates the state of society and the state of the environment.

The TVM framing maintains the tried and trusted (for several hundred years) approach where change in state is recorded using balance sheet accounts and operating impacts are recorded using profit and loss accounts, but applying these ideas not only to financial accounts but also to social accounts and environmental accounts.

While this is not obvious from the Cambridge graphic, the socio-enviro-economic system is very very complex with a multitude of activities and impact flows, some positive and others negative. Most important is to understand the big difference between State, Activity and Change in State and the concept of Progress being Change in State in a positive direction. Most modern economic analysis and media / political commentary is very simplistic usually describing a change in one dimension without also describing the change ... usually opposite in direction ... of the other dimensions.
One of the places where this is happens is in the calculations of the US Congressional Budget Office and most of the financial deliberations in Congress. It is amazing that most Government Budgets fail to differentiate clearly between expenditures and investments, something that has been required in the corporate private sector for well over a century!


Multiple Perspectives

Not obvious from the Cambridge graphic is that progress and performance looks very different depending on the specific perspective that is being observed. Most of financial analysis is done from a corporate financial perspective with a focus in impact on stock markets and investors. This may represent a big proportion of global wealth, but a quite small proportion of the global population.

The TVM reporting methodology may be used for all the many actors in the socio-enviro-economic system. The actors are:
  • the individual
  • the family / the household
  • a community organization
  • the community
  • the place
  • the corporate business organizations
  • their products
  • supply chains
  • production operation
  • use of products
  • post use waste chains
  • holding companies
  • government entities and programs
  • the sector
  • the nation
  • and others
This contrasts with the prevailing focus of the prominent metrics in the modern economy ... that is metrics like:
  • National GDP growth
  • Stock market value growth
  • Corporate profit growth
In recent years metrics about society and the environment have been ignored in the broader conversation, and it is only academic reports on these subjects that get into the news and only for a very short time.

It is corporate profit performance that is the dominant metric of performance in the modern world ... and in the main, this information flows from the corporate organization together with supporting information. While this reporting is usually governed by national regulation, that is not to say that it is going to represent a true and fair picture of the performance of the organization.

Activities

The TVM framework separates an activity from the organization that implements an activity. An activity used resources to produce products together with waste of various types.

A business organization may have many different activities. The results of many different activities may be added together to reflect the totality of the organization.

Products

A business organization may produce many different products. Where the organization produces many different products they may be added together to reflect the totality of the organization.

A product is created in multiple steps. There is various steps in the supply chain with resources consumed along the way and value added. Eventually the product is sold to an end user which may create ongoing social value for the user and at the same time add to environmental degradation. Finally there is a post use waste chain, which may add more negative environmental impact.

Actors

Many actors are people and organizations made up of people.

The natural world may be considered to be an actor as well. Many activities take place in the natural world without the direct involvement of people, but a whole range of activities that are going on within the ecosystem.

There is a wide range of behavior involving actors: for example
  • an individual who is a worker being paid an hourly wage.
  • an individual who is a manager that gets paid a bonus when costs are low and profits are high.
  • an individual who is old and./or disabled and no longer works, but still needs food and shelter.
  • politicians who have to decide between decisions that will do good for the country and those that will win reelection.
  • investors who need to balance social and environmental issues with the profit performance of the organization.
There are a lot of organizations that are very powerful actors ... many of these are for-profit companies, some are not-for-profit organizations with access to people with power and influence and some are governmental organizations.

There have been many examples of major for-profit corporations hiding important facts about their operations so that they appear to be actors who deliver beneficial impact to society and to the environment when in reality they are not.

The TVM framework has much in common the Cambridge framework, but the TVM framework attempts to be completely coherent and comprehensive. TVM does this by embracing the foundational strength of conventional double entry accountancy and enhancing it to incorporate social value and impact and natural capital value and environmental impact.

The TVM framework uses a variety of proxy measurements, but avoids the use of currency or money as the dominant metric. This is because money value is not constant since the value of money is determined by a market mechanism with value changing all the time.

Beginning of Period
STATE

ACTIVITIES End of Period
STATE

BOP STATE
Inputs ...
Resource Use
Outputs ...
Value Created (Destroyed)
EOP STATE
SOCIETY / SOCIAL CAPITAL SOCIETY / SOCIAL CAPITAL
People / Human Capital People / Human Capital
Relationship Capital Relationship Capital
Locational Capital Locational Capital
Spiritual Capital Spiritual Capital
Cultural Capital Cultural Capital
SOCIETY / SOCIAL CAPITAL

The components of this section are:
  • People / Human Capital
  • Relationship Capital
  • Locational Capital
  • Spiritual Capital
  • Cultural Capital
ENVIRONMENT / NATURAL CAPITAL

The components of this section are:
  • Sun
  • Air
  • Water
  • Resources
  • Minerals
  • Biodiversity
  • Ecosystems


ECONOMY: FINANCIAL, PHYSICAL, AND INTANGIBLE CAPITAL

The top level elements of this section are:
  • Financial
  • Physical, and
  • Intangible
Within the Financial segment there are these sub-elements:
  • Individual Wealth Gains
  • Business Value / Profits
  • Stock Market Gains
  • Real Estate Gains
Within the Physical segment there are these sub-elements:
  • Land and Buildings
  • Infrastructure
  • Processes
  • Equipment
  • Working Capital
Within the Intangible segment there are these sub-elements:
  • Knowledge Capital
  • Institutional Capital
  • Cultural Capital


Peter Burgess


The text being discussed is available at

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