You Need These Forms Of Capital As Much As You Need Money

Forms of capital


Since Adam Smith’s redefinition, capitalism hasn’t just been about financial capital. There are different forms of capital that companies deal with every day. Besides money, we rely on human labour, on land, water, and energy, on machinery, and the community — and every business needs these resources to function efficiently.

In a language that is now standardized, we have managed to codify the financial part: We have adopted international standards on how to value assets, debts, and also project profits. But mostly we speak in the abstract about the other kinds of money, even though they can make or break us as easily as the financial ones.

Let’s use these few instances,

Can a manufacturing company whose cooling systems rely mainly on water be run without a viable source of water supply?

Is it possible to run a brick and mortar Fashion Shop with no social media pages and absolutely no real social connections?

Absolutely not.

You will need more than just Financial capital to keep your business rolling.

Consultant Mark McElroy advocates a multi-capitalist approach to managing growth by dynamically balancing the other forms of capital amongst each other, and importantly, maintaining the health of their cycles.

“This is about living within our means,” says McElroy. “The regulative ideal is to preserve, produce, and maintain vital capitals, to not put them at risk.”

Here are the six kinds of capital to focus on, according to McElroy:

Internal economic capital.

This includes financial capital (funds available, including debt and equity finance), and non-financial capital (for example the value of your brand).

External economic capital.

This takes into account the impact an organization has on the financial and non-financial capital of other entities (for example, a newly built estate may reduce or increase real estate values nearby).

Natural capital

This includes all natural resources or elements we rely on, as well as ecosystem services such as climate regulation.

Human capital

This includes knowledge, skills, experience, health, attitudes, and motivation of individuals.

Social and relationship capital.

This consists of teams, networks, and groups of individuals working together, and includes their shared intellectual capital.

Constructed capital

This consists of material objects, systems, or ecosystems created or cultivated by humans.

The emerging field of corporate sustainability, which translates the concept of sustainable growth into concrete action points, has been looking for a way to measure the other types of capital in the same way that we measure finances.

For example, environmental consultancy Trucost has developed formulae for pricing natural capital. Carbon pricing and emissions trading schemes have also been evolving with time. Today, a movement to fix an internationally agreed price on carbon emissions is gathering traction.

But McElroy opines that natural, social, and other forms of capital be evaluated not in financial terms, but on their own terms. He also suggests evaluating your breaking points under each form of capital.

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