Financial capital thrives by consuming finite resources. But if we continue on the current path, we risk undermining the very systems that support our businesses, economy, and communities. To change course, we must reframe how we create and measure value – and finance professionals have a key role to play,?writes AICPA and CIMA’s Associate Technical Director, Peter Spence.
Financial capital can be likened to a three-legged stool, supported by insurance, banking, and investment. If one leg fails, the entire system collapses. Financial capital grows through the consumption and transformation of other types of capital: manufactured, human, intellectual, societal, and natural.
Just as the first law of thermodynamics states that energy cannot be created or destroyed—only transformed—the same principle applies to financial capital. Increasing it requires the depletion of other forms of capital.
If we assume financial capital can grow indefinitely (as we often do), then logically, these other capitals could be depleted indefinitely to sustain that growth.
This leads to a troubling conclusion: the continual conversion of all other capitals into financial capital ultimately ends with their exhaustion. But these capitals—especially natural ones—are finite.
And if they are exhausted, we risk rendering our environment uninhabitable, all in service of increasing financial capital.
To avoid this, businesses must rethink how they create and measure value. This involves redesigning business and operating models—and, crucially, gaining the support of financial capital providers such as shareholders, investors, lenders, and insurers.
While these stakeholders are focused on financial returns, reframing value creation may mean accepting lower returns in the short term to protect the return of capital in the long run.
Finance professionals play a key role in this transformation. They help companies develop multi-stakeholder, multi-capital strategies and strengthen execution through Integrated Performance Management, guiding businesses toward sustainable success.
We are constantly told that the way we do business is unsustainable. Global warming threatens to make entire industries uninsurable. When that happens, banks may stop lending, and investors may pull out.
Even the best-case scenario—a rise in sustainability-related risks—will likely raise the cost of capital.
These effects won’t be limited to high-risk sectors. For example, extreme climate events could increase risks for the shipping industry, which could drive up underwriting costs or even lead to the industry becoming uninsurable, disrupting global trade.
Closer to home in the UK, our efforts to tame natural waterways are now leading to more frequent and severe flooding. The lesson? It’s better to work with nature than against it.
Managers today are, rightly, expected to hit monthly and quarterly financial targets and deliver shareholder value. But steering a company through today’s volatile and complex environment is increasingly challenging.
Policy uncertainty surrounding sustainability—an already complex, interconnected topic—adds further difficulty. Sometimes it’s more helpful to break sustainability down into simpler, actionable goals: reduce pollution, reduce waste.
Finance professionals are now tasked with preparing for emerging sustainability disclosure regulations. But operationally, it’s still “business as usual.” Concepts like integrated thinking and systems thinking are important, but companies can begin with more familiar territory.
Every business can start by reducing waste.
The Kaizen philosophy introduces the concept of “Muda,” meaning waste or futility. It identifies seven types of waste:
These principles apply across all industries. Tackling waste not only reduces costs—it can also contribute positively to environmental and social outcomes.
Pollution—whether air, land, or water—is often tied to waste. Address waste, and pollution often follows.
Business decisions shape the world. And in today’s transparent environment, those decisions must consider a wider range of stakeholders: communities, customers, suppliers, employees, investors, lenders, and regulators.
When businesses act with broader accountability, they can build trust, enhance their brand, boost sales, and improve margins.
Business and operating models should evolve to extend the traditional value chain—from just suppliers and customers to also include community and environmental well-being.
Change doesn’t happen overnight. Celebrate small wins, involve everyone, and accept that the initial steps may come with short-term financial costs.
Just as investing in capital equipment requires an up-front cost for a longer-term return, the same logic often applies to addressing waste and pollution. Use this reasoning to gain the Board’s buy-in—their understanding and support are essential.
When it comes to sustainability disclosure, lead with authenticity. Avoid lengthy, credulous reports that amount to greenwashing.
Start with small initiatives that are easily implemented and that have demonstrable benefits. Take pride in them. Champion the people leading them. Tell your sustainability story through the lens of management information and let external reporting become a natural extension of what you do every day.
The financial system that we all depend on for business sustainability is more likely to stay the course than if there are doubts about the authenticity of a business’s sustainability journey.
As the saying goes, a journey of a thousand miles begins with a single step.