The Five Capitals

The Five Capitals Model was developed to understand the different types of capital a firm would use to deliver its products and services. The goal is to enhance these capital stocks rather than degrade or deplete them. In order to understand how each form of capital potentially interacts with another, I have laid out the basic description of each type. There are times when one form of capital clearly has influence on another or times when one reflects the capability of another. I hope to share some insight on the implications of each type of capital on the firm and on our greater economy. 

1. Natural Capital - These are the raw materials and resources like energy, matter and processes that are needed by all businesses in order to produce their products and services. This includes:

• Sinks - Absorbing, neutralizing or recycling waste like forests and oceans
• Resources - renewable & non-renewable like timber and fossil fuels
• Processes - Enables life to continue in balance like climate regulation or carbon cycle 

Natural Capital is not easily replicable, rather it works for companies in a more ‘automatic’ way. If a company had to pay to replicate natural capital services or ecosystem services in financial capital it would most likely take millions or billions of dollars. Only recently have companies started paying money for services related to natural capital and It’s usually done indirectly. For example, paying an environmental fee in California when renting exhaust emitting equipment. This fee then goes into paying government environmental taxes which enters a specific area of government funded environmentally supportive programs. Natural capital provides a relatively irreplaceable set of services and because of this, I place Natural Capital as the number one most valuable form of capital. It provides a basis to which all other forms of capital can be built, explored and maximized.

2. Social capital - Considered to be any “value added to the activities and economic outputs of an organization by human relationships, partnerships and co-operation.” This plays out both internally and externally:

• Internally - “takes the form of shared values, trust, communication and shared cultural norms. Which enable people to work cohesively.
• Externally - “social structures help create a climate of consent or a license to operate in which trade and the wider function s of society are possible.” 

Its unclear to me where loyalty fits in - whether its Human capital or Social capital. Perhaps its a result of both a high level of human capital and social capital. Loyalty would best be exemplified in metrics like employee retention which in turn would reflect the level of human and social capital of a company. I feel like loyalty is usually a result of people being satisfied, acknowledged and included for one’s contribution to the greater whole.

Having high levels of social capital, both internally and externally, can be an extremely powerful asset. If you have a high level of internal trust within your organization it means less turnover and higher productivity. Turn over takes time and thus, financial capital and it also irritates the cohesiveness of a high functioning team. When a group of internal stakeholders can form a high functioning team that produces superior outputs, the company can excel in their social capital. Externally, social capital is just as important because as they say in Hollywood, “its not what you know, its who you know”. Our relationships are the bulk of most business transactions, if two parties are not able to agree and share the same values then they usually cannot work together.  It is because of these reasons that I believe that social capital is the second most valuable source of capital for any business.

3. Financial capital - Defined as “Assets of an organization that exist in a form of capital that can be owned or traded.” Some examples would be; ‘shares, bonds, banknotes and coin.’ It is essentially a reflection of all the other four types of capital and for this reason I classified it as the third most valuable form of capital. Financial capital is the standard ‘universal’ way which we measure value. Money is a symbol, it represents labor and output, which are seen as incredibly valuable forms of capital to have an a firms disposal.

4. Human Capital - This basically “Incorporates the health, knowledge, skills, intellectual outputs, motivation and capacity for relationships of the individual.” For me, human capital means having people involved in your organization that are assets in and of themselves. Either their capacity, commitment or consistency allows you to form a trusting relationship in which you can rely on them for intelligent output. These include good managers, skilled laborers and administrators alike. Having a high human capital value as a company, essentially means you have ‘good people’ working for you.

5. Manufactured Capital - This includes “material goods and infrastructure owned, leased or controlled by an organization that contribute to production or service provision but do not become a part of its output.”  I see it as the traditional sense of ‘physical assets’ such as buildings, infrastructure, transportation networks, waste disposal, communications, technology, tools, machines, IT and engineering.

Manufactured Capital is all about a business's physical capability to produce something. Do they have the machinery to produce? It can be powerful because it can bring reality to an idea and produce an output that can provide a financial return for the company. One could see it as relatively useless without a workforce but if the skilled labor were contracted or rented out then it becomes a lower risk investment. There is also the sale of the manufactured capital which is like having physical collateral if you needed to transform capital into more traditional types like financial capital.

Whether its physical, symbolic, energetic, intellectual, social or natural, the value of this world is tied to capital exchanges. We have created ways to express the value of capital and learned to exchange that value for capital equivalents. For me, sustainable capital weighs values and constraints across all five forms and makes decisions based on an underlying purpose to serve the needs of planet and people simultaneously.