# Triple capital accounting: Reframing corporate performance on greener terms
Author:  Pal Sinha, Barnali 
Author URL: https://financedigest.com/author/pal-sinha-barnali
Published: 2023-07-07
Category: LIFESTYLE
Category URL: https://financedigest.com/category/lifestyle
Meta Title: Triple Capital Accounting: Reframing Corporate Performance
Meta Description: Discover how triple capital accounting goes beyond financial metrics to include natural and social capital, vital for tackling the climate emergency.
URL: https://financedigest.com/triple-capital-accounting-reframing-corporate-performance-on-greener-termshtml

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# **Triple capital accounting: Reframing corporate performance on greener terms**

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_By_ **_Laurent Le Pajolec,_** _Board Member at Kreston Global Member Firm, EXCO A2A Polska_

**_Christina Tsiarta,_** _Head of Sustainability, ESG and Climate Change Advisory Services at Kreston Ioannou & Theodoulou_

With scientists recently warning that the earth’s atmosphere is likely to exceed the 1.5°C global warming threshold set under the landmark 2015 Paris Agreement within the next five years, it’s clearer than ever that we all have an urgent part to play in tackling the climate emergency. That includes the world of finance and accounting.

While the International Sustainability Standards Board (ISSB) recently [announced standards focus on carbon](https://www.financedigest.com/seenthis-anz-announces-partnership-with-adform-apac-in-its-continuous-drive-towards-more-carbon-efficient-campaigns.html "SeenThis ANZ announces partnership with Adform APAC in its continuous drive towards more carbon-efficient campaigns") accounting, they overlook crucial considerations on what is significant for ecosystems and the climate. Building on the intent of the ISSB’s standards, triple capital accounting (TCA) is a great solution for filtering financial and strategic [corporate](https://www.financedigest.com/what-green-criteria-sustainable-finance-houses-look-for-when-conducting-due-diligence-and-how-businesses-seeking-to-attract-investment-can-get-their-house-in-order.html "What green criteria sustainable finance houses look for when conducting due diligence, and how businesses seeking to attract investment can get their house in order") decision making through a scientific and sustainable lens.

TCA is designed to reset the focus of accounting techniques that have traditionally only considered the financial aspects of a company’s activities and the financial [assets on its balance sheet](https://www.financedigest.com/decoding-balance-sheets-analyzing-assets-liabilities-and-equity.html "Decoding Balance Sheets: Analyzing Assets, Liabilities, and Equity"). Under the TCA philosophy, as the name suggests, there should be three strands to accounting practice: looking at financial capital, natural capital and social capital. At its heart, the concept rejects the idea that making a profit is the only way to measure the success of a business and [posits instead that the organisation’s impacts](https://www.financedigest.com/the-responsible-marketing-agency-launches-to-drive-sustainable-and-positive-impact.html "The responsible marketing agency launches to drive sustainable and positive impact") on the environment and on society are important metrics too.

## **Natural and social capital as strategic assets**

The TCA framework allows for additional lines to be added to the balance sheet to show the depreciation of natural and social [capital](https://www.financedigest.com/striking-the-balance-between-consistent-creative-and-compliant-content-for-financial-services-on-social.html "Striking the balance between consistent, creative, and compliant content for financial services on social ") alongside financial capital. Importantly, all three lines of capital are treated equally as strategic assets and they cannot be substituted for one another. TCA is a branch of environmental accounting that is concerned with funding the costs of maintaining natural ecosystems and social environments, by highlighting them as liabilities that must be conserved, similar to financial capital. As well as being sound practice from an environmental, social and governance (ESG) standpoint, TCA allows these assets – and other aspects of the [company’s business model that might have been previously](https://www.financedigest.com/naturgys-profit-rises-on-lng-gains-soothing-shareholders-by-pietro-lombardi-madrid-reuters-spanish-power-utility-naturgy-reported-on-monday-an-88-jump-in-profit-for-the-first-six-months-of.html "Naturgy’s profit rises on LNG gains, soothing shareholders By Pietro Lombardi MADRID (Reuters) – Spanish power utility Naturgy reported on Monday an 88% jump in profit for the first six months of the year, boosted by strong earnings at its liquefied natural gas (LNG) business, which could help it to win over restive investors. Earlier this month, the company said it would increase its dividend floor through 2025 while trimming expected investment, as it sought to make rewarding shareholders a priority. Pleasing them has become a focus as Naturgy considers changes that could reshape the company and after arguments over the potential appointment of a chief executive. Naturgy’s first-half net profit jumped to 1.05 billion euros (.16 billion), boosted by its liquefied natural gas (LNG) business. Shares were down 0.2% in mid-morning trading, bucking deeper declines, in particular for Spain’s blue-chip banks and utilities after a general election on Sunday produced no clear winner. Renta 4 Banco analyst Angel Perez Llamazares said Naturgy performed better than expected, adding “cash flows also beat our expectation,” and debt fell more than expected. After natural gas prices hit record levels last year, Naturgy said a fall in procurement costs this year and hedging gains had boosed profits. In the first half of the year, the company “exceeded the objectives of operating efficiency, cash generation, investment materialisation and debt reduction,” Executive Chairman and CEO Francisco Reynes said. After rival Iberdrola named a separate CEO last year, Naturgy is the only large energy company in Spain to combine the roles of executive chairman and CEO. Earlier this month, the company raised the dividend floor to 1.40 euros a share, from 1.20 euros. Operating profit (earnings before interest, tax, depreciation and amortisation) is expected to reach 5.1 billion euros, compared with a previous guidance of 4.8 billion euros. It said it was targeting net profit of 1.8 billion euros in 2025. Naturgy also relaunched its plan to split regulated infrastructure operations and liberalised energy businesses into two listed companies. The project had been suspended after the Ukraine war disrupted energy markets and analysts are still sceptical. “We believe it is unlikely that Naturgy will be able to implement its asset split in the short term and it is also unlikely that a big change in the shareholding of the company would occur,” said RBC analyst Fernando Garcia. ( = 0.8986 euros) (Reporting by Pietro Lombardi, editing by Inti Landauro and Barbara Lewis)") undervalued by stakeholders – to be properly valued.

[Climate change](https://www.financedigest.com/exclusive-hsbc-fund-arm-toughens-thermal-coal-policy-to-curb-climate-change.html "Exclusive-HSBC fund arm toughens thermal coal policy to curb climate change") may be garnering most of the headlines, and for good reason. However, it’s far from the only ecological [threat we face](https://www.financedigest.com/new-kids-on-the-block-what-threats-will-neobanks-face-in-2022-and-where-will-the-opportunities-lie.html "New kids on the block: What threats will neobanks face in 2022, and where will the opportunities lie?"), and therefore it’s not the only green factor companies should consider in their TCA methodologies. Biodiversity erosion, changing land use, disruption to the nitrogen and phosphorus cycle, global water use, ocean acidification, ozone depletion, atmospheric aerosols, and the introduction of new entities into the biosphere should also be included.

There are many social aspects of the business landscape to take into account too. From human rights and anti-corruption in the [supply chain](https://www.financedigest.com/encouraging-female-talent-and-entrepreneurship-in-the-supply-chain-industry.html "Encouraging female talent and entrepreneurship in the supply chain industry"), to mental health and wellbeing in the workplace, and an increasing (and widening) focus on diversity and equality in company culture, the way companies carry out their corporate social responsibility (CSR) must be transparent and accountable.

The problem with traditional accounting methods is that it’s impossible to see the impacts a business is having (either positively or negatively) on the [world around](https://www.financedigest.com/what-a-5-note-will-buy-you-around-the-world.html "What a £5 note will buy you around the world") it. That has got to change.

## **What does TCA look like?**

There are many different TCA methodologies available, including the Natural Capital Protocol, the Universal Accounting methodology, and the Triple Footprint Thesaurus. However, the two most common (which we focus on here) are the CARE model (Comprehensive Accounting in Respect of Ecology) and the LIFTS model (Limits of Foundations [Towards Sustainability)](https://www.financedigest.com/a-journey-towards-a-sustainable-future-leading-the-way-for-a-greener-tomorrow.html "A Journey towards a sustainable future: Leading the way for a greener tomorrow").

**The** **_CARE_** **model** proposes that there should be an obligation to preserve natural and human capital assets alongside financial assets on [balance sheets](https://www.financedigest.com/ecb-policymakers-back-jumbo-rate-hike-differ-on-balance-sheet-cut.html "ECB policymakers back jumbo rate hike, differ on balance sheet cut"), in the P&L and in other performance KPIs. Here, human and natural capital refer, not to people or ecosystems themselves, but specifically to the assets derived from services provided by humans or by nature, through which a company creates value.

As they are based on services, human and natural capital form part of what is called ‘immaterial capital’, which [falls outside of a traditional contractual or market](https://www.financedigest.com/the-fall-detection-system-market-to-show-innovation-based-steadiness.html "The Fall Detection System Market to show innovation-based steadiness") framework. This means that intangible assets like skills, for example, are measured under this model because they increase shareholder value.

Other social CARE indicators include the worker participation rate, the [unemployment rate](https://www.financedigest.com/spains-unemployment-rate-inches-up-to-12-87-in-q4-2022.html "Spain’s unemployment rate inches up to 12.87% in Q4 2022"), customer service quality and training delivery. On the environmental side, issues like a company’s carbon footprint, and contribution to air quality or biodiversity are among the key indicators, alongside the [financial indicators](https://www.financedigest.com/new-research-indicates-confusing-bank-jargon-could-be-fuelling-financial-vulnerability.html "New research indicates confusing bank jargon could be fuelling financial vulnerability") you would expect to see such as growth rate, profitability, expenditure and debt.

This model extends the idea that a company can only calculate its profits once it has repaid its debts, considering the realms of its ecological and social ‘debts’, as well as its financial ones. In this way, it helps companies better understand their true performance and their [impacts across the financial](https://www.financedigest.com/revolutionising-finance-exploring-the-impact-of-omnichannel-insurance-on-customer-experience.html "Revolutionising Finance: Exploring the Impact of Omnichannel Insurance on Customer Experience"), environmental and social spectrum.

**The** **_LIFTS_** **model** was designed to help companies ensure the sustainability of their activities by adopting a socio-environmental [system that allows them to monitor](https://www.financedigest.com/the-wireless-fetal-monitoring-systems-market-to-join-the-growth-adsorption-spectrum.html "The Wireless Fetal Monitoring Systems Market to join the growth adsorption spectrum") the integrated performance of social capital and environmental capital, in a way that ensures they do not exceed the limitations of the earth’s ecosystem (known as the planetary boundaries) or degrade people’s access to basic needs (known as the social foundations).

There are three categories of impacts for which a company is responsible: operational impact, [supply chain](https://www.financedigest.com/volkswagen-sticks-to-outlook-as-size-offset-supply-chain-woes.html "Volkswagen sticks to outlook as size offset supply chain woes") impact, and the impact of its products and services. Looking at the company’s business model, the LIFTS accounting approach determines areas of the business with a strong potential impact on the ‘boundaries’ and’ foundations’, so that transformative steps can be taken where necessary to [become more sustainable](https://www.financedigest.com/croatias-coast-turns-to-solar-in-bid-to-become-energy-sustainable.html "Croatia’s coast turns to solar in bid to become energy-sustainable") in these areas – and overall.

It’s worth [noting that within this model](https://www.financedigest.com/the-humanized-mice-model-market-to-grow-on-a-satisfactory-note.html "The Humanized Mice Model Market to grow on a satisfactory note"), companies can identify the planetary boundaries and social foundations that are likely to be most impacted by their activities, so that they can prioritise what’s most important when it comes to monitoring performance and effecting change. Results are presented within the balance sheet and P&L, categorised by boundary/foundation and include an associated physical unit, such as £ per ton of CO2. Each result is calculated and analysed separately and performance in one [area](https://www.financedigest.com/demand-for-fast-transit-of-logged-woods-from-forests-to-stock-areas-is-expected-to-result-in-higher-demand-for-forwarders.html "Demand for Fast Transit of Logged Woods From Forests to Stock Areas Is Expected To Result In Higher Demand For Forwarders") cannot be offset against performance in another.

In this way, activities are [recorded alongside audited financial accounting in order](https://www.financedigest.com/indias-aerospace-suppliers-see-upside-in-parts-making-from-record-jet-orders.html "India’s aerospace suppliers see upside in parts-making from record jet orders") to track multi-capital performance. Once the results are put into context, they provide vital [insight into the company’s](https://www.financedigest.com/veterinary-teleradiology-market-insights-by-leading-companies-and-emerging-growth-till-2031.html "Veterinary Teleradiology Market Insights by Leading Companies and Emerging Growth Till 2031") integrated performance.

## **What’s the direction of travel?**

Several frameworks and standards already exist to help organisations measure and report on sustainability. These include the IFRS’ newly published standard providing General Requirements for Disclosures of Sustainability-related Financial Information, along with the standard for Climate-Related Disclosures. A framework to allow companies to bring nature and biodiversity into their decision-making and reporting – and thereby reduce the risk that nature and biodiversity loss can pose to organisations – is being developed by the Taskforce on Nature-related Financial Disclosures (TFND).

[Expectations around](https://www.financedigest.com/polyimide-fibers-market-is-expected-to-increase-at-a-healthy-cagr-of-around-5-over-the-forecast-period-of-2021-2031.html "Polyimide Fibers Market is expected to increase at a healthy CAGR of around 5% over the forecast period of 2021-2031") incorporating environmental and social considerations into corporate decision-making and financial disclosures are growing as regulations increase and as the pressure from stakeholders to demonstrate commitment to ESG  issues ramps up. Organisations and policy-makers worldwide, including the UN, the World Bank and the EU are all keenly focussed on harnessing the green economy, and the voices clamouring for natural capital and social capital accounting to become widely [adopted alongside financial](https://www.financedigest.com/why-mlops-will-boost-the-wider-adoption-of-ai-in-financial-services.html "Why MLOps will boost the wider adoption of AI in financial services") accounting are getting louder. All of which [puts TCA firmly in the spotlight](https://www.financedigest.com/analysis-nickel-meltdown-puts-spotlight-on-lmes-search-powers.html "Analysis-Nickel meltdown puts spotlight on LME’s search powers").

It’s a radical new way of looking at business performance, but one that makes a huge amount of sense. Transitioning to a TCA system will require major changes in [outlook and execution by businesses](https://www.financedigest.com/meningitis-diagnostic-testing-market-analysis-status-and-business-outlook-2017-to-2025.html "Meningitis Diagnostic Testing Market Analysis, Status and Business Outlook 2017 to 2025"), which could throw up many challenges. However, it may well open up significant opportunities too, as companies gain a more rounded perspective of the impacts of their [operations and use that visibility to adapt their business](https://www.financedigest.com/streamlining-business-operations-with-fleet-tracking-a-game-changer-for-small-businesses.html "Streamlining Business Operations with Fleet Tracking: A Game-Changer for Small Businesses") models to become more sustainable and resilient, adding value to their activities and to their brands in the process. TCA is the future of accounting: the future of the planet depends on it.


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