Traditional economic definition of capital ignores the vital components that come from the environment and society. The essence of the capital concept lies in the fact that it is a stock or asset that provides the flow of goods and services in the interests of people’s welfare. However, it is clear that a narrow, traditional economic definition doesn’t fully cover all the sources, beneficial for the enterprises, and that there are sources of capital outside the organization’s productive assets that enhance production of economic products as well.
It is becoming broader recognized that capital, such as natural resources, human knowledge, and social cohesion, is a critical resource and asset, used by businesses and the economy as a whole in order to create respective products and services.
Therefore, in recent years, several models of capital treatment have been developed by numerous organizations, such as the World Bank, the Organization for Economic Cooperation and Development, and the Department for Environment, Food and Rural Affairs of the United Kingdom. The purpose of the abovementioned proposals is in recognizing and establishing distinctions as between broader stocks and assets.
The following categorization of 6 types of capital was introduced by the International Integrated Reporting Council (IIRC) as a system of structures, interacting and combining with each other, and, therefore, they constitute the main resources, which organizations rely upon so that to operate and produce products and services successfully.
Industrial capital
The industrial capital lies within the crafted physical objects used by a company to produce goods or provide services. It includes:
- buildings;
- equipment;
- infrastructure (roads, ports, bridges, waste and water treatment facilities).
Financial capital
Financial capital is understood as a funding pool that is:
- available to organizations within the process of goods or services production;
- received through financial injections such as loans, equity, grants, investments and other types of financial transactions.
Natural Capital
Natural capital is an organic contribution to the production of goods or services.
The organization’s activities usually have a positive or negative impact on natural capital.
The concept includes:
- water, land, minerals, and forests;
- biodiversity and ecosystem’s health.
Social capital
Social capital can be defined as specific norms of relations within social groups and between them, serving to enhance individual and collective well-being.
Social capital is shaped by:
- shared values and behavior;
- key relations, as well as trust and loyalty to the company, protection of customers, suppliers, and business partners;
- social approval of the company’s activities.
Human capital
These are the skills and experiences of people, as well as their innovative aspirations, including:
- harmonizing and maintaining a governance structure and ethical values, such as the recognition of human rights;
- an ability to understand and implement organizational strategies;
- corporative loyalty and motivation to improve processes, products, and services, including management skills and team-building capabilities.
Intellectual capital
- intellectual property, such as patents, copyrights, software and organizational systems, procedures and protocols;
- intangible assets, associated with the brand and the company’s reputation.
Sustainable development and shifting emphasis to the human capital
Human Capital in Ukraine
In 2017, Ukraine ranked 24th out of 130 in terms of human capital development on the Human Capital Index list, published by the World Economic Forum, gaining leading positions among the developing countries.
However, according to experts, due to the mass emigration, the situation may get worse significantly. State monitoring of the ways companies operate with human capital can be very helpful — in particular by introducing compulsory reporting — and Ukraine has already taken a step in this direction.
The latest changes, introduced into the law “On Accounting and Financial Reporting in Ukraine”, provide for mandatory submission of management report for medium and large enterprises. It should particularly be noticed that, besides financial information, large enterprises are obliged as well to provide additional information — the one that offers a transparent review of the company’s development and its current state, together with a clear picture of its main risks and uncertainties.
The report should cover the following points:
- probable opportunities for the company’s further development;
- information on the research and development in general;
- information on the shares acquisition;
- the existence of the company’s affiliates;
- application of financial instruments — if it is important for the assessment of an enterprise’s assets, liabilities, financial position, as well as respective income and expenses, — the company’s tasks and policies in the field of financial risk management, taking into account the insurance policy for each major type of planned operations, to which it applies hedge accounting, and probability of risks identification — that of price, credit, cash flows and liquidity.
To crown it all, Ukraine is moving towards sustainable development. Although the GRI report or the like are not yet binding, providing such information with open access will enable not only the state and society to observe the organizations’ activities in the areas of social, ecological and sustainable development, but will also empower companies in attracting new foreign investments due to transparency of activities and matching the enterprises’ goals with those of the general global strategy.