Route2’s Total Capital Accounting framework gives the full picture of production. It assesses and evaluates the changing state of all the types of capital that an organisation depends on and generates — natural, human, intellectual, social, manufactured, and financial.
Conventional financial accounting has a critical limitation, the inability to effectively reflect the full costs and benefits of production. This incentivises the misallocation of financial capital and the misdirection of business activities.
The production and investment decisions of businesses often affect people not directly involved in the transactions. Sometimes these effects – termed externalities – are insignificant, but often they are substantial.
Externalities can be negative and positive, and in both cases distort the market prices of goods and services.
This price distortion incentivises business activities that inadvertently undermine the foundations for wealth creation.
Route2’s Total Capital Accounting framework helps correct this distortion. It assesses and evaluates the changing state of the six types of capital related to any organisation’s direct and indirect activities; namely, natural, human, intellectual, social, manufactured and financial capital.
These capital impacts can be presented in a similar manner to traditional financial accounting: Societal Profit & Loss Statement, Societal Balance Sheet, and Societal Risk & Opportunity Statement.
Systematically implemented, Total Capital Accounting has the potential to improve decision making, market pricing and help redirect the global economy to a more sustainable footing.
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