
Integrated profit and loss reporting
This brief presents a framework for integrated profit and loss (IP&L) reporting that includes financial, natural, human, and social capital. It aims to quantify corporate impacts beyond financial capital, providing a comprehensive view of business performance. The IP&L approach helps businesses align sustainability with corporate accountability, benefiting stakeholders.
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OVERVIEW
The report introduces the integrated profit and loss (IP&L) framework, which measures corporate performance across multiple forms of capital—financial, natural, human, and social—allowing businesses to account for their broader impact. Traditional financial reporting primarily focuses on shareholder value, while IP&L includes externalities that affect various stakeholders, including employees, communities, and the environment. This approach informs corporate decision-makers, investors, and regulators, offering a more comprehensive understanding of business performance and sustainability leadership.
Capital as a metaphor for value
“Capital” is used in an economic context to represent assets that generate value over time, such as income. The report highlights the risks of depletion across different types of capital: natural capital is being eroded due to environmental degradation, social capital is undermined by inequality and polarisation, and human capital is jeopardised by poor health outcomes and environmental pollution. These risks underscore the need for businesses to measure and manage their impacts on more than just financial capital.
Integrated reporting and the valuation framework
The IP&L framework evolved in response to the 2013 International Integrated Reporting Council’s (IIRC) call for a broader stakeholder perspective. It incorporates natural, human, and social capital alongside financial performance. Companies like AkzoNobel and Yarra Valley Water have applied this model, recognising the importance of natural capital dependencies in their operations. The framework builds on the Natural Capital Protocol, which guides businesses in measuring their reliance on environmental resources. The inclusion of these capitals is designed to help businesses become more resilient and sustainable by capturing the full range of their impacts.
The framework provides a structured process for evaluating business externalities, including both positive and negative impacts. These externalities are categorised under four main drivers: environmental, human resources, community, and economic. For example, environmental drivers like pollution or greenhouse gas emissions are quantified in terms of their broader impacts, such as damage to ecosystems or health costs. Positive drivers, such as employee training programmes, can increase human capital through improved skills and productivity. By measuring these impacts across different types of capital, businesses gain insights into their total effect on stakeholders.
Drivers, outcomes, and impacts
The IP&L framework links business activities (drivers) to their outcomes and subsequent impacts on stakeholders. These drivers include environmental actions, human resource initiatives, and community programmes. The report explains that outcomes, such as improved employee skills or environmental degradation, can have significant positive or negative impacts on natural, human, or social capital. For instance, environmental damage from pollution may lead to higher health costs, while positive human capital externalities, such as skills training, create broader societal benefits. These insights enable companies to manage both risks and opportunities more effectively.
Ownership and the ethics of offsets
The report explores the ethical dimensions of externalities and offsets, urging companies to consider the ownership of impacted capital. For instance, a mining company cannot offset pollution in a developing country by afforesting land near its headquarters. The framework stresses the importance of fairness and ethical responsibility in corporate sustainability strategies. This focus on ownership categories adds an additional layer of accountability, ensuring that companies address the right stakeholders in their impact assessments.
Recommendations
The report recommends adopting the IP&L framework to integrate natural, human, and social capital into corporate reporting, helping businesses better manage their externalities. By doing so, companies can align with global sustainability goals and become more future-ready. The IP&L approach also provides a standardised structure for reporting, enabling cross-sector comparisons and facilitating more informed decision-making among investors and regulators.