In recent years, the term 'well-being' has been increasingly heard. It is sometimes translated as 'welfare', with the connotation that it contributes to people's well-being. Until now, 'wealth' has been assessed using the increase in gross domestic product (GDP) as an indicator, but wellbeing, such as health, has not been sufficiently taken into account in GDP. Therefore, the new Inclusive Wealth Index (IWI), which takes into account inclusive wealth that contributes to people's well-being, is beginning to be used.
IWI (new national wealth index) expected to be a measure of progress on the SDGs
In order to properly and sustainably promote 'development' as outlined in the SDGs, a variety of economic models and policy tools are required. A series of processes to comprehensively evaluate initiatives and review their content and targets are extremely important. The United Nations has adopted the Inclusive Wealth Index (IWI), developed by Nobel Prize winner in economics Kenneth Arrow and Persa Dasgupta, author of the Dasgupta Report published in the UK, as a comprehensive evaluation method. The IWI attempts to measure the overall wealth of a country or city by quantifying it as a stock in three indicators: man-made capital, natural capital and human capital.
In Japan, 'regional development driven by the SDGs' is set out in the 'Second Comprehensive Strategy for Town, People and Work', and local governments are trying to realise both sustainable town development and the achievement of the SDGs. Referring to the idea of new national wealth, the SDGs will be sustainable if average wealth per capita increases, while the SDGs will be unsustainable if it decreases.
Figure 1 shows the economic flows and stocks assumed by the IWI (New Wealth of Nations); the IWI (New Wealth of Nations) and welfare have a stock/flow relationship, with wealth generating welfare.
First, wealth is used for annual production activities in a given society. This wealth consists of three types of stock - man-made capital such as factories and machinery, natural capital such as forests and farmland, and human capital such as education and health - which are used in production activities to create flows.
IWI used by local authorities and businesses
What local authorities need when implementing projects, including those to achieve the SDGs, is an explanation that makes sense to local residents and some measure of the effectiveness of the project. This is where the adoption of the new national wealth index is gaining ground.
The Urban Research Centre at Kyushu University is using the IWI (New National Wealth Index) to promote urban development in collaboration with local authorities such as Hisayama Town, Miyawaka City and Nogata City (both in Fukuoka Prefecture). (Table 1)
Table 1 Municipalities using the IWI (new national wealth index)
Miyawaka City has set "Assets per citizen in the new national wealth index: 31 million yen (H27) → 32.55 million yen (R6)" as a numerical target for Basic Objective IV "Formation of a sustainable and vibrant local society" of the "Second Miyawaka City Comprehensive Strategy for Town, People and Work Creation" in 2020 (2020). Nogata City is also utilising this in the 'Sixth Nogata City Comprehensive Plan' starting in FY2021 (2021). This is the first time in the country that the comprehensive plan has been utilised.
In corporate activities, for example, use is made of human capital. The well-being of employees is an important management resource and one of the key indicators for understanding corporate activities. (Chuo-ku, Tokyo), which is developing the 'Hataraku wo Yosuru®' support business for companies, and the Urban Research Centre of Kyushu University have conducted joint research and developed an index to measure corporate value by quantifying the mental health status of 'workers' (employees), who are responsible for corporate activities, as human capital. A project has been initiated to present the nature and effects of stress and mental health measures that enhance corporate sustainability.
ESG disclosures required by companies
We all know that in recent years, companies have been required to address Environmental, Social, and Governance (ESG) issues. In the global equity markets, the way investors are behaving has also changed and is moving towards sustainable investment that focuses on these aspects.
One of the problems with sustainable investment is that it is more difficult to gather information than investing in general stocks and bonds. In addition, standards and methods for gaining understanding by a wide range of investors and companies are still developing. On the other hand, growing interest has led to a social demand for the publication of information disclosure items, such as corporate disclosure regulations, fiduciary responsibility, investment eligibility and ESG risk management. For example, the Task Force on Climate-related Financial Disclosures (TCFD), which was established as a framework for understanding and disclosing financial impacts of climate change, has developed four areas: governance, strategy, risk management The Corporate Governance Code revised in 2021 requires prime market listed companies to disclose information in accordance with the TCFD recommendations. Also in 2022, the Taskforce on Nature-related Financial Disclosures (TNFD) published a beta version of a framework for the management and disclosure of nature-related risks.
Sustainable investment and new national wealth are interrelated in the pursuit of current wealth (i.e. financial returns) and future wealth (i.e. social positives), both aimed at long-term economic prosperity, taking into account social and environmental factors. Increased sustainable investment in sustainable and socially responsible companies will lead to increased new national wealth.
Quantifying the invisible, including human rights
The neglect of human and natural capital, which used to be non-financial assets, is a risk for companies.
One company that disregarded human rights and suffered very heavy losses was a major US apparel company that was exposed in 1997 for forced labour and child labour. Long working hours and child labour at factories in Indonesia and Vietnam, where the company outsourced its operations, were discovered, leading to a worldwide boycott. Losses due to this are estimated to be as high as ¥1.4 trillion. Elsewhere, in Bangladesh in 2013, more than 1,100 people died in the collapse of an illegally constructed building that housed several factories subcontracted from global apparel companies. Low wages, poor working conditions and forced labour ......, these resulted not only in financial losses but also in the loss of vital human capital - human lives.
Child labour problems also occur in mining. For example, in the Republic of Congo, children are forced to work in the mining of mineral resources such as cobalt, gold and tin ore, according to the US Department of Labour's report on child labour, Investigation into the Worst Forms of Child Labour.
The International Children's Fund (UNICEF) and the International Labour Organisation (ILO) report Child labour: global estimates for 2020, trends and future challenges, published in 2021, defines child labour as the engagement of 5-17-year-olds in 39 hazardous industries and occupations, including forestry, mining and machinery maintenance, and working long hours of 43 hours or more per week. The law defines child labour as the engagement of 5-17 year olds in 39 hazardous industries and occupations, such as forestry, mining and machinery maintenance, or working long hours of 43 hours or more per week. It then reported that an estimated 160 million children (63 million girls and 97 million boys) are engaged in child labour worldwide by the beginning of 2020. It further noted that the number of children aged 5-11 years engaged in child labour accounts for more than half of the total number (89.3 million).
Failure to address ESG as well as human rights issues is directly linked to corporate risk. In Japan, disclosure of human capital information has become mandatory for major companies issuing Annual Securities Reports under the Financial Instruments and Exchange Law since the settlement in March 2023.
As ESG initiatives are required in products and services that trace back through the supply chain, and the importance of natural capital management and human capital management is increasing for organisations as a whole, there are a wide range of issues that need to be taken into account, and there may be limits to what you can look out for on your own. Therefore, ESG analysis, including the impact on capital, can be carried out quantitatively based on data, enabling risks to be avoided in advance.
Valuing administrative services and projects that contribute to improving the social and relational capital of the region, as well as non-financial information in enterprises, through the new national wealth index, will help to promote a well-founded policy-making and corporate environment.
aiESG can support you in analysing ESG impacts going back through the supply chain, analysing them using the IWI (new national wealth index), analysing capital impact for use in natural and human capital management, as well as disclosing non-financial information based on the analysis.
Companies that need help with ESG-related information disclosure, regulatory compliance and quantification for natural and human capital management are encouraged to contact us.
Enquiry:
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Bibliography
Managi, S. and Kumar, P. (2018), "Inclusive Wealth Report 2018: Measuring Progress Towards Sustainability", Routledge.
(in...)https://www.taylorfrancis.com/books/e/9781351002073)
For an introduction in Japanese, see Shunsuke Managi (ed.), Valuing Affluence: the Construction of a New National Wealth Index, Chuokeizai-sha, 2017.
Cabinet Office, Office for Regional Development, 2020, Promoting the SDGs for Regional Development, p. 20.
(in...)https://future-city.go.jp/data/pdf/sdgs/sdgs_ bk.pdf)
Dasgupta, P., A. Duraiappah, S. Managi, E. Barbier, R. Collins, B. Fraumeni, H. Gundimeda, G. Liu, and K. J. Mumford. 2015. "How to Measure Sustainable Progress", Science 13(35): 748.
Joint Economic Research Institute, 2020, Survey on how to promote and develop initiatives for the co-creation of sustainable communities, p 131.
Organizzazione internazionale del lavoro, & UNICEF.(2021). Child labour: global estimates 2020, trends and the road ahead. ILO and UNICEF.
(in...)https://www.ilo.org/wcmsp5/groups/public/—ed_norm/—ipec/documents/publication/wcms_797515.pdf)
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