Business behavior produces positive and negative externalities that affect society, ecosystems, and the planet. Impact valuation enables companies to identify, measure and report these externalities – and allows investors to obtain a true picture of a company’s value. The SAM Corporate Sustainability Assessment (CSA) helps companies to address this nascent, but momentous trend and reap its benefits ahead of less forward-looking competitors.
Impact valuation is a new movement that many companies have not yet grasped or fully understood. But it is set to grow dramatically in the future as social awareness increases and more experts across accounting, finance and sustainability advocate it as a means to elevate sustainability standards in business, equip companies with tools for the task, and hold them accountable for their performance.
Holistic view of value created (or destroyed)
In the past, a company’s main value proposition was narrowly defined in terms of profits and/or losses on financial statements, and its main stakeholders were narrowly defined as its customers, creditors, investors and shareholders. Impact valuation forces companies to broaden these limited financially oriented definitions to capture the total value they create (or destroy), not just in terms of financial capital but also in terms of social, human, and natural capital. These too are critical resources that companies use but rarely recognize as input factors for production or output factors for external impact.
As the evolution of standardized impact data will make it easier for investors to analyze and compare company sustainability performance between firms, impact valuation is set to evolve into a crucial tool to gain and maintain competitive advantages. With its annual CSA, SAM helps companies to collect the relevant data, adopt the latest best practices and prepare for the requirements and demands of stakeholders in the future.
The impact valuation criterion in the CSA is part of the “Future Questions” section of the questionnaire. This enables companies to thoughtfully consider, explore, and challenge themselves on this emerging, but imminently important sustainability topic without penalizing their overall sustainability performance as the results are not included in their overall sustainability score. Questions focus on whether companies are conducting impact valuation on social or environmental externalities; whether these externalities originate from operations during upstream manufacturing and processing phases or further downstream from products and servicing phases; and which impact valuation technique companies are adopting.
Misconceptions and misimplementation
However, undertaking a proper impact valuation involves multiple levels of complexity and is resource-intensive. Without an imminent threat to business operations and a strong understanding of how impact valuation can improve a company’s value proposition to society, management may therefore think the longer-term benefits are not worth the short-term investment costs.
Indeed, as the 2019 CSA shows, a large majority of companies do not yet conduct any impact valuation at all – and of those that do, fewer than one-third correctly execute an impact valuation based on the standard definition. With its CSA, SAM seeks to redress this balance by raising companies’ awareness of the importance of impact valuation and providing them with the necessary insights and understanding.
Managing risks, seizing opportunities
By correctly identifying and quantifying otherwise unmeasured external environmental and/or social impacts, and then assessing how these affect natural and social capital indicators, companies can gain a holistic view of not just their negative costs and potential risks, but also the positive benefits they generate and the promising opportunities they can explore. As such, companies increase their ability to strengthen key areas, expand into new ones, overcome obstacles, and increase overall resilience to future risks.
Impact valuation can help companies proactively manage risks such as threats to business operations from reduced or damaged natural, social and human capital resources; regulatory actions against business activities that create negative externalities; consumers’ growing preference for sustainable products and services; negative reputational effects arising from their supply chains, and increasing financing costs or divestment by sustainability-focused shareholders.
At the same time, impact valuation enables companies to understand and seize opportunities by informing them of ways to augment positive and mitigate negative impact results; by demonstrating material value creation and thus creating goodwill and trust among stakeholders; and by enabling inter- and intra-industry collaboration on key impact issues, thus strengthening the sustainability of specific industry value chains.
Through its forward-looking criterion, the CSA helps ensure that the externalities having the greatest impact are being assessed, measured through quantification or monetization techniques and integrated into business strategies. By including the results of the measurement of these externalities with internalized earnings from company financials, companies and investors can obtain a true picture of the triple bottom line – the total value created (or lost) for all stakeholders in society.
New standards evolving
Efforts are already underway by sustainability reporting bodies like the WBCSD, GRI, SASB, CDP and even the CFA Institute to develop integrated and “impact-weighted” accounting systems that enable companies to internalize and monetize their negative and positive externalities, much like traditional P&L statements internalize the cost and benefits of their inputs and outputs of production. This should also help reform fundamental and investment analyses by integrating impact into the financial ratios used to generate company forecasts and valuations. SAM will contribute to this process by expanding and deepening its collaboration with industry standard-setters in the future.