Is impact valuation the silver bullet for sustainability?

This article is brought to you thanks to the collaboration of The European Sting with the World Economic Forum.

Author: Vikram Nagendra, Director, Sustainability, SAP, Superna Khosla, Director, Global Reporting, PwC

• Managing and measuring impact makes good business sense.
• Boards and management now have access to unprecedented levels of sustainability information, but identifying what is important for impact management is complex.
• Businesses, standard setters and capital market participants all have a role to play in developing standardised methodologies for impact valuation.

Managing impact makes good business sense: there is a growing recognition that, over time, externalities become internalised and directly affect a company’s cash flows, its access to finance and potentially its licence to operate. And new reporting requirements will shine a light on how well businesses are or aren’t managing their impacts.

Today, boards and management have unprecedented access to sustainability information, but identifying what is important is a complex task. Across multiple sustainability topics, there are different measurement bases, and the data collected is often input and not impact-focused. So, is impact valuation (i.e., placing a monetary valuation on impact) the silver bullet?

That’s a question we’ve been considering at SAP and PwC, both separately and working together. A simple language is needed to cut through the volumes of disparate data and unlock the potential for increased insights. This will help boards and management identify the hotspots across a range of KPIs and business activities, enabling prioritisation of the issues that matter and need to be managed. A deeper analysis, beyond headline topics and qualitative judgements accompanying impact valuation, can unearth hidden risks and opportunities – but this all requires a common yardstick or denominator. And investors seem to agree.

Impact valuation in practice

With PwC impact valuation experts, SAP first began to explore the concept to assess the overall value of a new product line under development. This quickly led the SAP team to see potential benefits in other areas and explore how impact valuation could help establish a clear line of sight through the value chain on various topics, such as carbon emissions and adequate wages.

The SAP impact team has begun to put a dollar value on its emissions based on the social cost of carbon. This is uncovering hotspots in the value chain to focus on. Its view is that staying aligned to net zero targets becomes extremely difficult without this.

The impact team is focused on how insights are operationalized and is doing this by:

• Embedding impact management into controlling functions by making societal value one of the decision-making criteria (and beginning a shift of internal carbon pricing towards the social cost of carbon).

• Engaging with product development teams.

• Revising approaches to procurement and supplier engagement to address material impacts.

Many companies are now innovating with impact valuation, using the results to assess capital projects and to demonstrate the social value they create. PwC has supported a multinational energy company in using impact valuation to illustrate the value contributed to society through GDP and job creation to bring alive its Just Transition strategy. In another case, PwC measured and valued impacts so the company could understand stakeholder preferences in relation to a construction project and make informed decisions based on quantitative analysis.

Impact valuation is also a valuable tool in propelling business model reinvention. PwC supported a luxury fashion firm (resale platform) with its impact report, in which it demonstrated the environmental cost savings of its offering to customers. The firm also used the insights to set future targets around diversity, equity, and inclusion (DE&I).

Impact valuation supports high quality impact reporting to stakeholders

Reporting under the Corporate Sustainability Reporting Directive (CSRD) is creating a new impetus for companies to identify and manage impacts. The process of placing a monetary valuation on impacts utilizes frameworks that set out established impact pathways and supports the identification of impacts, risks and opportunities (IROs) and the double materiality assessment.

Also, with little guidance to support how companies meet narrative disclosure requirements, impact valuation can help. Frameworks developed to place a monetary valuation on impacts can be a valuable aid for meeting narrative disclosure requirements.

The path to impact maturity

The ambition for SAP is to publish an impact profit and loss account, giving transparency to stakeholders on the trade-offs, risks and opportunities across environmental and social matters. PwC’s Global Investor Survey 2023 indicates investors are interested in this holistic view of a company’s overall impacts.

Image: PwC’s Global Investor Survey 2023

On the path to impact maturity, SAP became one of the founding members of the Value Balancing Alliance (VBA), whose goal is the creation of standards for translating environmental and social impacts into comparable financial data. PwC and other impact experts are working with VBA and The International Foundation for the Valuation of Impacts (IFVI), which has a programme to publish such standards. Various exposure drafts are out for consultation as we write.

“

We want to change the way company performance is measured and valued. And that can only be done with a global measurement standard for disclosing the positive and negative impacts of corporate activity.”— Dr. Christopher Sessar, Chief Accounting Officer, SAP

Leading companies are taking action and calling for a common language for impact. Businesses, standard setters, and capital market participants all have a role to play in making this happen. It may not be a silver bullet, but impact valuation goes a long way toward bringing clarity and insights for boards and management to steer towards a sustainable future.