Pursuing a “feelgood preoccupation” with sustainability might originate in good intentions, but may not result in the impact we expect or desire. What matters to stakeholders is how they are or will be affected by a decision, an activity, or an intervention. This implies that the effects of decisions, activities, interventions need to be estimated looking forward and measured as they occur. Impact valuation allows to monitor and manage these effects.
What is impact valuation?
A good reference for the definition of impact valuation can be found at the Impact Taskforce. While this group was inaugurated during the UK G7 presidency and lead by Rt Hon Nick Hurd, it has continued its work. In the words of their report, impact valuation is analyzing and measuring “a change in an aspect of well-being or the condition of the natural environment caused by an organization.”[1] Measuring inputs and outputs of each economic actor is not enough. Tracking inputs and outputs is certainly important but not sufficient. Impacts however express positive and negative long-term effects stemming from a regular activity or a targeted intervention. They can be intended or unintended, occur directly or indirectly as side effects. While input and output metrics are embedded in established standards for measuring financial and economic success, they are inadequate to understand, let alone factor in and address, global megatrends.
Why impact valuation?
Long-range perspectives on risk, long-standing commitments, and long-term value creation all require impacts to be measured, operationalized, and compared. The UN SDG impact metrics project has hence proposed impact metrics to be used by all economic actors in any country. To better contextualize and compare the many impacts, the G7 Impact Taskforce proposed the valuation of impacts in one of three ways: monetary, quantitative, qualitative.
Until today though, measuring impacts, not to mention their valuation, are neither part of the expected nor of the habitually disclosed metrics of businesses, investors, or governments. Such absence of unifying disclosures is often cited as the major drawback on progress towards a more equitable and sustainable future.
Is there a need for mandatory disclosures of impacts? Not necessarily. One could argue that there is a case for applying contextualized impact metrics for each of the three actors – businesses, investors, governments. Let’s zoom in on each of them.
Impact valuation makes good business sense
For businesses, the situation appears to be straight-forward: Feasibility and business relevance have been demonstrated multiple times. Ahead of COP27, the WEF published an article by Sonja Haut referencing seven ways in which impact valuation drives value for businesses: brand differentiation; talent attraction and retention; innovation; operational efficiency; risk mitigation; capital access and market valuation; as well as theme alignment. In her recently published book “The Case for Impact” she provides a deep-dive on each of these ways of unlocking value.[2]
Achieving more impact transparency for investors through harmonization
While businesses individually may move ahead using the practice, comparability of their impacts and performances is only possible with a certain level of standardization. The member companies of the Value Balancing Alliance, supported by the Big 4, have developed and tested a harmonized approach of impact valuation. Harmonization, possibly standardization, of impact valuation is a crucial next step.
With standardization in place, mainstream investors could base their investment instruments on impact. Without it, a holistic risk transparency on megatrends is open to few capital market players only: Some investors use proprietary approaches to compensate for the current gaps in environmental, social and governance (ESG) standardization of company data – and to derive a competitive edge from the insights obtained. While many ESG information services have come up in response to the expectations articulated by the original report on materiality by the UNEP FI, they have not yet provided impact transparency. In the meantime, the fastest growing asset class is impact investing.
Impact investing is the idea to invest with the intention to make a positive impact for a specific societal and/or environmental challenge, contributing to closing the UN SDG funding gap. Mostly unknown only five years ago, the size of the impact investing market reached an estimated USD 1.164 trillion.
Impact valuation for governments is possible now
There are other supranational efforts that express an ambition to look to impact as a means of better understanding the positive and negative effects an activity or a decision can have on a broad range of stakeholders. The UN, OECD, Capitals Coalition, GIIN, GRI, Social Value International, Value Reporting Foundation and others jointly launched the Impact Management Platform to set standards and issue guidance to bring the practice of impact management into the mainstream for organizations and investments. Also, collective intelligence bodies such as business alliances, think-and-do tank communities or innovation hubs can support organizations to accelerate their efforts of implementing standards. The UNEP FI report called on a range of actors to step up. Could they all be using measured and valued impacts? The short answer is yes! And some of them are doing so already. The UN SDGs articulated a globally valid ambition in 2017. In the meantime, impact transparency can be obtained for most sectors and countries globally. Anyone utilizing the data available by the system of national accounts, together with the statistics on sector relationships[3] would yield impact transparency for a wide range of topics through 152 indicators such as air emissions, water waste, land use, forced labour, child labour. Any government could now know the social, environmental, or economic impact of any industry active in their country, and globally. Any investor could now know the social, environmental, or economic impact of any industry they invested in. Is this the answer to everything? Certainly not. But it is a strong common starting point for dealing with global megatrends.
[1]https://www.impact-taskforce.com/media/io5ntb41/workstream-a-report.pdfc
[2] https://www.amazon.com/-/de/dp/3033094902/ref=sr_1_1?crid=29BINV0G19LMP&keywords=the+case+for+impact+a+guide&qid=1673933339&sprefix=the+case+for+impac%2Caps%2C200&sr=8-1
[3] https://www.value-balancing.com/_Resources/Persistent/6/6/4/c/664cd668b396779e6fe973d29bda937091927d68/20210316_VBA%20Impact%20Statement_Socioeconomic_Publication.pdf
