This is quite a misleading headline, because this ‘objective way’ has been around for years. Governments make important policy decisions based upon a societal impact calculation. And when evaluating policies, the non-financial impact is calculated. However, this is not yet standard practice for companies, although there are standard methods around. With the increasing understanding that a company’s duty is more than just to create profit for its shareholders, the demand for Impact Valuation has increased. With Impact Valuation I mean the way in which to calculate the societal (economic, social and / or environmental) impact of an organisation. This blog is about practical examples of Impact Valuation on product, project, business unit or company-wide level.
Why do we measure impact?
How often do you think: ‘I want to know what the real impact of this policy is? ” Or, “what causes the most negative societal impact in our supply chain, and how can we improve this?”. Perhaps questions are raised, such as: “What does our service add to the environment and how can we determine the progress of our Purpose? How can we enable our stakeholders to see the societal impact of our business?”
Impact Valuation provides the answers to these questions. It’s an MBA-way of measuring, analysing and managing. Impact Valuation shows what the real societal impact of an organisation is (and can be). And these insights are rapidly becoming more important. Not only to gain a better understanding of our own operations, but also for the investors to understand the non-financial effects of an organisation. This can be done at product or project level, business and even company wide. Here below, some examples:
- A pepper trader wants to get rid of the plastic packaging required to give peppers a longer shelf life. A large group of consumers want plastic free vegetables. Environmental analysis demonstrates that due to the current distribution system, it’s actually more environmentally friendly to use plastic. Impact Valuation can help the trader to understand where the distribution system can be changed, thus eliminating plastic from the shelves.
- A toothpaste producer wants to understand the environmental impact of selling toothpaste packed in a box versus without. Marketing analysis shows that tube sales with extra packing justifies a price increase. However, environmental pressure increases with additional packaging. Impact Valuation can illustrate the societal costs of additional packaging and relate this to the price / sales increase.
- The owner of a racing circuit wants to comprehend the societal impact of rebuilding the circuit to accommodate Formula1. There is an economical, particularly for regional SMEs, plus an environmental impact. Races have, by definition, a negative environmental impact whilst a positive social impact, measured by the increased happiness of local fans. An Impact Valuation may offer comparisons and provide a societal impact calculation of all ‘capital’. Such a summation of capital is quite controversial, but certainly beneficial.
- A production company wants to create a circular product to fit their portfolio, but are unsure which to choose. Financially there is little difference. Impact Valuation will enable the calculation of the environmental impact and make a comparison based on monetisation. Resulting in a better understanding of the production and a fact-based way to choose the right product.
- A coffee trader wants to open its own plantation and evaluate the impact of various possible business locations. There are large dependencies such as future water demand, climate change, available local labour and knowledge, land prices, tax, local subsidies, opportunities for organic agriculture, political stability and more. Impact Valuation can create a better understanding of the options, making them comparable.
- A company wants to focus on the core business and divest businesses that no longer fit the strategy. Over the years, the value chain has shortened due to the acquisition and development of upstream and downstream businesses. In order for the individual business units to render these parts activities have been developed for third parties. The question not only regards the economic value of these businesses and how they fit into the strategy, but also what the societal impact is. This creates a better understanding of the future business value.
- To appeal to the stable impact investors, such as pension funds, a company wants to understand the societal impact of business operations and possibly report on it. For this, a complete integrated income statement is best. A decision should be made to value part of the business’ societal Impact. The company should connect ‘externalities’ to the core business to determine which effect of the company should be incorporated. For an energy company this will concern the environmental effects. For a service just the social side and product manufacturer will have the choice as to which societal impact is calculated, depending on the product and company strategy. Impact Valuation can provide a transparent view of the economic, environmental and social effects and be used for impact investment reporting.
- More and more companies have a social purpose. The goal (purpose) of company X is to improve people’s lives. This is realized by the sale / rental of their products. But how do you determine if someone’s life is enhanced by the product of the company, and how long are these effects? What is its value and what is the value of a life in the various countries where company X does business? Impact Valuation can provide an analysis to achieve this purpose, based on available corporate and country data, therefore improving connection between the purpose and business strategy.
There are numerous examples of the application of Impact Valuation. For all commercial and non-commercial organisations an impact assessment has a high added value. Empact has developed an Impact Valuation Cycle© to help organisations. In order to develop together the knowledge within the organisation and enable a frequent recurrence.