This is pretty misleading headline because that objective way has been around for years. The government uses a social impact calculation in major policy decisions, and for policy evaluation, the non-financial impact has been calculated for years. For companies, while there are standard methods, this is not yet standard. But with the rise of awareness that a company can do more than create profits for shareholders, the demand for impact valuations has also risen. By impact valuation I mean calculating the social (economic, social and/or environmental) impact of an organization. This blog primarily provides practical examples of impact valuation at the product, project, business unit or company-wide level.
Why do we measure impact?
How often do you ever think, “I would like to know what is the actual impact of this measure?”. Or “What has the most negative social impact in our production chain and how can we improve it?”. But also perhaps questions like, “What is the added value of our service on the environment? How can we objectively determine the progress of our purpose? In what way can our stakeholders see the social impact of our operations?”
Impact valuations provide the answer to these questions. It is a business-oriented way of measuring, analyzing and managing. Impact valuation shows what the real social impact of an organization is. And these insights are becoming increasingly important, on the one hand to get a better grip on one’s own operations and on the other hand to give investors a better insight into the non-financial effects of an organization. This can be done at the product level, project level, business unit and even company-wide. Some examples:
Product level
- A bell pepper trader wants to get rid of the plastic packaging needed to keep a bell pepper fresh longer. A large group of consumers do not want plastic around their fruits and vegetables. Environmental analysis shows that the current distribution system makes it more environmentally friendly to use plastic. Impact appreciation can help the retailer know where the distribution system can be changed to eliminate plastic from the shelves anyway.
- A toothpaste manufacturer wants to know the environmental impact of selling a tube of toothpaste in a box versus without a box. Marketing analyses have shown that selling tubes in extra packaging justifies a price increase. However environmental pressure is higher due to extra packaging. Impact valuation can show the social cost of the extra packaging and relate it to the price/sales increase.
Project level
- The owner of a racetrack wants to know the social impact of making the track suitable for formula one racing. There is an economic effect, especially for regional SMEs. An environmental impact, because races by definition have a negative environmental impact and a social impact for example through the increased enjoyment of life of local fans. An impact valuation can compare and make a social impact calculation across all “capitals. It should be noted that such a summation of capitals is quite controversial, but is certainly good to perform.
- A manufacturing company wants to make a product group circular, but is unsure about which product groups. From a business perspective, there is little difference. Impact valuation can calculate the environmental impact and make a comparison based on monitoring. This gives a better understanding of the production chain and a choice of product group can be made based on real environmental pressure.
Business Unit
- A coffee trader wants to open his own plantation and wants an impact analysis about different possible site locations. There are major dependencies such as future water requirements and climate change, available local labor and knowledge, land price, tax burden, local subsidies, opportunities for organic cultivation, political stability and more. Impact valuation can value different options and make them comparable.
- A company wants to focus more on its core business and divest business units that no longer fit the strategy. Over the years, the value chain has become shorter and shorter through the acquisition and further development of upstream and downstream business units. To make the individual business units profitable, these units have also started to develop activities for third parties. The question is not only what is the business economic value of these business units and to what extent they still fit into the strategy, but also what is the social impact perspective. This provides better insight into the future value of a business unit and a decision can be made partly on the basis of impact valuation.
Company-wide
- To be attractive to stable impact investors like pension funds, a company wants to know and perhaps report the social effects of its operations. For this purpose, a fully integrated profit and loss statement can be made, but it is also possible to choose to have part of the social effects valued. Here it is important to connect to the core business to determine which effects are valued company-wide. For an energy company this will be the environmental impact, for a service provider the social impact and for a product manufacturer the choice of social impact will depend on the product and the strategy of the company. Impact valuation can provide a transparent understanding of the economic, environmental, social and human impacts of business operations.
- More and more companies have a social purpose. Company X’s goal (purpose) is to improve people’s lives. This is accomplished through the sale/rental of their products. But how do you determine when someone’s life has been improved by the company’s product? And for how long is this effect valid? What is the value of that effect? And what is the value of a life in the various countries where company X does business? Impact valuation can create an analysis based on available company and country data that not only better substantiates the realization of purpose, but also better connects it to corporate strategy.
There are countless examples of the application of impact valuation. For any commercial and non-commercial organization, impact valuation will be of great value. Empact has developed an impact valuation cycle© to help an organization with this. In order to jointly develop the knowledge within the organization and create a repetition frequency.