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18 Jul. 2018 | Comments (1)
What if companies found a way to communicate – in financial terms – the total value they create for society? There is a growing recognition that the value companies create (and erode) extends well beyond the revenues and profits expressed in an income statement. Traditional accounting does not take into account some significant impacts companies have on society, including the positive impact of investments in employee training, community development projects, and land restoration. There are also negative impacts such as those stemming from waste, greenhouse gas emissions, and workplace accidents, just to name a few.
Recognizing these gaps in traditional accounting, some companies are experimenting with approaches that help convey their total impact by monetizing their economic, environmental, and social impacts. While the concept is not new (a first attempt at corporate environmental accounting can be traced back to Dutch information technology company BSO/Origin in 1990, followed a decade later by Puma’s trailblazing Environmental Profit & Loss statement), recent examples extend beyond environmental accounting to also include social impacts. In a just released study, The Conference Board examined some leading examples of companies that are engaged in total impact valuation to identify key similarities and differences between their approaches.
The study finds that total impact valuation approaches, while still very much at a nascent stage, are being publicly piloted by more than a dozen companies from across several different sectors and geographies. Among the examples are Colombian cement company Argos, German chemical company BASF, Swiss building materials company LafargeHolcim, and Kenyan telecommunications company Safaricom. In fact, the study found publicly released examples of total impact valuation in every continent except for North America. U.S. companies appear to be very quiet in this area, perhaps concerned by legal issues stemming from the increased disclosure associated with this emerging practice.
The image below shows LafargeHolcim's 2017 Integrated Profit & Loss Statement, one example of a total impact valuation approach:
However, it may be in the interest of U.S. companies to become more engaged in this practice. After all, total impact valuation approaches can be useful tools for strategy development. The process of monetizing a company’s environmental and social impacts can reveal areas of significant value erosion that traditional accounting would not have illuminated. This process can also reveal areas where resources and attention could be better spent. Aside from aiding in strategic decision-making, total impact valuation can serve as an important tool for communicating with stakeholders. For some companies, impact valuation results can even strengthen their “license to operate” in some regions.
Total impact valuation is a fast-evolving concept and has its fair share of challenges. For instance, lack of any standard methodology means that companies can choose and assign value as per their own accord. For example, The Conference Board study found that the social cost of carbon (SCC) prices used by companies range from less than $30 to more than $160 per metric ton of CO2. The methodological issues are even more pronounced for impacts that are trickier to monetize, such as employee training or health and safety incidents.
Beyond methodological challenges, it is also worth mentioning that total impact valuation is not without its critics. There are some ethical concerns associated with monetizing certain impacts, such as fatalities, and there is also the risk that impact valuation results could be used for greenwashing purposes. The practice of total impact valuation has great potential, but companies need to be prepared for the challenges inherent in embarking on this cutting-edge exercise.
In 2019 The Conference Board will release a follow-up report which will examine how companies are putting their impact valuation approaches to use, and how total impact valuation is adding value to their business. Stay tuned!