• Frankfurt, 13 December 2024

Understanding the Value of OHS Through Impact Accounting

Companies generate economic, social, human, and environmental value in the regions where they operate. While economic value is measured and accounted for according to internationally recognized financial standards that enable comparability, social, human, and environmental value created or eroded is often presented in different non-monetary units that do not allow for comparability or are harder to understand for corporate decision-makers. For this reason, valuation stands as one of the key tools to translate non-financial KPIs into monetary values and enhance decision-making by providing a comparable metric based on empirical evidence.

While Occupational Health and Safety (OHS) KPIs provide relevant insights on their own, they do not capture the broader societal consequences associated with them. These different societal impacts are easier to understand when translated into monetary terms.

Valuing these impacts does not imply assigning a price to human life or human rights. Life and human rights are invaluable and cannot be traded as market goods. People cannot sell a year of their life or any of their human rights to someone else. The valuation approach is different and considers aspects such as how much people would be willing to pay to avoid certain health risks or to purchase life-protecting goods that enhance life expectancy. The valuation of these sensitive topics is based on extensive research in fields such as environmental and health economics and is frequently used in policymaking.

The valuation method for impacts related to OHS considers three main types of impacts:

  • Human health: The loss in workers’ quality of life.
  • Healthcare costs: Medical expenses borne by workers or society that are not covered by employer insurance.
  • Lost wages: Income and benefits workers miss out on when they cannot work.

OHS Impact Accounting: An illustrative example

Let’s imagine a French company with 1,000 workplace incidents during a year, which would not be too deviated for companies above 50,000 employees on an average industry1. According to the International Labour Organization (ILO) data on severity distribution, they could be divided like this:

  • 922 temporary incidents resulting in approximately 21,090 lost workdays in a year.
  • 77 cases leading to long-term incapacity.
  • 1 fatal incident.

In this example, the potential value loss from impacts on human and social capital is estimated at USD 150 million, but after deducting USD 20 million covered by employer-funded insurance, the total impact amount to USD 130 million. Of this, 87.5% (USD 114 million) corresponds to human health losses, 12.3% (USD 16 million) to uncompensated lost wages, and 0.1% ($0.1 million USD) to healthcare costs.

1 Assuming an incidence rate of 2% or below.

By using impact accounting, companies can better understand and reduce their social impacts, promoting safer and healthier workplaces. For example, if the company mentioned earlier implemented a plan to reduce OHS incidents by 50%, it could generate a social return of USD 75 million in reduced social value losses. This would help illustrate the human benefits and the social profitability of such investments, making it more compelling for internal buy-in and to attract investors.

The total social impact per lost workday -including both reported temporary injuries and estimated days lost due to long-term incapacity and fatalities- amounts to $686 USD, which can be used, for instance, as an internal price or shadow pricing mechanism to enhance awareness and hold divisions accountable for their OHS performance.

How Are These Values Determined?

The methodology is detailed at the recently published Exposure Draft for the Occupational Health and Safety methodology developed by the International Foundation for Valuing Impacts and the Value Balancing Alliance under the governance of the independent Valuation Technical & Practitioner Committee (VTPC). It includes the following measurement and valuation components:

  • Human health: Health valuation can be performed in different ways, and this methodology opts for a preference-based approach building off the latest research. The methodology consider Value of a Statistical Life (VSL) multipliers based on research from the UK Health and Safety Executive and a single global value for a statistical life from the OECD to value each person’s life equally regardless of their country of origin.
  • Healthcare costs: These are estimated using a detailed study by Safe Work Australia, which provides information on healthcare costs related to injuries, illnesses, and fatalities borne by workers and the society in Australia. The World Bank’s Health Price Level Index is used to adjust these figures for different countries.
  • Lost wages: Wage loss is calculated using company-specific data to estimate how much income workers lose for every missed workday, including those related to long-term incapacity or fatalities.
  • OHS insurance: The percentage of workers insured, the portion of contributions covered by the employer, and the amount of wage replaced through insurance benefits are accounted for in the estimates of healthcare costs and lost wages.

The exposure draft methodology is currently open for public consultation until January 31, 2025, and feedback is encouraged. Comments, especially on specific questions in the draft, can be sent to research@ifvi.org. It will also be piloted by the Value Balancing Alliance member companies during the coming months.

 

Author: Francisco Ortin Cordoba

Senior Manager, Value Balancing Alliance

 

Data & Assumptions

This article provides an example based on a hypothetical French company with 1,000 OHS incidents. The data is purely illustrative and does not represent any real organization. The classification of incidents follows the severity distribution outlined in Appendix B of the OHS methodology, which states that, in the French economy as a whole, 92.2% of incidents are temporary injuries (with an average of 23 days of absence), 7.7% are long-term incapacity cases, and 0.1% are fatalities. For simplicity, all incidents in this example have been treated as injuries. It is assumed that 90% of workers are insured, that the employer cover 100% of OHS insurance funds, and that the wage replaced by the insurance is on average 60% of the pre-incident wage, corresponding to the French regime for the first 28 days of absence, based on the ILO database (see additional details on IFVI-VBA’s OHS Exposure Draft). Any analysis based on this example should be approached with caution, as further refinement may be needed for specific use cases.