„To future-proof your company, you need to measure and value your impacts”

Sonja Haut, Head of Impact Valuation at Novartis, and one of the pioneers and practitioners of the approach, strongly believes that a membership in the Value Balancing Alliance prepares companies beyond ESG regulation like the EU taxonomy directive. And not only that: The VBA provides a transparent and comprehensive tool kit for impact valuation that creates strategic value for every member company.

VBA: What was the reason for Novartis to become one of the founding members of the Value Balancing Alliance?

Sonja Haut: Back at the time, we had been a member of the Impact Valuation Round Table working with other companies to identify what the benefits of harmonising the approach to measure and value impacts were. But out of that lose membership, we couldn’t move forward and make strides beyond the publication of “Operationalizing Impact Valuation.” Hence, it became clear that we needed to give ourselves a different setting than just an informal get together. We needed to combine our efforts more formally and work with a greater focus on the many benefits of measuring and valuing impacts. So, we’ve come together with other companies and the Big Four accounting firms Deloitte, EY, KPMG, and PwC to move forward on harmonising, measuring, and valuing impacts.

I perceive, measuring and valuing impacts is a big endeavour for companies: In your experience, what challenges do companies typically face when starting the journey of impact valuation? What were the most challenging aspects for Novartis?

Well, at first, I perceived data availability and the number crunching to be the number one challenge - just to find out that that was the easy part. It was quickly done, almost mechanically. The key challenge for us was to effectively engage with our internal stakeholders and get them on board. To make them understand what impact valuation is all about, to make sure they understand what their role in the entire journey is. So, based on that I would say, a key element on getting started with impact valuation is the internal stakeholder alignment.

Is finding the relevant indicators a challenge at all or are companies basically pretty much clear on what they need to measure? What experience did you at Novartis make in this respect?

When we at Novartis began to look into the subject, there were many different approaches out there, but there was no VBA framework. So, we utilised our materiality assessment to determine the indicators we would need. Predictably, we found out that there was mainly coverage of the environmental impact perspective. Hence, we then put a focus on exploring social impacts, like the social impact of fair pay, but also, particularly for our company, the social impact of medicines. 

Nowadays, the VBA framework exits. In what way does that make life easier for companies that are deep diving into impact valuation today?

With the method papers of the VBA published, one can easily get started by taking a look at the indicators and doing the quick calculation exercise, and getting the social, environmental, and economic impacts for one’s own operations at the upstream value chain. With that, companies today basically can utilise the results to find out what the big material topics are for them.

With regulators thriving to push industries into more sustainable operations in the past years, there is a number of different approaches and frameworks for impact valuation: What is unique about the Value Balancing Alliance – and what are the benefits for a company to join the VBA?

What’s really unique is that that we at the VBA are field testing the method with practitioners. We’ve already published the results of two piloting rounds to actually provide evidence to that. So this is different from policy, this is different from other concepts and scores. 
When it comes to the benefits of joining, in all fairness, ESG, sustainability, and impact valuation are still quite new concepts when compared to other elements of managerial practice. So there also is an element of organisational learning involved. And that element can be expedited by being a member of the VBA, having an effective exchange with companies in a similar situation and sharing experiences and views on effective concepts to move ahead. And I believe, that way it is much easier for companies to get started with impact valuation than it was eight years ago when we were pioneering the approach at Novartis.

So you implemented impact valuation eight years ago. Novartis started materiality assessment, which can be seen as a prerequisite to impact valuation, as early as 2006. You must be pretty advanced in the topic. Are you still benefiting from the VBA, are you also learning from other VBA members – or are they learning from you?

The driver for us to engage in the VBA is to work towards an established and harmonised approach to measuring impacts. This is what makes our efforts to be heard and valuable for potential standard setters, for users of data like investors or governments certainly, but also for more lay audiences, who just want to understand the impact of a company beyond financial results. And for that, we need comparability, we need unified benchmarks, that really cut across and measure what matters to stakeholders. 
We as Novartis could not pull that off alone. This is why we published so many business examples as well and shared our concepts, because we do believe that by working towards a standardised approach for impact valuation, companies can be fairly assessed once the standard is widely applied. From then on, companies can start competing on impact performance rather than on the methodology used.

The purpose of harmonised and comparable impact valuation is to give impacts a company has on society and the environment a transparent value. To achieve this, the VBA as well as Novartis hold the conviction that it is most efficient to measure impacts in monetary terms. Why is that?

Our approach on social, environmental, and economic impacts spans across the entire value chain and includes indicators such as the social impact of medicines, of wages and salaries, employee development, occupational safety, and supply chain analysis of exposures to human rights violations. And on the environmental side, it’s carbon and other greenhouse gases, air emissions at large, waste, water, and land use, and we include as well economic impact dimensions like contributions to GDP and employment, and with the exception of the latter, which is simply the number of jobs created, everything is monetised. 
And the reason for this is that at the point of introducing the entire approach to leadership teams, one needs to make it easily palatable what this is all about and why it is relevant for businesses. So without that element of monetisation, we would never have been able to pull impact valuation off the ground. We would not have been able to get leaders interested in it to the extent that they feel equipped to actually talk about these things to their external constituencies, which is the situation we are in right now. 
Monetisation thus delivers the language of business and comparability of impacts across all dimensions. And it also makes impacts comparable and assessable by other stakeholders, like policy makers, customers, or investors.

Measuring one’s own operations is one thing. I assume it is much harder to measure the impacts of downstream activities, where one has to get a grip on operations of suppliers or impacts of goods and services on end users. What are the most prominent challenges in this respect?

For the pharmaceutical industry, this is almost straight forward because of the regulatory requirements to engage in clinical trials to assess the safety and efficacy of a new medicine, of a new health technology, to use the technical term. Derived from that, we in our industry have a pretty good understanding on what the social impact of innovative medicines is. 
Now, for other products and services, this is less straightforward. Thus, I guess, there will be exploratory studies required to establish similar processes for other industries, for other goods and services, so that other companies can get a similar readout on the social impacts of their goods and services.

On the EU level, there are quite a few regulations underway demanding of companies to assess their impact on society and the environment. The EU taxonomy regulation is one example. Does a VBA membership and the engagement with impact valuation prepare companies to better meet requirements like that?

I believe so. One thing is helping companies understand what these requirements actually consist of. But it is of so much more value to also have an approach at hand that helps companies not only to survive, but really creates value for them, strategic value out of all of what is coming at us.

I have heard professionals in the financial services industry say that ESG ratings and indicators measuring impact valuation will become as important and commonplace to investors as financial ratings are nowadays. What do you think?

I agree, I would absolutely say so. The question is what makes a viable, sustainable business for the future in view of all the megatrends. I believe to future-proof your company, you need to measure and value your impacts, and what is currently coming from regulations in this respect is not answering that question to full. So, I am convinced there will be market pressures, there will be increasing regulatory pressures to get to that. Speaking to other people in the impact valuation environment, they believe this way of evaluating companies is maybe not yet around the corner, but likely fully established in five years. Which means we all need to get started now.

I guess you have to get started now to be ready in five years, because as you said before, all the data you need for all the multiple impacts are not readily available now. So this will take some preparation…

Yes, and while we talk a lot about digital savviness, my impression is that a number of companies my still need to do some homework on processes and systems: The more transparency you need, the more agility you need, the more it is clear that lacking transparent and standardised digital processes in your own operations makes things even more complicated. So, I guess this lead time of approximately five years should be wisely used to really push through high priority projects on data management.

When it comes to digital savviness and transparency, how can other VBA members profit from your experience at Novartis?

What we hear quite often is that there are not a lot of companies that have the same level of transparency on suppliers, which actually is the entry ticket to impact valuation along the upstream supply chain. So, I hope other people can benefit from our experience in that field.

Are there other examples where you would say Novartis has shaped the VBA methodology?

We had a living wage policy in place since 2012 and that allowed me to tap into that and work on the topic of the social impact of wages and salaries. This has become a corner stone of the VBA methodology. I believe I can say that it's us who brought this notion into the VBA family and got it established there.

Do you hold the belief that companies become better and more sustainable in their operations once they truly and thoroughly start with impact valuation and reflect upon the role of their business for society?

I will say so and not only that. It also allows them to have a coherent story about their various activities and engagements. It also is a way of getting to the heart of whatever their purpose statement and mission statement is. Today's world is complex. And often, simply explaining why one engages in all these seemingly disparate elements at a corporate level is really hard to do if you don’t have a consistent coherent perspective, which valuing and measuring impacts delivers so forcefully, so strongly.

How does impact valuation shield companies, how does the VBA framework shield companies against possible green washing accusations?

The sheer fact that the VBA is about a harmonised approach in impact valuation is already one aspect that shields the VBA itself and the users of its methodology against green washing and, hence, green washing accusations. The VBA methodology is not about allowing users to pick and choose what suits them best, but instead, one has a set of metrics to utilise and a set of scopes across the entire value chain. When applying the VBA methodology, one has to evaluate positive as well as negative impacts. That way, no undesirable facts can be hidden. Thus, by utilising the VBA approach holistically along the entire value chain, that is one element of preventing green washing. In addition to that, the VBA impact valuation process as well as the data used within the process can be audited.
The other thing is we need context and benchmarks, and with the approach of the VBA, one could derive full impact transparency for each sector. And then, it is up to governments to also express the commitments they make on behalf of all of us in a way that is compatible to impact valuation - so that we as companies can understand what the thresholds and boundaries are we should be operating in.

About Sonja Haut

Sonja Haut has been working on impact valuation at Novartis since 2015. Since August 2022, she heads Impact Valuation at Novartis in Group Financial Reporting and Accounting. From May 2019 she has led the Strategic Measurement and Materiality team in Global Health and Corporate Responsibility. Previously she served as Head of Group Reporting Systems Development in Novartis Finance, launching and implementing reporting processes for Group functions. She joined Novartis in the IT department of the Pharma Division in 2001. Sonja earned an MBA from the IMD Business School in Lausanne, Switzerland, and holds Master degrees in Physics and Mathematics from the University of Freiburg, Germany.