Learning from Pioneers

The Value Balancing Alliance offers members a field-tested methodology. Also, they have the opportunity to benefit from the experience of companies with a proven track record in impact valuation, like Novartis.

The way corporations in different economic sectors around the world are doing business will be changing significantly in the next few years. With the shared conviction to create a more sustainable future in environmental, social, and economic terms, the “2030 Agenda for Sustainable Development” was adopted by all United Nations (UN) member states in 2015. At its heart are the 17 Sustainable Development Goals (SDGs). Another major cornerstone was reached when in December 2015, 196 parties at the UN Climate Change Conference (COP21) in Paris adopted the Paris Agreement, with its overarching goal to keep the increase in the global average temperature to well below 2°Celsius above pre-industrial levels.

While politicians, businesses and organisations around the world have thus given themselves objectives towards more sustainability, one major task is still underway: To translate these goals into actions and create comprehensive and transparent standards to keep track on and measure progress in the epochal shift towards a more sustainable future. Major global companies and institutions have already taken the initiative and taken action on ESG, the environmental, social, and governance aspects of their operations. One company that stands out with its efforts is Novartis. It has been analysing its impacts on the environment and society for eight years now. It is thus safe to say that Novartis is a pioneer in impact valuation. 

Forerunner in the Field of Impact Valuation

Novartis is a forerunner in the field of impact valuation, systematically measuring the way the company influences the environment, society, and the economy. “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”, Sonja Haut, who heads Impact Valuation at Novartis in Group Financial Reporting and Accounting, points out. Read the full interview HERE. On the environmental side, the company is valuing and measuring carbon and other greenhouse gases, air emissions at large, waste, water, and land use. Impact valuation at Novartis also includes economic impact dimensions like contributions to GDP and employment.

Novartis started the journey of systematically valuing impacts as early as eight years ago. But, as Sonja Haut puts it, no company alone can master the challenge of establishing a harmonised approach of measuring impacts – without which, keeping up progress in reaching the 17 SDGs and in adequately addressing climate change on a global scale would not be possible. That is why the international pharmaceutical company decided to join forces with other corporations and major scientifical institutions around the world and became a founding member of the Value Balancing Alliance.

Companies and Stakeholders Join Forces

The Value Balancing Alliance (VBA) was founded in June 2019 as a non-profit organisation. In the VBA, more than 25 international companies such as BMW, BASF, Bosch, Deutsche Bank, L’Oreal, Mitsubishi, Novartis, or SAP work towards changing the way how a company’s performance is measured and evaluated. The objective of the VBA: Establishing a standardised approach to impact valuation, measuring a company’s externalities in the common language of business, in monetary terms. In their epochal endeavour, the VBA is supported by leading universities such as Oxford University and Harvard Business School, the big four accounting firms Deloitte, EY, KPMG, and PwC, and stakeholders from governments, civil society, business, financial markets, and standard-setting bodies.

In the past four years following its foundation, the VBA has constantly developed its approach to impact valuation further through field-testing with practitioners from its member companies. This groundbreaking work has resulted in numerous method papers, explaining in detail how a company can measure its environmental, social, and economic impacts for its own operations, its upstream impacts along the supply chain, or the downstream impacts of its goods and services, covering the dimensions of for instance suppliers and end-users. Members of the VBA can discuss the challenges impact valuation as a fairly new concept in managerial practice bears, effectively exchange on their experiences – and thus constantly push forward and evolve the development of indicators and metrics.

Profit from Groundwork

For Sonja Haut, the opportunity to engage in discussions with peers in a similar situation and being able to apply a shared methodology are among the major benefits of a VBA membership. When Novartis pioneered impact valuation, they had to derive the initial set of impact valuation metrics from their global materiality assessment. The company systematically evaluated its impact on nature, mankind, and the environment by interviewing thousands of internal and external stakeholders. Also, there had been no VBA methodology to resort to back at the time, Haut recalls.

Companies starting to deep-dive into impact valuation today, however, can profit from the groundwork of VBA members like Novartis: “With the method papers of the VBA published, one can shortcut that process for global materiality assessments in the companies. 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 and the upstream value chain. Companies today basically just need to utilise the read-outs to find out what the big material topics are for them.” Read the full interview HERE.

New Regulations on the Horizon

Meanwhile, dealing with material topics, finding out where a company has to improve on its environmental, economic or social footprint, is a mandatory exercise. Political institutions such as the European Commission or the United States Security and Exchange Commission (SEC) are pushing forward new regulations. Those regulations have one thing in common: In the near future, it will not suffice for corporations to disclose financial key performance indicators. They will also have to create transparency about the positive and negative impacts their business activities have on society, nature, and the environment - and vice versa: They have to get their sustainability performance indicators straight – and direct their operations and investments into more sustainable directions.

The VBA prepares its members for these regulative requirements on the horizon, by providing them with a methodology to evaluate their impacts. But there is more to the VBA and impact valuation. By reflecting upon its externalities, companies can gain strategic insights to actually become more successful not only in terms of sustainability, but also in financial terms. In addition to that, impact valuation helps them gain more traction on their mission and purpose, as Sonja Haut points out: “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.” Read the full interview HERE.

Fastest Growing Area of Investment

Furthermore, 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. So, impact valuation also helps companies cater to the needs of the capital markets. “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 believe there will be market pressures, there will be increasing regulatory pressures to really get to that”, Haut maintains. Read the full interview HERE.

In a paper published on the topic, the World Economic Forum (WEF) underscores that impact valuation in the current environment of stakeholder capitalism has a no-nonsense financial dimension: Impact investing is the fastest growing area of investment with a market size of approximately 1,164 trillion US-Dollar, the WEF states. Impact investors seek to close funding gaps that stall the delivery of the UN Sustainable Development Goals.