The graphic illustrates the argument that the economy and society should be seen as embedded parts of the biosphere, i.e. our planetary boundaries. It challenges the current sectorial approach where social, economic and ecological development are regarded as separate parts. Companies play a crucial role to enable sustainable and inclusive value creation. Therefore, it is paramount to identify, understand and ultimately manage businesses multiple impacts on society.
There are two major perspectives on value in sustainable finance: Firstly, there is a stakeholder perspective that focuses on positive and negative impacts of corporate activities on the environment and by extension society – the value to society perspective. And secondly, a financial-driven view of how these impacts (and dependencies) affect the (longer term) financial performance of corporations – the value to business perspective. Both perspectives are inherently connected and have, thus, been widely acknowledged as “double materiality”. The VBA embraces both methodological streams, as both streams are fundamental for understanding a company’s long-term value creation.
The Value Balancing Alliance methodology employs a monetary metric to tangibly discern the impact of business models, place it in the local context of the activity, understand the significance and weighting of individual sustainability aspects and, ultimately, better integrate them into corporate management.
For example, it makes a fundamental difference whether a company is consuming water in an arid climate (in the desert) or a humid area (by a lake). The value of water is not simply a quantitative function of the number of gallons consumed. A company also has to decide how to use its resources: for research, reduction of climate emissions or water consumption. Human resource development for employees is also very important. A monetary metric helps companies put the value of a program or initiative into context - as shown by the experience of member companies in the regular piloting of our methods.
Our methodology emphasizes the need to avoid offsetting individual dimensions and their indicators: e.g., impacts of greenhouse gas emissions can never be used to offset the financial or social performance of a company. The aim of our methodology is just the opposite.
To understand the underlying calculation methodology for monetary impact valuation better, download our General Methodology paper.
The influence of a company goes far beyond the boundaries over which it exercises financial or operational control. For example, decisions regarding materials and suppliers have indirect impacts on a company’s supply chain. Similarly, the design of products and services affects how customers use and dispose of products, which leads to indirect impacts on society. Hence, a meaningful assessment of the relationships between companies and nature and companies and society needs to take such upstream and downstream effects into account. Therefore, users of this methodology should apply impact valuation to areas influenced by business activities even if the influence occurs outside the narrow boundaries of mainstream financial reporting.