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: 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 applied methodology is grounded in impact valuation, meaning that impacts on society, customers, employees, and the environment will be quantified along the value chain and translated into monetary units. Impact measurement and valuation (IMV) allows to integrate pre-financial information in financial statements which speaks to the reality of financial markets and the corporate world. Applied in steering and disclosure, IMV embeds human well-being within the planetary boundaries as yardstick in our processes.
Traditional environmental and social reporting stops at the quantification of impacts (e.g. tonnes of greenhouse gas emissions). The assignment of a monetary value to these impacts allows for an understanding of the scale of the consequences of more traditional measurement and reporting. It also enables a direct comparison of different impact areas.
The basis for impact valuation is a common understanding of how activities and inputs relate to impacts on human well-being. This process of interpreting the complex links between business activities and impact on society is reflected in the “impact pathway”.
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.
In the last months we have seen tremendous efforts to harmonize the frameworks for sustainability disclosure and reporting at the international level. The Value Balancing Alliance strongly supports:
- the merger of SASB and IIRC as Value Reporting Foundation
- the collaborative effort of the Impact Management Project, SASB,
the IIRC, and the IFRS Foundation to establish as Sustainability
Standards Board by November this year
- the announcement of the EU Commission in the Corporate
Directive to support an international baseline for sustainability reporting.
Our ambition is that an international sustainability reporting standard will reflect the principle of the double materiality based on standardized sustainability accounting methodologies as developed by VBA.
The lack of standardisation across corporate environmental assessment methods, including natural capital accounting standards and practices, continues to hamper the mainstreaming of environmentally sustainable activities and assets across the economy as well as correct corporate identification of and management of environmental risks. The project TRANSPARENT aims to develop the first set of natural capital accounting principles and corporate implementation guidelines tested by industry practitioners. It is supported by the LIFE program grant by the EU Commission and led by the Value Balancing Alliance in consortium with the Capitals Coalition🔗 and the World Business Council For Sustainable Development🔗. The consortium supports the implementation of the Green Deal targets by developing pragmatic solutions for corporate natural capital management accounting and decision making.
The project kicked off in March 2020 (Press release) and runs until the end of 2022. The primary output includes the world’s first standardised methodology providing practical application guidance for corporate accountants in charge of establishing a natural capital accounting system. The methodology is being developed in an iterative process and close engagement with corporate practitioners, experts, academia and the general public. Each phase of the methodology development is accompanied by stakeholder reviews and followed by public consultations.
Project deliverables include a benchmarking study (Benchmarking report), methodology and application guidelines validated by corporate piloting, a management “blueprint” for decision making, selected industry sector application guidelines, as well as a recommendation on the future structures that would be needed to ensure future updates and uptake in the EU and globally. More information can be found on the project website operated by consortium partner Capitals Coalition here: EU Project.