• Frankfurt, 29 June 2021

How people and the environment are finally part of the balance sheet

Comment: Luka Mucic of SAP explains how the Value Balancing Alliance, whose members include BMW, Bosch, Michelin, SAP and Porsche, and the Big Four accounting firms, has cracked the code of putting a price on nonfinancial impacts

As risks for the environment, economy and society grow around the world, more and more companies want to define their positive contributions in these areas. But it’s challenging to put a price tag on impact, and the cost can appear invisible.

Publicly listed companies, in particular, have a special duty of care here. In order to make truly robust decisions, ecological and social impacts need a price tag. Only then there is a chance for them to be on equal footing with commercial performance.

But the road to identifying these numbers is long and comparability is crucial, but not widely available. The root cause of this can be found in current reporting practices. While many companies already provide a wealth of information on how their businesses affect the environment, economy and society, each sets its own priorities.

Reporting frameworks such as the Global Reporting Initiative (GRI) provide basic guidance, but the corporate culture and type of business model results in different criteria emerging front and centre. Accordingly, reporting becomes company-specific and is insufficient for sustainable resource management.

Creating a common accounting language

Groups from a wide range of industries have set out to close the comparability gap through the Value Balancing Alliance (VBA). Companies such as BMW, Bosch, Deutsche Bank, Michelin, Porsche, and SAP are participating, together with the Big Four accounting firms (PwC, Deloitte, EY and KPMG) the OECD and universities like Harvard and Oxford. The alliance is working to create a methodology by mid-2023 that will enable companies to measure and evaluate their performance in a way that allows for comparison with that of other companies.

To achieve this ambitious goal, we must first implement standards on how to measure factors that cause external effects, and then convert these effects into their monetary value.

Let's look at measurement first. The importance of this is particularly evident in the case of carbon dioxide emissions. After all, measurement effort here reaches far beyond the company itself. Often, a large proportion of a company’s emissions footprint is produced upstream by suppliers, which is the case in the chemical industry, for example.

Elsewhere, it's the other way around: emissions only really start to rise downstream once the products have reached the customer. The measurement data that needs to be collected thus extends from the supply chain through to production and into the use phase. It can't get much more complex than that. To solve this, the VBA is developing guidelines on how companies in a wide range of industries can credibly record the relevant data every step of the way.

The end of external costs

From this end-to-end data collection, a huge amount of information is generated. The VBA is also creating guidance for calculating the monetary value of this data. For example, at SAP we have calculated that the total amount of carbon dioxide emissions associated with our purchasing decisions – which amounted to 2 million kilotons in 2019 – had an environmental impact of $189m.

But how did we arrive at this exact dollar value? The calculation runs on a set of rules – a price – representing all impacts resulting from the emissions. Because climate change involves a large number of extremely complex chains of effects, from ecological changes to upheavals in economic systems, to adverse effects on our health, setting a price is easier said than done. Combining all these effects in a single calculation is anything but trivial. Whenever possible, the VBA experts rely on findings that have already been validated. However, in some cases the alliance is doing this work itself.

For carbon dioxide, the VBA proposes a kiloton price of $94 (for reference year 2019). Of course, this value is not set in stone and it may need to be changed in the future. To proceed with a sense of proportion when setting such a coefficient, the responsibility for this should go to a globally recognised body such as a UN organisation, the World Bank or the OECD.

Where these new insights can be applied

While there is still a lot of work ahead, for the first time companies will have a methodology at their disposal with which they can uniformly measure and evaluate their impact. In addition to measuring environmental effects, such as the decline in biodiversity, and social damage, like human rights violations in the supply chain, the analysis also focuses on economic impact. This is especially crucial when these economic effects have never been part of a company's cost accounting previously. Economic impacts on a business can include things such as the social benefit of further education or the economic effects of the taxes, duties and salaries that are paid.

Once the costs and returns of all these factors become clear, company leaders will have a much broader knowledge base to make truly sustainable business decisions.

Sustainability pioneers like the Club of Rome called for a 360-degree view of corporate sustainability management called more than 50 years ago. From 2023 onward, this vision will become much more concrete.

Source: Reuters Events - Sustainable Business