Impact measurement and valuation is the collection of quantitative impact data and its conversion into dollar values. This is challenging – current methodologies are experimental – but the benefit is the information it provides to business managers and responsible investors and lenders, enabling the comparison of projects, calculations of cumulative impact and informed decision making.
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- Last updated 21 May 2021
Outputs are goods, services, by-products, waste and actions produced by a business.
Outcomes are the immediate consequences of business outputs to stakeholders and the environment.
Impacts are medium to long term, positive or negative changes experienced by stakeholders that may be intended or unintended and are attributable to business outcomes or outputs.
Most businesses measure their sustainability inputs (eg water use), outputs (eg wastewater) and outcomes (eg wastewater chemical oxygen demand). But very few businesses measure impact (eg changes in human health indicators among downstream water users), and fewer still convert impacts into monetary values (eg cost to society).
Index of Methodologies
Measuring Revenue Contribution to SDGs
Example: Chr Hansen
Chr Hansen, a bioscience company based in Denmark is the first company in the world to publish audited information on its revenue contribution to the SDGs. An assessment of the product portfolio (> 3,000 products) shows that 84% of revenue in 2019 had a direct positive contribution to SDGs 2, 3 and 12, up from 81% in 2017.
Using a methodology devised by Chr Hansen, every year the finance, sustainability and product category teams identify and assess every product against eight impact categories (see chart below), using evidence from several sources, including: results from scientific or clinical trials, reviewed impact studies or articles, customer trials and feedback, and R&D tests. Thus, annual revenues from each product are apportioned across 3 SDGs.
The results are audited by a third party to obtain limited assurance. Chr Hansen follows recommendations given in the guide Business Reporting on the SDGs co-developed by the Global Reporting Initiative and the UN Global Compact.
The economic impact of an entity has two elements:
- the economic value added, which is the sum of wages, profits and taxes
- the additional jobs supported, both direct and indirect (full time equivalent)
Amazon recently selected Arlington, Virginia, for HQ2, its new North America headquarters, from more than 200 bidding cities across Mexico, Canada and the US. The RFP stated that tax incentives were highly desirable. Each bid team had to figure out the potential economic impact of HQ2 in their locale in order to understand the tax incentives they could offer.
The Arlington team estimated that the construction phase (2019-2030) would create on average 2,300 annual jobs (direct and indirect) and generate US$1.5 billion value added. The operations phase (2021-2030) would create on average 26,715 annual jobs (direct and indirect) and generate US$6.1 billion value added (IMPLAN, 2019). The Arlington County Board calculated a net economic impact of $162 million over 12 years and was able to offer Amazon US$23 million in incentives, expecting to earn $14 in new tax revenue for every $1 in subsidies (Washington Post, 2019).
Example: Great Barrier Reef
Great Barrier Reef is a unique and complex ecosystem and the largest living structure on Earth. It is irreplaceable and certainly priceless. ‘At a time when the global natural environment is under threat from the pressures of humankind, particularly climate change, it has never been more important to understand the economic and social value of the natural environment…to know what kind of policy action is required in response’ (Deloitte, 2017).
The economic impact of the reef on the Australian economy in the year 2015-2016 through tourism, fishing, recreation and scientific research was 64,000 direct and indirect jobs and AU$6.4 billion value added.
Ecosystems services is a branch of policy research focused on gains and losses relating to conservation and its impact on human well-being. There are three approaches to ecosystem valuation: ecological and cultural (non monetary) and economic (monetary) (Pandeya et al, 2016).
- Ecological and cultural valuation approaches examine the importance of natural capital to people through cognitive, emotional and ethical arguments. These are significant benefits or losses that are too difficult to estimate in dollar terms, but they should not be ignored; rather, they should be incorporated in qualitative form in any decision analysis or presentation of impact evaluation (ibid.).
- Total economic value (TEV) is a framework for establishing the flow of benefits from nature to humans and is split into use and non-use values. Use values include the extractive, such as water consumption, fish catch and crop yields, and the non-extractive, such as tourism and recreation, as well as option value, ie future use. Non-use values include altruism value (preserving something for free use by others), bequest value (preserving something for future generations) and existence value (preserving something so that it exists, even if it is never used) (ibid.).
Valuation can be market based or non market based (NZIER, 2018 (pdf)):
- Market-based approaches include change in productivity, change in income, replacement cost, preventative expenditure and relocation expenditure.
- Non market-based approaches include surrogate market prices, stated preference (eg willingness to pay, choice modelling), benefit transfer, life satisfaction, quality adjusted life years and subjective wellbeing.
Example: Great Barrier Reef (continued)
Excluding the cultural value of Great Barrier Reef to Traditional Owners, its functional value to the environment, and its brand value to Australia, none of which could be monetised, the economic, social and iconic value of the reef is estimated at AU$56 billion, being the sum of its value as perceived by those who have visited the reef as tourists, those who have not yet visited the reef as tourists and its everyday recreational users, based on their willingness to pay (Deloitte, 2017).
Environmental Profit and Loss
EP&L involves defining, quantifying and monetising the environmental and health impacts of a business’s operations throughout its supply chain. It can reveal business risks associated with resource scarcity, environmental regulations and changing consumer preferences, thereby guiding business sustainability decision making.
EP&L relies upon other approaches such as ecosystem services, life cycle assessment (LCA) and the Natural Capital Protocol:
- Ecosystems services (above) is a branch of policy research focused on gains and losses relating to conservation and its impact on human well-being.
- Life Cycle Assessment (LCA) evaluates the overall environmental impacts caused during a product’s lifecycle (production, use and disposal).
- The Natural Capital Protocol is a decision making framework that enables organisations to identify, measure and value their direct and indirect impacts and dependencies on natural capital.
Kering, a global luxury fashion group (which includes Gucci, Yves Saint Laurent, Bottega Veneta, Balenciaga and Alexander McQueen), uses lifecycle assessment and the Natural Capital Protocol to produce an EP&L, which helps them understand where their biggest impacts are, develop a knowledgeable decision-making process, steer business strategy responsibly, manage risks for the future and be transparent with stakeholders.
There are seven steps in Kering’s methodology: (i) decide what to measure, (ii) map the supply chain, (iii) identify the priority data, (iv) collect primary data, (v) collect secondary data, (vi) determine the monetary value of data and (vii) collect and analyse results. The process examines air emissions, GHG emissions, water consumption, water pollution, land use and waste, analysing outcomes and their impacts on people, then it translates the data into a monetary value. Kering’s 2019 environmental loss was €524 million.
Kering prioritises growth and financial performance. 2019 revenue was €15.9 billion, up 13.3% in the year, and profit was €2.3 billion. However, the company has reduced its environmental intensity (€EP&L per €1,000 revenue) by 29% since 2015 and plans to reduce it by 40% and carbon emissions by 50% (science-based targets) by 2025. Kering scores A on carbon, B on water and A on forests by CDP; and is ranked 23rd and the most sustainable textile, apparel and luxury goods corporation in the world, according to the Corporate Knights’ Global 100 index. (Kering ESG Presentation June 2020 (pdf)).
The EP&L breakdown shows that Kering’s greatest impact (damage) occurs as a result of raw material production, including land use for leather and other animal fibres, greenhouse gas emissions and water pollution from metals extraction. Kering has developed a new biodiversity indicator in collaboration with the Cambridge Institute for Sustainability Leadership (CISL) and the Natural Capital Impact Group (NCIG), and has partnered with Stanford University’s Natural Capital Project and NASA to explore uses of ecosystem modeling data to track progress in ecosystem services generated by sustainable pastoral practices by nomadic cashmere breeders in Mongolia. The company released its 2019 EP&L data on an open source platform to encourage other businesses to adopt natural capital accounting (Kering EP&L Report, 2020 (pdf)).
Carbon Adjusted EPS
Danone, a food company based in France, is the first company in the world to publish a financial statement including profit adjusted for the cost of carbon emissions across the business, including its supply chain (ie scopes 1, 2 and 3). Its goal is to reduce emissions 50% by 2030 compared to a 2015 baseline.
Allowing €35 per tonne of GHG emissions, the company’s earnings per share went from €3.85 to €2.38, a drop of 38%. The company believes it has reached peak emissions – they reduced 9% in 2019 – with the result that carbon-adjusted EPS growth was greater than headline EPS growth in the year.
Danone’s share price rose very slightly on the day its carbon-adjusted EPS was announced, indicating that investors were already aware of the company’s carbon impact and were pleased to see it reported that way. CDP reports that in 2017 almost 1,400 companies were factoring an internal carbon price into their business plans.
Social Return on Investment
‘Social value is the quantification of the relative importance that people place on the changes they experience in their lives. Some, but not all, of this value is captured in market prices. It is important to consider and measure this social value from the perspective of those affected by an organisation’s work.’ – Social Value International
Social return on investment (SROI) is the value of a social impact expressed as a percentage of the input investment. The steps involved are: (i) establish scope and identify stakeholders, (ii) map inputs, outputs and outcomes, (iii) collect outcomes data and put a value on them; (iv) establish impact and (v) calculate the net present value of impact and SROI (Social Value International, 2012 (pdf)).
An outcomes map avoids double counting. For instance, if a company provides a training course (input) and two people do the course (output) and one of them gets a promotion (outcome), the final value is one course and one job promotion (not two courses and one promotion).
Establishing impact involves accounting for the following:
- Deadweight – the measure of an outcome that would have happened anyway if the businesses action had not taken place. This is usually based on trends.
- Displacement – how much one outcome displaced others.
- Attribution – how much of an outcome was caused by other organisations.
- Drop off – the amount by which an impact reduces over time (after one year).
Calculating impact involves the following:
- Impact = total outcomes less deadweight less attribution.
- Impact in year x = impact in year x-1 less drop off
- Impacts over time are discounted by a discount rate and summed to produce a net present value (NPV).
- SROI = NPV/value of inputs.
Example: Macquarie Group Foundation
Macquarie Group Foundation, the philanthropic arm of an Australian investment bank, provides support to community organisations through finance, volunteering and skills sharing. Through Social Ventures Australia (SVA), Macquarie Foundation invested in SecondBite National Food Distribution, a project identifying sources of surplus fresh food that would otherwise go to waste and facilitating its distribution to agencies.
SVA carried out a SROI analysis of SecondBite activities, finding that in 2012 2.5 million kilograms of fresh food was received by food agencies through SecondBite, supporting people who were homeless, in a crisis situation or in general need of support. With an investment of AU$3.7 million in 2012, AU$10.2 million of social, economic and environmental value was created for stakeholders – an SROI of $2.75 for every $1 invested. This was an increase of more than 65% from 2010 SROI, which was $1.65 for every $1 invested (SVA, 2013 (pdf)).
True Price is a social enterprise, based in The Netherlands, that has developed the ‘true price’ total pricing concept and provides its principles, methodology and monetisation factors on an open access platform.
True price is what you would have to pay for a product if social and environmental costs were added on top of the market price, ie if externalities were internalised by the economy. For instance, the true price of a conventional cotton t-shirt that retails at €15.00 is €22.30 once €7.30 of external costs are taken into account. The true price of conventional cotton is €4.20 per kilo of cotton seeds. The true price of certified cotton from India is €2.90 per kilo of cotton seeds. True price, if charged, would lead to very different purchase decisions.
For a 2018 report for Fairtrade International (pdf), True Price analysed the household income of more than 3000 farmers in Côte d’Ivoire (see chart below).
Household income from cocoa farming is US$2,707 per annum – a living income would be US$7,318. In Côte d’Ivoire, 58% of cocoa farmers earn even less than the extreme poverty rate of $1.90 per day and only 7% earn at least a living wage of $20 per day. The retail price (in New Zealand) of a 250g bar of Whittaker’s Milk Chocolate is about US$3.50.
True Value is a methodology developed by KPMG to quantify material externalities in dollar terms, used to develop business cases that capture both corporate and societal value. The true earnings bridge (see image below) visualises significant positive and negative externalities showing where the company is creating or reducing value (KPMG, 2014 (pdf)).
Example: Volvo Group
Volvo Group used True Value to understand how the total cost of electric buses compares with that of diesel and biogas buses when social and environmental impacts are taken into account. Combining the management accounting technique Total Cost of Ownership (TCO) with True Value, Volvo and KPMG devised True Total Cost of Ownership (TrueTCO).
They carried out a comprehensive stakeholder dialogue and materiality analysis, which identified the socio-economic and environmental impacts to be quantified in financial terms: greenhouse gases, resource use, energy use (non-renewable), local pollution, conflict mineral use, noise, safety, travel time and tax incentives. These were valuated and added to financial costs: vehicle lease, fuel, driver costs, garaging and maintenance.
Using a diesel bus as the baseline, it was found that the classical TCO of an electric bus is higher than that of a diesel bus (when only direct financial costs are taken into account); however, the TrueTCO of an electric bus is lower than that of a diesel bus when the costs of environmental and socio-economic impacts are taken into account (KPMG, 2015 (pdf)).
Total Impact Measurement and Management
TIMM is a framework developed by PwC to aid business decision making through comparative quantitative judgements of positive and negative impacts in four areas: social, environmental, tax and economic. It assesses how value may be generated (or destroyed) in the short and long term, highlighting the potential net impact of business decisions, beyond financial results. TIMM does not necessarily provide a dollar value for impact, but focuses on trade offs between options, enabling an informed decision and providing a visual for communicating decision rationale with stakeholders (PwC, 2013).
The Travel Foundation and TUI Group used TIMM to measure the overall impact of a large tour operator in a mainstream holiday destination in order to understand and manage tourism activities for the benefit of destinations, travel companies and tourists.
Four impacts were assessed: economic (employment); tax; environmental (emissions to air, land and water and the use of natural resources); and social (livelihoods, skills and cultural heritage). It was found that economic and tax benefits were by far the greatest impact, at €84 per guest per night, far exceeding environmental (€4) and social (€0.2) costs (The Travel Foundation, 2013).
- No valuation methodology can provide a good answer without good data. Project plans should allow for data to be collected, validated, analysed and reported (NAB, 2015 (pdf)).
- Some non financial data can be converted to dollar values using the market values of similar activities.
- Valuation techniques include surveying consumers on their willingness to pay (stated preference, contingent value) and revealed preference.
- Non market valuations (financial proxies) used in studies are maintained in valuation databases, eg Lincoln University New Zealand Non-Market Valuation Database; HACT social value bank; and Australian Social Value Bank.
- The New Zealand Treasury’s CBAx Tool website provides useful guidance on social cost benefit analysis and a spreadsheet model containing a database of standard values, eg the cost of an emergency room visit, the value of statistical life and the health costs of air pollution. Treasury’s Better Business Case website may also be useful; in particular, methods and tools.
Author: Jennifer Wilkins
Last updated: August 21, 2020