Through the concept of net impact companies can see the core of their value creation and develop a lasting and sustainable competitive advantage. In the future, investors, clients and stakeholders are going to expect a clearly assessed net impact from all companies. From 2016 onwards impact valuation has been included in criteria for Dow Jones Sustainability Index.
How do companies create value?
Value creation is complex. The impacts of value creation span whole value chains and significantly affect clients, supply chains, environment and the society. However, nowadays most companies assess and measure their value creation narrowly, mainly through economic value with a focus on operating profit, return on equity and other economic key figures.
In reality, even economic value creation is a much wider issue. Significant economic impact and value creation happens when clients and the society utilize the products and services provided by a company and activities in global supply chains provide employment and affect local and regional communities.
Understanding and actively managing the components and extent of this value is a basis for developing competitive advantage in the market. If a company outperforms its peers in providing economic value to its clients, it has a clear competitive advantage. Likewise, provision of added value through supply chains supports sustainable competitive advantage.
Environmental and social value creation are likewise instrumental for a sustainable competitive advantage. Environmental value creation happens when a company provides products and services which reduce environmental problems, such as climate change, resource depletion and environmental pollution, and minimizes its ecological footprint. Similarly, products and services can support the provision of ecosystem services, such as clean water and air. Social value is created through supporting and respecting the needs of employees, stakeholders, value chain partners and communities.
How is net impact assessed?
In the net impact approach, environmental and societal impacts and value are assessed through identifying the positive and negative value components and eventually calculating the net impact. Net impact shows whether a company creates or reduces environmental and social value.
As an example, we can look at climate impacts. A company can create positive impacts e.g. through binding carbon, replacing more carbon intensive energy in the energy market and providing products and services which substitute more carbon intensive alternatives. Negative impacts are created e.g. through emissions throughout the value chain: from own operations, in the supply chain, in the use of products and services, and eventually when the product is disposed. In addition to climate, a similar approach can be applied to any environmental or social theme of relevance.
Quantified impacts are often also monetized in order to compare net impacts of different aspects. Through monetization, environmental and social aspects of value creation are translated to monetary terms to enable comparison to economic value creation and understanding of environmental and social trade-offs and side benefits.
What are the benefits of the net impact approach?
Business relevance and strategic priorities define which issues are most crucial to analyze in terms of net impact. Understanding the net impact of most relevant sustainability themes helps companies integrate sustainability into their strategic decision making.
For example, strategic and investment options can be compared based on net impact analysis. In addition, operative management can utilize the net impact approach to take sustainability side benefits and trade-offs of various operative actions into account. Net impact is also crucial in corporate responsibility reporting and supports stakeholder communication.
How to get going
Net impact is a relatively new topic and methodologies are constantly developing. However, widely adopted global methods do exist. For investment projects, IFC Performance Standards pave the way for including net impact assessment in environmental and social impact assessments. From corporate responsibility and value creation perspective, Social Capital Protocol and Natural Capital Protocol of World Business Council for Sustainable Development are good and versatile tools. However, there is no single method to serve all needs, and careful consideration of needs and scope is always required.
Gaia is an experienced partner in net impact assessment and related strategic and corporate responsibility development. We can effectively identify best methods and approaches for each specific case. If you want to have a deeper look at a specific case, our recent pilot study on impact valuation for UPM is available on UPM Corporate Responsibility web site.
Tiina Pursula is Gaia’s Business Director and experienced in leading projects on net impact assessment with various methodological frameworks.