Impact management across all four capitals – natural, human, social and financial – is key to mitigating business risks, which can lead to significant financial impacts for the organization.
Our impact measurement toolkits and analytics provide critical information, including scenario assessments and benchmarks, to enable decisionmakers identify possible improvements and, ultimately, increase business value.
Impact measurement provides critical inputs for business strategy development. It provides decision makers with comparable metrics, in order to determine key trade-offs, investments and technology.
Impact measurement and valuation provides insights into business operations and that of the value chain, which mitigates significant risks to the business and its stakeholders.
Impact Measurement enables the Organisation to communicate the true Impact, both positive and negative to all the stakeholders of the Organisation. Since the strategic decisions made by the Organisation based on Impact Measurement results in the long term Sustainability of the Organisation, stake holders can make informed choices as related to the Organisation in areas such as Investment, Returns, Policy, Brand Choice, Community Support and Employment Choice. Impact Measurement based stakeholder communication removes perceived biases and misunderstanding of the Organisation’s actions.
Four Capitals and Three Levels of Ownership
The four capitals – natural, human, social and financial – are well established economic paradigms. It is important for organizations to recognize these four capitals and their three levels of ownership in order to succeed in today’s VUCA world.
Our framework - four capitals and three levels of ownership - for impact measurement is consistent with the ‘inclusive wealth’ approach at the macro-economic level adopted by UN Environment’s Inclusive Wealth Report (IWR).
What is Social Capital?
Social Capital constitutes of the productive value of social connections, where productive is understood not only in the narrow sense of the production of market goods and services, but in terms of the production of a broad range of well-being outcomes (Scrivens k., 2013).
What is Financial Capital?
Financial Capital comprises of all manufactured capital, such as buildings, factories, machinery, physical infrastructure (roads, water systems), as well as all financial capital and intellectual capital (technology, software, patents, brands, etc.)
One of the key principles used in accounting is materiality. Materiality helps in focusing on issues which are most important, and whose inclusion or exclusion can potentially affect decision making. All identified material issues have underpinned risks. The purpose for materiality is identifying areas for key risks requiring measurement and management. Material issues lead to risks ranging from Regulatory, Operational, Market, and Reputational. All material issues directly or indirectly can have financial implications on business’ performance.
What is a Driver?
A flow which arises from the activities of agents (i.e. governments, corporations, individuals) in eco-agri-food and business value chains, resulting in significant outcomes and leading to material impacts
A ‘driver’ can have multiple outcomes leading to both positive and negative impacts. For assessing the impacts from business activities, the first step is to express or measure these drivers in quantitative or qualitative terms. For example, release of air pollutants from cement manufacturing plant (drivers) leads on change in atmospheric concentration of Nitrous and Sulphur oxides (outcomes), which can be associated with multiple impacts including those on human health, damage due to acid rain, etc.
GIST impact evaluation framework incorporates most material impact drivers across all four capital classes (natural, human, social and financial). The impact drivers under each capital category are:
All impact drivers have cause and effect pathways which provide the relationship between the impact ‘driver’, the change which it creates in stocks and flows of four capital categories (natural, financial, social and human) also called the ‘outcome’ and finally a positive or negative contribution to one or more dimensions (environmental, economic, health or social) of human well-being called as ‘impact’. Few examples of cause effect pathways are shown below:
Economic valuation seeks to provide a monetary estimate of the change in an individual’s wellbeing as result of impacts associated with specific outcomes of material drivers.
Materiality assessment allows the organizations to identify the drivers which are most relevant. Each important driver needs to be measured to track their performance. One of the key challenges with performance tracking using multiple indicators is that each indicator has its own appropriate unit for measurement. Cross-comparability among these measured quantities with different units is not feasible. For example – comparison between tonnes of particulate emissions to volume of water consumed is not feasible.
Also, the end impact of these outcomes can have very different scales depending upon ‘who’ is getting affected (receptors) and ‘how’ they are getting affected. Impact valuation in economic terms helps bringing all the impacts into a single metric i.e. Dollar value impact ($) which takes into consideration of the cause effect pathways, who gets affected and how they get affected. Impact valuation uses each indicator’s ‘shadow price’, which represents the true cost or benefit to society.
Today’s stakeholders, including regulators, investors and consumers, are demanding greater depth of reporting and higher degree of transparency from businesses. This is driven by the underlying desire for stakeholders to better understand the impacts of the business on not just the bottom-line, but also on employees, society and the planet – in order to establish whether it meets with the values espoused by them (e.g., socially responsible consumers) and is effective in identifying and mitigating non-financial risks (e.g., ESG investments).
Our impact assessments and Integrated Profit & Loss (IP<M) reports are designed to deliver impact disclosures that enable businesses to generate multi stakeholder-relevant disclosures
Benchmarking provides reliable data to inform business decision making. Analytics based on measuring and valuing multi-capital impacts is further enhanced by comparing one’s performance versus that of peers / industry.
Benchmarking enables decision makers to gauge the effectiveness of sustainability practices and policies; in order to ensure continuous improvements in mitigating risks along business operations and value chain.
How to Manage Risk?
In the VUCA world, normal business, financial and operational risk assessment no longer suffices. External risks arising out of Environmental, Social and Human Risks are becoming existential in nature and can threaten the survival of the Organisation. A Company’s factory location that was relatively risk free when it was set up 20 years ago, today and in the near future can be at extreme risk due to stressed water resources or severe shifts in weather patterns. A ban on single use plastics can threaten the survival of the Company. Community protests can lead to shut down of a mining operation. The 4 Capitals Impact Assessment Framework helps Organisations to identify and take proactive steps to manage the rapidly increasing VUCA risks.
Four capitals impact assessment enables corporates to identify and measure the impacts of material non-financial risks to their business operations and value chain. This enables companies to be ‘future-ready’ in a VUCA world – e.g., setting carbon price in anticipation of evolving regulatory risks.
Impact measurement allows corporates to:
For Investors & Banks
Four capitals impact assessment enables investors and banks to identify and measure the impacts of material non-financial risks to their investments in a manner which is free of subjective-bias (non-scientific ranking) and one which provides cross-comparability across and benchmarks within sectors.
Impact measurement allows investors and banks to:
Four capitals impact assessment enables regulators to extend their focus beyond guidelines for only financial disclosure to include measurement of the impacts of material non-financial risks. This is vital for ensuring that the industry is able to mitigate high non-financial risk, which can lead to disruption of business activities and impact investors.
Impact measurement enables regulators to:
Four capitals impact assessment enables NGOs to measure the economic value of impacts of their activities on beneficiary well-being. By developing robust quantitative and qualitative metrics, it allows NGOs to track performance and demonstrate the value that they generate for society and for investors.
Impact measurement allows NGOs to: