Trade and Investment

Impact valuation: How to challenge and elevate traditional decision-making

Industries such as mining are ripe for impact valuation.

Industries such as mining are ripe for impact valuation. Image: Reuters/Amit Dave

Liviana Sordo
Senior Manager, Climate Change & Sustainability Services, Ernst & Young LLP
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  • Impact valuation is central to ensuring that sustainability action is right for people and the planet.
  • Results drive strategic internal decision-making and external stakeholder engagement.
  • Starting early is crucial, and actionable insights are more desirable than perfection.

Impact valuation can help businesses prosper in a world where we see an increase in the occurrence, frequency and severity of social and environmental issues. A vital metric in the era of stakeholder capitalism, it involves quantifying and valuing a company's positive and negative externalities related to society and the environment. The question often asked is whether the effort of impact valuation is worth it. The answer is: It depends on how you use it.

Industries with significant impact potential, such as mining, agriculture or pharmaceuticals, are crucial to the global sustainability agenda – across issues like clean energy, zero hunger and good health. Understanding impact is integral to risk management and value creation within that context – and to how we will ensure a just transition, build resilient food supply chains, and tackle healthcare inequality.

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There are no simple solutions. Businesses are faced with a rapidly changing landscape of potential risks and, quite rightly, an expanding range of stakeholders that are holding them to account. To take mining as an example, we see the collision of geopolitical challenges, a desperate need for investment in critical minerals for the green transition, and a duty to do right by host communities, among broader issues such as climate change and socio-economic inequality.

The application of impact valuation to specific scenarios can complement traditional, financial value-based decision-making, while also serving as a useful tool for stakeholder engagement and ensuring businesses maintain a social licence to operate. The concept allows the holistic consideration and measurement of sustainability topics beyond carbon emissions, from resource use to social development.

Companies like Anglo American are using impact valuation to complement the integration of sustainability into business strategy. Roderick Groenewoud, the Sustainability Strategy Principal at Anglo American, says: “Our purpose is to reimagine mining to improve people’s lives. We wanted to articulate value through the eyes of our stakeholders and get a data-driven feel for the externalities that might introduce risk to our bottom line.”

How different impacts can be valued and presented alongside each other
How different impacts can be valued and presented alongside each other Image: EY

Anglo American has been building its approach to impact valuation for years, with ongoing support from the EY organization. The work started by developing and testing a valuation methodology through a series of pilots related to key investment decisions, which face sustainability challenges. One considered the impacts associated with the construction of a desalination plant for Anglo American’s Los Bronces copper mine in Chile. The area has suffered years of drought, impacting production. The analysis showed that Anglo American’s commitment to using water from the plant would not only benefit the business, but could also enable the release of freshwater to the wider catchment area. Another pilot looked at automation, and the balance between providing employment to local communities and future-proofing operations.

Following this, impact valuation was applied to a number of assets to understand the overall impact value of mines throughout their lifetimes, from breaking ground (historical impacts) through to closure (projected impacts). The implications of environmental mitigation measures and long-term socio-economic development have also been considered. Now, Anglo American is starting to work on the integration of impact valuation into planning and holistic decision-making.

As part of the Value Balancing Alliance, a group of multinational companies with the goal of standardizing impact valuation, Anglo American also participates in the development of new approaches and applications to the practice. Currently these results are not reported externally. The company’s approach has been driven by the aim of better decision-making as opposed to reporting. Of course, reporting and disclosures is an important part of moving the concept forward, and transparency is vital to any approach. The scope to use impact valuation for greenwashing is vast, and any abuse of the concept could lead to a rapid breakdown of trust with stakeholders.

How the impact value of different scenarios can be considered over time
How the impact value of different scenarios can be considered over time Image: EY

Another challenge in impact valuation is that, much like greenhouse gas accounting a few years ago, approaches are still being aligned and standardized. Companies taking the lead, such as members of the Value Balancing Alliance, will have a significant advantage when adoption picks up, as practicing impact valuation is as much a cultural effort as a logistical one. Sustainability experts who intuitively understand impact drivers may be uncomfortable with valuation, and financial analysts who are familiar with valuation may lack the necessary sustainability knowledge to translate results into action. On the logistical side, it is time-consuming to locate the required data, set up robust data systems, and integrate sustainability data points into planning activities.

At the same time, insisting on perfection does not help to achieve the purpose of impact valuation, which is to drive decisions that align with stakeholder capitalism, balancing people, planet and profit. As such, the use of proxies and assumptions to supplement missing data and get the ball rolling, provided these are acknowledged, is pragmatic.

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A good place to start would be the first page of Anglo American’s story; that is applying impact valuation to a specific challenge and then expanding from there. If you are still unsure whether the effort is worth it, ask yourself this: Would you be comfortable making life decisions based purely on financial implications, ignoring all other forms of value, such as time, health and happiness? Why should businesses, given the considerable scale of the implications of their decisions, be any different?

The views reflected in this article are the views of the author and do not necessarily reflect the views of the global EY organization or its member firms.

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