Identifying, Assessing and Addressing TBL = Long-term Value Creation

For a long time, annual reports have been the source of information regarding company’s performance, however much of the relevance was in terms of financial data. Companies have now made rapid transition from financial to non-financial data which together demonstrates the agility of the company to survive future shocks. Long term value generation has become a key driver for sustainability and has resulted in addition of several indices – for example: S&P Dow Jones (DJSI) and RobecoSAM together: Long Term Value Creation Index (LTCV). The index is based upon selected criteria which reflect companies’ quality management and its potential to generate long term value which proves to be a driver for RebecoSAM Corporate Sustainability Assessment (CSA).

Investor Seeks – Potential to Generate Sustainable Value

Assessment and disclosure of Long Term Value Creation Index (LTCV) by itself can be a complex exercise which may need significant progress in methodology and subsequent consensus building. In the meantime, businesses may disclose its diligent approach to assess the positive and negative social, environmental and economic value generation across the value chain. This would assist investors to understand and evaluate the potential of the business to generate sustainable value.

Companies generate products and services and in the process contribute to other outputs in the form of waste and by-products. The question that arises is does businesses measure the impact across the entire supply chain? Is it Business as Usual (BAU) or they go beyond it and do impact valuation? The answer is yes, since companies face pressure from its stakeholders, sometimes from NGOs, Government agencies it is necessary for companies to assess the impact. The impact can be positive and negative for society and environment.

Companies while generating the product and services have inputs in the form of raw material used and output in the form of environmental impact i.e.; emissions, waste water and hazardous waste generation, impact on health (negative impact but can be mitigated) social impact being increased productivity, employment (hiring, retention, improved quality of life to the employee and its family, skill development and company earnings) a positive impact.

The economic value generated help company, its employees through salaries, incentives and benefits; , shareholders through dividends and improvement in stock value; creditors through regular uptake and servicing of loan; and government in the form of tax which it pays. However environmental and social value generated (positive) and being affected (negative) by activities of the company is often neglected or limited. Impact valuation will allow companies to know what part of value chain in product generation with maximum environmental and social impact will help companies in assisting their growth paths and where to invest? For example RobecoSAM has come up with three questions that companies need to address:

  • Does the company conduct impact valuation?
  • What type of valuation?
  • Does the company disclose the information to its stakeholders?

    “Business is not all about Profit and Loss anymore – Its has more to do with impact on Society and Environment and its valuation”

Impact valuation help companies in identifying risks which in turn create opportunities for innovation in order to manage the negative impact. For example RobecoSAM surveyed 184 companies from 15 industries of 30 countries for impact valuation. Companies from Europe and Asia-Pacific were leading in impact valuation response evaluation for 2017 with major response from chemicals, metals & mining and oil, gas and consumable fuels industry.

Companies from varied industrial sectors : Beverages, Chemicals, Construction Materials, Containers & Packaging, Diversified Consumer Services, Food Products, Hotels, Restaurants & Leisure, Household Durables, Media, Metals & Mining, Multi line Retail, Oil, Gas & Consumable Fuels Paper & Forest Products, Specialty Retail, Textiles, Apparel & Luxury Goods did undertake impact valuation, however  for efficient impact valuation strategy setting, measuring and improving performance, product development and supply chain management were key inclusive factors that the companies need to address.

What companies lack is strategy setting, measuring and improving performance, product development and supply chain management as key inclusive sustainability factors for decision making for a more efficient impact valuation?

An appealing thing that was addressed in the RobecoSAM survey was: companies are undertaking impact valuation and majority of them are monetizing it. However what companies lacked was disclosure on valuation. A disclosure practice in place will help companies identify material issues and also exhibit to the investors the sustainability impacts which it creates.