As mandatory ESG reporting comes into play from next year within the European Union (EU), most companies will have to comply with the new rules regarding ESG disclosures. Herein lies the sustainable trend of impact valuation, which is gradually gaining traction with stakeholders, consumers, and investors. So what is this trend towards sustainability? Is it a new greenwashing tactic adopted by businesses, or is it a trend in sustainability that will benefit society and the environment?

What Is Impact Valuation? 

Impact valuation, as its name suggests, essentially entails determining whether a company's commercial operations exert a positive or negative impact on society and the environment, thus driving value. The business gauges its worth and environmental impact via its operations, supply chain, and goods. Impact valuation enables management staff, risk managers, consumers, and investors to track and manage the company's impact. It not only identifies, quantifies, and reports external influence, but it also helps investors understand the worth of a company.  

What Are The Benefits Of Impact Valuation? 

Impact valuation enables businesses to recognise the environmental and social issues affecting their operations and make decisions that will ultimately benefit shareholders and stakeholders. Along with measuring a company's impact on the environment and society, impact valuation also assists businesses in identifying both positive and negative effects, setting realistic goals to reduce negative effects, and tracking and monitoring overall progress in setting goals, so as to develop more positive impacts in the future. 

Impact valuation is helpful in establishing a good reputation with customers and investors. A company's reputation in the market is enhanced if its operations have a favourable impact on the environment. Similar to this, a company's beneficial impact on social issues and the environment assists in recruiting a broader pool of talented and qualified people who want to work with an organisation that has a positive impact on the world.

This also helps to retain personnel along with attracting new customers to the brand. In addition to reducing operational expenses and increasing operational efficiency by using energy-efficient resources and conserving water and other renewable resources, impact valuation benefits firms by fostering long-term stakeholder confidence. 

Challenges of Impact valuation? 

Impact valuation tries to assist businesses and organisations in measuring the effect that their respective enterprises are having on the environment, but there are several difficulties in doing so. Firstly, there is no appropriate ‘approach’ or tool for determining the precise impact of organisations. This makes it a very difficult procedure because the majority of organisations employ various techniques to gauge and assess the societal repercussions. As a result, there are significant disparities in how organisations record their sustainability impact, which causes uncertainty and unreliable reports that cannot be independently confirmed. 

Social Challenges

Second, while evaluating the impact valuation of their business, most organisations simply consider the environmental element and ignore the social impact. The social impact of the business, including employee surveys, taxes, and employment, is frequently disregarded. Even after taking these factors into account, it becomes very challenging to quantify and estimate the social impact that a firm is having on society through its operations. 

CSR And Dubious Claims

Finally, organisations operating under the banner of ‘corporate social responsibility’ frequently use inflated claims about the environmental sustainability of their business to mislead investors and potential customers because there are no means to verify the veracity of the statements. Recent years have seen a rise in the issue of greenwashing, in which large corporations try to gain the trust of investors and customers by using false advertising and ESG ratings to mislead their clients. 

So, the rule requiring mandatory reporting, which will go into effect by 2024, will reduce cases of greenwashing to a minimum. Similarly to this, an appropriate rule for determining the impact must be established for impact appraisal. Several recently established organisations, like the Value Balancing Alliance and Harvard’s International Foundation for Valuing Impacts (IFVI), have been developed with the intention of evaluating the value generation of a corporation, which essentially entails converting environmental and social externalities into monetary values. 

Going Forwards

Companies can improve internal decision-making, increase openness to external stakeholders, and discover the most important effects and material topics by measuring impact. To translate accurate reports and outcomes of a company's environmental and social impact into comparable financial statistics, however, will require a considerable amount of effort. Developing approaches to provide higher sustainability, openness, and comparability in the company will require careful implementation and resources due to the process's complexity.    

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