We know the financial value of a truck, a cargo ship or our own business site. The reporting of turnover, profit and costs are transparent in an annual report. Financial and economic indicators are not the only measures that determine the value of a company. Healthy and satisfied employees, less Carbon emissions due to new production processes, gender equality of wage conditions, etc. These elements are at least as important as profit figures. Nevertheless, the application and measurement of the social index is not yet widely accepted. But Christian Heller, Vice President at BASF and CEO of Value Balance Alliance, sees a clear shift from the emphasis on profit only, to a holistic and integrated way of decision making taking the planet and people next to financials into account. From profit maximization to value optimization.
BASF, a chemical company in the port of Antwerp, is an international player with a sustainable policy strategy. We meet BASF in our daily life with numerous solutions.
“We want to contribute to a world that offers a viable future with an improved quality of life for all. We do this by creating chemistry for our customers and society, by making optimal use of available resources”
Today, sustainability plays an important role in the valuation of a company, and this importance will increasingly prevail.
FPIM stands for Federal Participation and Investment Company (maatschappij in Dutch). Its core business, on the one hand as an investment company and on the other as a holding company for the Belgian State, is:
FPIM's investment strategy, since its inception in 2006, has been focused on supporting sustainable sectors or enhancing the sustainability within traditional sectors. The financing is not just aimed at making a profit but should also make a significant difference for the environment, biodiversity, climate, health... Renewal in transport, energy transition and also retrofitting in the construction sector are investment interests par excellence.
We have focused our spotlight on sectors with a clear sustainable trajectory that are also in need of investment.
Gross national product (GNP) measures the economic growth of a country. Companies are bound by a report that properly identifies their financial and economic achievements. In addition to profit, people and the planet are now the two other pillars of a healthy company. Business reporting is evolving along with this development, especially in the European Union via the Corporate Sustainability Reporting Directive and Taxonomy regulation. But is the existing interpretation of GNP still relevant? The ranking of the most successful companies would look completely different if we included the social index.
"If you want to have a future as a company in the changed business environment, you have to think long-term. You need to rethink what value means for a business: The value of the enterprise itself and its value contribution to society. You have to take more KPI into account beyond profits: Intangibles, impacts and dependencies on natural, social and human capital...", Christian Heller.
The focus of value in all its facets in the economy is kicking off a sustainable era. As interest in sustainable business grows, the question arises: how can we measure the social value of a business?
A global market economy is the most effective system we know driving wealth and innovations. The financial aspect is a must in entrepreneurship. "You have to make a profit from your business operation, but you have to ask yourself: what is your profit based on?", says Christian. It no longer makes sense to bet on expensive investments with fossil fuels as the only energy carrier. Creating long-term value around the business also means acting in a forward-looking way, and that's where the answers lie in sustainable and innovative solutions.
"For many sectors and companies that also means: changing and transforming your business model. Not easy, but if you want to survive, you have to shift gears today towards a support base where profit is not in conflict but integrated with people or the planet", Christian.
Every company is a link in a large network. The customers and environment are making their voices heard louder in these times. Social media creates an accessible platform to express opinions and form communities. We are all sensitive to image building around a brand or product. Businesses need to take this into account. Each decision can draw an entire community to you or just repel them completely.
Take the Friday's for Future Movement as an example. Who would have thought twenty years ago that an entire generation would come out on the streets, advocating for a sustainable future? A company cannot ignore the voice of the community in making decisions.
"Take the Friday's for Future Movement as an example. Who would have thought twenty years ago that an entire generation would come out on the streets, advocating for a sustainable future?" cites Christian. "A company cannot ignore the voice of the community in making decisions" The shareholder value doctrine is outdated. Due to the increasing influence of business, with good reason more groups in our society are demanding responsible action.
Koen Van Loo also observes this shift from close by. He notices that companies that take steps in the right direction are often steered by 'sensitive leaders'. "The example must come from above," Koen cites. "A leader nowadays not only has professional and management skills, but is also connected to the environment, has a healthy dose of empathy and knows what the world needs. As Christian points out, financial matters must of course also be considered, but it doesn't stop there for a new leader," says Koen.
Companies, municipalities and end customers have gone through a major awareness phase. Awareness has grown that humans are depleting the planet. This has negative consequences for the climate. The way we work together is also undergoing an evolution. The mission and vision of a company, also in the social field, increasingly determines who we want to work for. Does that vision match your own values?
However, the fundamental business models have undergone little or no change. This will change very fast in the coming years driven by consumers, companies, investors, and policy makers.
"Companies have been reporting their sustainability efforts for many years. But we still lack consistency in the reporting frameworks and in methods on how we measure performance. Take the measurement of a training course. Training is valuable, absolutely, but there are gradations. You can spend hours taking a training course and learn nothing. So what value do we assign? Information on sustainability is not comparable at this point in time and is not fully integrated in decision making and steering ," Christian Heller.
To address that problem, international companies have joined forces together with the four largest audit firms and founded the Value Balance Alliance, which is led by Christian Heller.
The goal of the VBA is to enable companies to be change makers for a sustainable future: from profit maximization to value optimization.
"We are standardising methods to measure and value the impact of companies on nature, society and economy and the value of the enterprise beyond just financials. We are connecting already available knowledge and bridge the gap between financial and non-financial information.
We are scaling up sustainability integration by a broad applicability of our method. And we are piloting and testing the method in day-to-day business decisions and disclosures. In peer learning sessions, we share examples of how holistic business steering paves the way towards a sustainable and inclusive future," Christian said.
For years, companies have thought in numbers and accounting to balance active and passive. From that methodology using monetary metrics emerged the solution to weigh social values against financial values. Under the principle of "management accounting," it becomes easier to make decisions when multiple indicators are at play.
Is this the complete solution to identifying the social value of a company? No. But it is a useful tool to help a company in the decision-making process, towards a sustainable future. We make it possible to make a comparison between profit and the impact on the environment
Are you considering buying a new high-emission machine or will you invest in a company, which is about to offer a green alternative to that machine? The decision is not easy without considering the long-term benefits. And it's just what the Value Balance Alliance is trying to accomplish: Taking financial, social, human, and natural capital aspects into account in a common, comprehensive system to deliver value for all.
Many aspects of how to measure sustainable performance are coming together, Christian informs us. For example, BASF brings various methodologies together building on company data and measurement methods (bottom-up) and industry data and methods (top-down). .
Christian, formerly responsible at BASF for the project Value to Society, and his team started with indicators such as profits, taxes, wages, training, health and safety, air pollution, climate, land use, water consumption and pollution, or waste. ... The methodology involves evaluating a production processas well as the up-stream and down-stream value chain.
The central question: can you define and measure consistently the positive and negative value drivers of a company, which reflect and demonstrate the sustainability performance of a company? Yes, BASF has proven that measuring its value to society since 2013. The results of different applications inform the decision making and steering processes within the company.
"In time, we need to have a globally effective baseline for reporting. If financial and non-financial aspects are not measured in a consistent approach, robust and standardized, we cannot compare the performance of companies. This does not yet exist as a standard, but BASF, together with its partners, strive to develop and implement a holistic approach for better decision making and transparency in reporting," Christian says.
FPIM evaluates investment opportunities in principle on the basis of a five-year business plan, which is quite a long time for a start-up. The essence of the plans must be crystal clear to Koen and his team. On the other hand FPIM is a patient, long-term investor that does not look for short term financial returns. In addition, the evaluation of an investment request is linked to the societal aspect. What does the company have to offer in terms of people, climate, environment...? FPIM looks at this in detail for each application.
"What we look at above all is the power of persuasion, when it comes to a positive impact for people and the planet. This is often how we distinguish an interesting project from those that are not retained."
A specialized team processes all available information, challenges the business plans and assesses which companies receive a positive result, with the Board of Directors of FPIM having the final investment decision authority. Currently, there is no automated processing of all applications for investment. For now, FPIM still makes decisions based on the expertise within FPIM and inside our network. The Value Balance Alliance may be able to complete this approach in the future.
"It is the norm that companies that add societal value have an essential advantage. Companies that only think about profit have no chance of securing an investment by FPIM," says Koen.
Global harmonization of reporting and alignment with political targets. To meet the EU's 2030 climate and energy targets and the objectives of the European Green Deal, it is fundamental to focus investments on sustainable projects and activities. The EU has introduced three main initiatives to enhance the contribution of the economic sector: CSRD for transparent reporting at corporate level, Taxonomy as classification system for sustainable business activities to re-allocate investments, and the SFDR .
This is a good start, but we need to take global markets into account. Therefore, the EU efforts need to align with a global baseline as currently in development by the IFRS Foundation.