What is impact valuation and how can it measure the business value of social and environmental efforts?

Is your company measuring and valuing its impacts? If not, it should be. Impact measures are what matters to stakeholders. Stakeholders are those individuals and groups who have vested interests in the success of a business, and hence it is of vital importance to understand what makes a difference to them.

As established in 1973 by the Davos Manifesto, business stakeholders include clients, shareholders, employees, as well as societies. Business leaders need to be cognizant of the interests of all their stakeholders. Impact valuation then measures any changes in the well-being of stakeholders affected by a relevant business activity. In effect, it is the managerial concept for stakeholder capitalism – and it is gaining traction in the business community.

From its early beginnings in 2017 to a recognized niche category in just a few years, the global impact investing market has now exceeded the iconic $1 trillion mark: indeed, the latest Global Impact Investing Network report from October 2022 estimates the market size to be $1.164 trillion.

Impact investing comes in many forms, but a common thread is that impact investors seek to close funding gaps slowing or stalling the delivery of the UN Sustainable Development Goals. The practice is well framed by the Impact Management Platform, which provides standards, guidance, and actions for impact investing.

The pivotal role of impact valuation as a driver for value creation of businesses is much less known and established. So, what does it mean for businesses to measure and value impacts? The first thing to say is that impact valuation involves quantifying and valuing a company's positive and negative externalities related to society and the environment.

When done well, impact valuation covers both the intended and unintended effects of business activities. This includes a company's products or services, operations, and supply chain. By valuing positive and negative externalities more systematically and as thoroughly as possible, impact valuation can help businesses make decisions that create value for all stakeholders – not just shareholders.

Impact valuation can help businesses manage stakeholder capitalism in three ways. First, it can help businesses identify and understand their impacts – this insight is a strategic breakthrough. Second, it can help them set goals and target investments to maximize their positive impacts and minimize their negative impacts. And third, it can help them track and report their progress in creating value for all stakeholders.

The benefits of impact valuation are attracting growing interest. Inspired by the 2020 Deloitte Review article Measuring the business value of corporate social impact: Beyond social value to enterprise performance, I identified seven areas in which impact valuation can drive business value.

We see a rapidly expanding body of practitioners of impact valuation across the globe, drawn from very different industries. They know from experience that the approach drives top-line, bottom-line and company value. While there is still much work to be done to perfect the impact valuation concept, it already has the potential to revolutionize how businesses operate.

We live in unsettled, uncertain times, which slow some elements of the change agenda while accelerating others. But as the world moves inexorably towards stakeholder capitalism, impact valuation will become an increasingly important tool for businesses to manage their relationships with key stakeholders. By understanding the impact of their activities, businesses are better equipped to make more informed decisions about how to allocate resources, including capital, and to unlock stakeholder value.

Over time, and done well, impact valuation can help businesses prosper and create long-term value in a world of social and environmental challenges. It can help to align the interests of business with the interests of society. Making impact valuation the new normal – the way businesses operate every day – is elementary to sustaining both capitalism and the wider economic, social, and environmental systems it relies upon.