Estimate value created

Organisations estimate the value created and eroded for different stakeholders to compare available management decisions

Last updated: November 23, 2021

Overview

Valuation is the process of estimating the relative value that an organisation creates, preserves or erodes for its stakeholders, expressed as a common unit.

Understanding the total value that an organisation creates requires considering two perspectives:

• the value of an organisation’s impacts to the stakeholders that experience them (sometimes called impact valuation); and
• how these stakeholders who experience impact, along with changes in the external environment, in turn create or erode value to the organisation and therefore affect investors’ determination of enterprise value.

By expressing performance in a common unit of value (such as a monetary value or a score), impact valuation can help to assess the relative importance, worth, or usefulness of different impacts to stakeholders in context, and as a result, can improve decision-making of organisations. It also allows comparison with performance information from other value perspectives, such as value created for the organisation and its investors.

For a full picture of the value an organisation is creating or eroding for society, the value of all significant impacts on all stakeholders should be considered. Figure 1 below illustrates the value of different impacts on one organisation’s employees: some positive (light grey), some negative (dark grey) resulting in a monetary value for the net employment impact of the organisation.

A set of calculations based on available impact data sit behind the valuation of each topic, for example: the health and wellbeing value estimate is driven by the value employees of the organisation have placed on any workplace injuries, sexual harassment, insufficient health insurance and insufficient parental leave.

The illustration also shows how important it is to share the data behind a ‘net impact’ valuation so that the organisation and its stakeholders can understand and manage the negative impacts (e.g. diversity) which could be obscured by an impact valuation that is positive overall (see net employment impact in red).

Figure 1: Using monetisation to value impacts on employees

The purpose of impact valuation

Impact valuation methodologies rely on the information collected in the ‘assess impact’ action.1 Impact valuation can help organisations to:

• estimate total value and/or net impact of a project, organisation, or investment, considering its various positive and negative impacts on various stakeholders, and the degree to which stakeholders were underserved with regards to those impacts;
• compare options, make decisions, and communicate the rationale for those decisions internally and externally; and
• communicate performance in terms of the relative value of impacts to those who experience them, so that external parties (e.g. investors, policymakers) can make decisions based on that information.

Standard-setters that focus on valuation recognise that interpersonal comparisons of value are technically challenging and raise complex moral questions. The value of something is inherently subjective and context specific. However, given that value judgments are already implicit in any resource allocation decision, impact valuation methodologies provide a way to make the data and rationale behind these value judgments more explicit, transparent, and informed by the perspectives of the stakeholders experiencing the impact.

Methodologies for estimating value to society

There are three ways of estimating the relative value of an impact to stakeholders that experience them:

1. Monetary (e.g. the estimated monetary value to a stakeholder of a benefit they experience, or a harm or loss that they avoid or experience. This is known as impact monetisation);
2. Quantitative non-monetary (e.g. ratings on a scale of 1 – 10); or
3. Qualitative (e.g. low/medium/high).2

There are pros and cons for each method, and no strict rules for when each should be applied. Organisations are encouraged to be transparent about their methods, and disclose the strengths and weaknesses of the data used.

Data used in impact valuations can be:

• primary data gathered from stakeholders experiencing the impacts; or
• secondary data about companies, sectors, and states/countries.

Impact valuations can be undertaken on a small or large scale:

• Geographic: From a single community in one town or village; to multiple stakeholder groups across a state or region; to national or international groups of stakeholders; or
• Enterprise: From small start-ups; to individual business units of larger companies; to company-wide approaches spanning large multi-national corporations.

Characteristics of high-quality impact valuations

• Rigour sufficient for the decision being made, including:
  • Relevance and completeness: all outcomes that matter to stakeholders, and only those outcomes, are included in the analysis; and
  • Accuracy: not systematically over-estimating nor under-estimating impact;
• Stakeholders have been engaged in a way that gives confidence that the results of the valuation analysis represent their views, or the reasons for divergence are made transparent;
• In the absence of primary data, practitioners often use the results of valuations done previously in other geographies or sectors, in which case the risks for decision-making of the limitations and potential inaccuracies of the analysis should be considered and disclosed.

Estimating value to the organisation

Understanding how an organisation’s stakeholders – and the external environment in which it operates – create or erode financial value helps organisations identify opportunities for cost savings, revenue generation and risk mitigation.

How an organisation’s stakeholders create or erode enterprise value can vary hugely according to event, firm, context and timing factors.

Many organisations already implicitly consider this aspect of value-creation when they consider the financial implications and trade-offs inherent in most business decisions.

However, the cost or benefit to the organisation may not reflect the cost or benefit to society. If taxes were introduced reflecting the value to society (e.g. carbon tax), then the value created for stakeholders would be mirrored by the value created for the organisation.

Figure 2: Using sustainability information to manage risk and identify opportunities

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Resources

Estimating value to society

Estimating value to the organisation