This week I talk with Dr Daniel Dias, founder of Route2, and we discuss value to society and why decision makers should take a whole value chain approach to decision-making.
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How did you get started in social value?
In 1998 one of the leaving thoughts from LSE was a lecture around market failure being responsible for the environmental and social problems we experience. Externalities – those costs and benefits that do not have a price which leads to their overuse. That led me to set up a company called Trucost Plc, which was all about pricing goods and services back into large company financial accounts.
Lots of ecosystem services are not priced in markets and so they deteriorate through overuse. Through Trucost, I ended up doing a PhD with Robert Costanza – putting values to ecosystem services at the University of Vermont. Through that, I looked at externalities wider than the environment. 2011 we set up Route2, since then we’ve been working with organisations across the globe, quantifying their business impact, and integrating that into decision systems to drive more sustainable decision making.
What do you mean by an Ecosystem Service?
In essence the functions that deliver benefits to humanity. For example food, minerals and water. But also clean air, climate regulation that helps prevent climate change. The way the ecosystem functions is through a series of processes that combine to deliver services that we use. If you go to the canal, a reservoir, or a beach, these are recreational pursuits in nature. As we slowly degrade nature these will become less pleasurable. We are very much dependent on regional and global ecosystem services. We need to invest to maintain these ecosystems.
What is Route2?
Route2 operates as an advisory organisation, for corporations globally, and investment firms. It was established to capture a wide set of impacts beyond environment, such as the impacts of child labour and its prevalence in lots of inputs which are typically invisible. It delivers its output as” Value to Society”.
For any activity we can assess and evaluate its value to society on an annual basis to support financial reporting and accounting. Value to Society is a methodology which quantifies and values in monetary terms. There is a balance between environment (natural), people (human) , knowhow (intellectual capital), trust and stakeholder (social capital), manufactured capital (built assets) and financial capital (cash and cash equivalents). We look at how a company interacts with those capitals, as a result there are positive and negative impacts, and we put a pound sign against these impacts.
Once we have assigned these values, the positives are added to Gross Value Added, and the negatives are taken away from GVA. GVA is a conventional metric of economic activity. It shows the value of the work supported. GVA is a conventional metric of economic contribution. When you net all these out you get an overall metric of Value to Society.
There’s an opportunity to package that up to compete in the ESG (Environmental, Social, Goverenance) market which is more investor based. Entities like Aviva, Legal and general, etc, are thinking about how we maximise returns on investment and minimise impact on environmental. Our work in measuring GVA also delivers great data to support investment decision making within the ESG market.
How do organisations use GVA?
Companies generate impacts – lots are unintended. They get to the end of an operating period, and they notice they have tonnes of carbon or cubic metres of water consumed or a recorded sickness absence rate, number of occupational injuries, inequality of opportunity, community investment, etc. So where do you start? There’s always been a need for companies to focus or prioritise.
A lot of companies develop materiality matrices, holding stakeholder engagement sessions to identify and prioritise activities. But we looked at translating into a common denominator, i.e. money, which provides a natural weighting to support that prioritisation. It also allows you to aggregate these into larger metrics, e.g. total impact, which we call value to society. This can be combined with a financial metric, such as a societal profit measure. You also have an integration element. So if you are thinking about capital expenditure and you want to consider the wider impact of those decisions, you can integrate the broader impacts into your models. It makes the impacts more meaningful.
How do you introduce commonality across financial practices
At the moment we don’t require standardisation, but it has to go that way at some point. Whether that be the Global Reporting Initiative, Sustainability Accountancy Standards Board, Carbon Disclosure Project, or Integrated Reporting Movement, etc, are alternatives that are considering converging around a reporting standard to accelerate and increase the uptake. There is a further step to take to move this to being part of the core financial decision making in a business. Translating into value terms is definitely building in momentum.
There is impact weighted accounts coming out of Harvard Business School, suggesting that the way forward is to value these impacts. These might not be a full regulatory requirement, but in time there will be some regulation around it. In the meantime you have Route2 who are pushing this agenda and bringing these costs to light. From our point of view these broader societal costs and benefits are future financial risks and opportunities for businesses. These are costs (e.g. carbon) that companies will have to deal with soon.
What’s next for Route2?
What we’re fascinated by at the moment is data surfacing technologies. In this process of quantifying impact and assigning value, it’s important to understand the location of where these impacts happen. It makes a big difference when assigning a cost value to that. We are looking at technologies e.g. citizen science to earth observation data sets and incorporating data and systems and frameworks. We are looking to harness these technologies out there now.
We’re trying hard to make what we do more tangible through these blogs we post, through our website, through LinkedIn and Twitter. One of my colleagues says it’s always a bit sad what we post in terms of cost to society, but we are trying to bring about the positives and the solutions as well.