Integrated reporting: tips for organizations
Measuring value creation
Value is created or destroyed by an organization by how it uses and affects the various capitals.
In general, the value created by an organization materializes in tangible and intangible assets when it affects the capitals owned by the organization.
Monetization of intangibles
It is possible to measure changes in the value of intangibles as a result of a sustainable growth strategy or a specific initiative. These initiatives can be communicated to show the value of intangibles in an integrated report. The process of identifying and measuring intangibles and communicating the outcome can help investors to:
- Recognize, to a greater extent, the cash flows that the organization is capable of generating in the future
- Associate the generation of these cash flows with the various intangible assets that create value on a sustainable basis
- Perceive reduced investment risk
Monetization of externalities
The extended value an organization produces or destroys impacts the value of its intangibles such as brand reputation or license to operate. It can also reveal the long-term feasibility of the business model and whether it relies excessively on a contribution from society or the environment.
There are a wide variety of externalities produced as a consequence of business activity. The first challenge lies with acknowledging or identifying their existence.
When the externality is destroying society’s value (e.g., global warming or biodiversity loss), the challenge is how to mitigate the impact and develop a “profit and loss” approach to identify mitigation costs and compare them with the value for society of implementing mitigation actions. These efforts should be communicated to the market because they can contribute to preserving or increasing intangible asset value.
Some approaches to estimate the impact of externalities on the value of intangible assets include:
- Relating externalities generated with share price
- Increasing customer loyalty or brand equity
- Securing bids for operating licenses or public tenders, paving the way for operating cost savings within the organization as well as geographic and sales growth
- Reducing energy dependence and natural capital depletion
- Proactively reducing negative externalities (this can reduce the potential for more legislation)
The value of measuring value
There are challenges to overcome when measuring and monetizing value. For instance, a lack of one global monetization guideline limits consistency and comparability of monetized outcomes.
Monetizing externalities poses a challenge as it’s heavily based on assumptions. Additionally, in some regions, there may be limitations on what can be disclosed in terms of monetized value within an integrated report.
Finally, revealing excessive detail regarding monetized value can be seen as a risk.
Despite these challenges, there are significant benefits in measuring value. Most importantly, it clearly demonstrates the extent of the positive or negative impacts on each of the capitals caused by the value-adding activities of the business model.
It also assists in the process of ensuring that growth in the value of one capital doesn’t depend (at least excessively) on the destruction of another capital’s value. And critically, it helps investors better understand, “what’s in this for me?”