It is time for impact valuation to be scaled up and scaled broad
The importance of valuing impact
Impact is 'a change in an aspect of people’s wellbeing or the condition of the natural environment caused by an organization'. By this definition from the G7 Impact Taskforce, measuring inputs, outputs, and outcomes of business activities is important but not sufficient. Only measuring impacts will indicate what matters most to stakeholders and society at large. Impact valuation is increasingly gaining strategic importance in business steering and target setting for companies and decision-makers such as investors and government stakeholders.
As a co-founder of the Value Balancing Alliance (VBA), Novartis is at the forefront of the evolving field of non-financial or Environmental, Social, and Governance (ESG) reporting. Novartis started measuring and valuing Social, Environmental, and Economic (SEE) impacts in 2015. Impact valuation metrics are based on material topics identified through the Novartis materiality assessment. Articulating the impact of Novartis business activities on society and the environment in monetary terms has elevated ESG themes across core business functions. It is through this monetization that impact valuation enables comparability, can support decision-making processes and increases transparency towards external stakeholders especially in relation to an organization’s performance.
Impact valuation is increasingly gaining strategic importance in business steering and target setting for companies and decision-makers
The industry-specific impact indicator
Apart from the environmental and economic sphere, a company’s reason for being - its purpose - needs to be captured as an essential part of any holistic impact valuation. The underlying question to define the industry-specific impact indicator is an inherent understanding of what a company produces to solve a specific problem. The indicator at hand for this task can broadly be referred to as the impact of products or services. For Novartis, the social impact of medicines together with the human capital impacts forms the 'total social impact' of the SEE impact valuation framework (note that the VBA covers all indicators, except the social impact of products).
The purpose of Novartis is to 'reimagine medicine to improve and extend people’s lives'. To develop a metric that is as simple as possible to capture this, we at Novartis have set out in 2018, together with our independent scientific partner WifOR, to develop a methodology that captures the social impact of our medicines. Our methodology has already undergone refinement and will continue to evolve.
Explained in a nutshell, the impact valuation of the social impact of medicines consists of two components. The first one is a quantification of the health benefits resulting from patients being treated with our medicines, where we attribute the incremental benefit in relation to the current standard of care as our contribution. The second component is the monetization of the gained productive and non-productive time of healthier people expressed through the resulting GDP contribution.
For the given scope of 139 medicines in our 2020 reporting and considering all the varieties of their indications delivers a 'social impact of medicines' accounting for USD 242 bn. This amount manifests the significance of the 'social impact of medicines' as a measurement of Novartis purpose. In comparison to this the environmental burden inclusive of own operation (production and commercial), and supply chain upstream and downstream (Pharmaceuticals in the Environment) accounts for USD 7.7 bn (Novartis in Society Integrated report, 2021). For our 2021 reporting it is our key target to cover the full Novartis innovative medicine portfolio, on our journey to further scale our impact valuation up.
The path ahead
Valuing a company’s impact in all three dimensions, especially on the products, creates tangible business value in many ways. At Novartis, we have leveraged them for ESG strategy storytelling, stakeholder engagement, forecasting and planning, access negotiations, non-financial reporting, and business risk mitigation, to name but a few.
Through this increased transparency on our company’s value proposition, the dialogue on the future of health and innovation can be enriched with data on the social valued created by making people healthier. This enables, through an illustration of the positive impact of our medicines, a shift away from considering health as a cost factor to seeing it as an investment. The impact narrative helps to shape this dialogue as we enable stakeholders to understand our positive and negative impact. After all, our purpose is to do our part in creating better lives and better futures.
Sustainability goes way beyond the environmental focus; it also includes the social and the economic dimensions. Impact valuation can pave the way as a guiding compass for companies to do the right thing, thereby strengthening their license to operate through building trust with society and to do things right, thus contributing to a sustainable planet. Hence, a holistic approach to sustainability requires impact valuation to be scaled up within companies and scaled broad across industries, so that every company can make informed decisions based on their actions’ positive and negative consequences.