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Use the discounted cash flow (DCF) model
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Calculate the social (S) and environmental (E) value of projects
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Assess the materiality of S and E factors
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Identify the advantages and shortcomings of the use of shadow prices
5.1 Basics of Value Calculation
Year | 2023 | 2024 | 2025 | 2026 | 2027 | 2028 |
Cash flows, in $ millions | –100 | 40 | 40 | 40 | 40 | 40 |
Carbon emissions, in thousands tons | 0 | 30 | 30 | 30 | 30 | 30 |
Year | 2023 | 2024 | 2025 | 2026 | 2027 | 2028 |
Cash flows, in $ millions | –100 | 40 | 40 | 40 | 40 | 40 |
Carbon emissions, in thousands tons | 0 | 30 | 30 | 30 | 30 | 30 |
Shadow carbon price, in $ | 224 | 224 | 224 | 224 | 224 | 224 |
Environmental value flows, in $ millions | 0.0 | –6.7 | –6.7 | –6.7 | –6.7 | –6.7 |
Total value flows, in $ millions | –100.0 | 33.3 | 33.3 | 33.3 | 33.3 | 33.3 |
Year | 2023 | 2024 | 2025 | 2026 | 2027 | 2028 |
Cash flows, in $ millions | –100 | 40 | 40 | 40 | 40 | 40 |
Discount factor, 6% | 1.00 | 0.94 | 0.89 | 0.84 | 0.79 | 0.75 |
PV (cash flows), in $ millions | –100.0 | 37.7 | 35.6 | 33.6 | 31.7 | 29.9 |
Financial value, in $ millions | 68.5 | |||||
Environmental value flows, in $ millions | 0.0 | –6.7 | –6.7 | –6.7 | –6.7 | –6.7 |
Discount factor, 2% | 1.00 | 0.98 | 0.96 | 0.94 | 0.92 | 0.91 |
PV (value flows), in $ millions | 0.0 | –6.6 | –6.5 | –6.3 | –6.2 | –6.1 |
Environmental value, in $ millions | –31.7 | |||||
Integrated value, in $ millions | 36.8 |
5.2 Material Social and Environmental Factors
There is a need to strengthen and ‘empower’ rightsholders to remind organisations of their ‘right to know’ when it comes to duties and obligations, not allowing ‘laissez-faire’ as a widely used option of systemic malfunctioning. We argue for a pulling of the sustainability context and materiality principles together under the ‘relevance’ principle leading to the following steps, embedded in a plan-do-check-act approach for management.Step 1: Identify impacts on capitals vital to rightsholder well-being: The first step in context-based materiality is to identify positive and negative company impacts on capitals (ecological, social, and economic resources) that are vital to rightsholder well-being. Companies have duties and obligations to uphold the well-being of their direct rightsholders, by managing their impacts on resources these rightsholders rely on.Step 2: Determine if impacts compromise carrying capacities of capitals: The second step in context-based materiality is to determine if company impacts compromise the carrying capacity of capitals. If company impacts are far removed from this risk, then the impact can be deemed immaterial; if the impact is reasonably proximate to overshooting the carrying capacity of a capital, then it is by definition material.Step 3: Ascertain strategic innovation opportunities to enhance capitals: The final step in context-based materiality is to ascertain if the impact lends itself to innovation opportunities with the potential to enhance or even regenerate capitals to achieve net positive impact.
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Greenhouse gas emissions, including carbon emissions
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Labour practices, including discrimination and inclusion
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Business ethics, including corruption and fraud
Factor | Example |
---|---|
Social factors | |
1. Labour practices | |
(a) Training (b) Discrimination and inclusion (c) Health and safety (employees) (d) Child labour and other human rights breaches (e) Employment well-being | (a) New competences training (b) Gender discrimination (c) Workplace health and safety (d) Child labour in the value chain (e) Additional benefits of employment |
2. Combatting poverty | |
(a) Underpayment in the value chain (b) Products/services that enable low-income people | (a) Paying below living wage (b) Microcredit |
3. Interaction with (local) communities | |
(a) Regional economic activity (b) Taxes (c) Consumer well-being (d) Health and safety (local residents) (e) Social cohesion (f) Business ethics | (a) Local employment and suppliers (b) Corporate tax (c) Consumer surplus of products sold (d) Chemical plant safety (e) Contributing to local sports club (f) Bribing (local) government officials |
Environmental factors | |
1. Pollution | |
(a) Emissions of greenhouse gases (b) Toxic emissions to air (c) Toxic emissions to water (d) Toxic disposition on land | (a) Carbon emissions (b) Emission of particulate matter (c) Chemical spill (d) Nitrogen disposition |
2. Use of scarce resources | |
(a) Scarce materials (b) Land (c) Water | (a) Cobalt for batteries (b) Deforestation for agriculture (c) Water usage in production |
3. Restoration | |
(a) Air (b) Land (c) Water | (a) Removal of carbon emissions (b) Land restoration (c) Water purification |
Employees | Workers in the chain | Suppliers | Customers | Society at large | |
---|---|---|---|---|---|
Stakeholder’s goals | Decent pay and working conditions | Decent pay and working conditions | Steady business | Cheap and fast fashion | Good S and E outcomes |
Does the company help or hurt those goals? | Helps as it does provide the above | Hurts: poor conditions as costs are squeezed at suppliers | Hurts: unreliable partner that cancels orders after finishing | Helps: delivers that | Hurts: suffering in the chain (S) and large environmental damage (E) |
Employees | Customers | Airports | Society at large | |
---|---|---|---|---|
Stakeholder’s goals | Decent pay and working conditions | Cheap tickets, good services, reliable, and safe transport | Fees, connections, traffic for retail operations | Jobs, tax income, access, environmental protection |
Does the company help or hurt those goals? | Helps for pilots, hurts for other personnel: job cuts, long hours | Helps: delivers cheap tickets and safety; less so on reliability and service | Helps by running many flights | Hurts the environment (E) and health of residents near airports (S); delivers on most other aspects |
5.3 Quantifying Social and Environmental Impact
Year | 2022 | 2023 | 2024 | 2025 | 2026 | 2027 | 2028 | 2029 | 2030 |
CO2-eq. million tons | 30 | 31 | 22 | 25 | 31 | 30 | 29 | 25 | 20 |
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Publicly listed firms are to report their global greenhouse gas emissions for the past calendar year in their annual reports. Private firms beyond a certain minimum size are to report their global greenhouse gas emissions for the past calendar year to a national registry in the country in which the firm is headquartered
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Corporate GHG emissions are expressed in tonnes of CO2 equivalent, where the aggregation weights for greenhouse gases other than CO2 are determined according to current IPCC guidelines
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Corporate GHG emissions comprise direct (scope 1) emissions from all installations and operating assets that the company (or its subsidiaries) has a majority interest in
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In addition to the above measure of gross direct carbon emissions (GDE), Bolton et al. (2021) support the reporting of corporate net direct carbon emissions (NDE), provided that GDE and NDE are reported separately. The NDE metric should only allow the subtraction from GDE of those carbon offsets that the firm, or its subsidiaries, has removed and sequestered durably from the atmosphere in the past year. Durability requires a reasonably high degree of confidence that the captured CO2 will not be released back into the atmosphere for at least 100 years. That means that most of the current offsetting schemes will not be allowed
Year | 2022 | 2023 | 2024 | 2025 | 2026 | 2027 | 2028 | 2029 | 2030 |
Quality life years added, × 1000 | 62 | 64 | 67 | 70 | 73 | 75 | 78 | 82 | 99 |
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Scope 1: All direct GHG emissions of an organisation
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Scope 2: Indirect GHG emissions from consumption of purchased electricity, heat, or steam
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Scope 3: Other indirect GHG emissions both upstream and downstream of the value chain of an organisation
People | Unit | 2021 |
---|---|---|
People, process, and product safety | ||
Fatalities employees | Number | 1 |
Injury rate employees | /200k hours | 0.21 |
Fatalities contractors | Number | 0 |
Injury rate contractors | /200k hours | 0.12 |
Planet | Unit | 2021 |
---|---|---|
Energy use and emissions | ||
GHG emissions—Scope 1 | Kilotons | 64.5 |
GHG emissions—Scope 2 | Kilotons | 172.1 |
Scope 3 upstream | Million tons | 6.8 |
Scope 3 downstream | Million tons | 7.7 |
Resource efficiency | ||
Freshwater use | Million m3 | 9.6 |
Freshwater consumption | Million m3 | 1.3 |
5.4 Monetising Social and Environmental Impact
Year | 2022 | 2023 | 2024 | 2025 | 2026 | 2027 | 2028 | 2029 | 2030 |
CO2, million tons | 30 | 31 | 22 | 25 | 31 | 30 | 29 | 25 | 20 |
Shadow carbon price, $ | 224 | 232 | 240 | 248 | 257 | 266 | 275 | 285 | 295 |
Environmental value flow, $ billions | –6.7 | –7.2 | –5.3 | –6.2 | –8.0 | –8.0 | –8.0 | –7.1 | –5.9 |
Year | 2022 | 2023 | 2024 | 2025 | 2026 | 2027 | 2028 | 2029 | 2030 |
Quality life years, × 1000 | 62 | 64 | 67 | 70 | 73 | 75 | 78 | 82 | 99 |
Shadow price, × $1000 | 119 | 119 | 119 | 119 | 119 | 119 | 119 | 119 | 119 |
Social value flows, $ billions | 7.4 | 7.6 | 8.0 | 8.3 | 8.7 | 8.9 | 9.3 | 9.8 | 11.8 |
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Human rights: these refer to the rights of any individual as stated in the International Bill of Human Rights of the United Nations, such as the rights to life, liberty, and personal security, to freedom from slavery or degrading treatment
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Labour rights: these are the rights in the Fundamental Conventions of the International Labour Organisation, such as the rights to freely chosen work, to fair wages, to a safe and healthy workplace, to unionise, and to freedom of discrimination
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Environmental rights: these refer to the right to a healthy environment and to natural resources, as enshrined in international agreements of the United Nations, such as the Paris Climate Agreement
Year | 2022 | 2023 | 2024 | 2025 | 2026 | 2027 | 2028 | 2029 | 2030 |
Environmental value flows (EVF) | –6.7 | –7.2 | –5.3 | –6.2 | –8.0 | –8.0 | –8.0 | –7.1 | –5.9 |
Discount factor, 2% | 1 | 0.98 | 0.96 | 0.94 | 0.92 | 0.91 | 0.89 | 0.87 | 0.85 |
PV (EVF) | –6.7 | –7.0 | –5.1 | –5.9 | –7.4 | –7.2 | –7.1 | –6.2 | –5.0 |
Environmental value (EV) | –57.6 |
Year | 2022 | 2023 | 2024 | 2025 | 2026 | 2027 | 2028 | 2029 | 2030 |
Social value flows (SVF) | 7.4 | 7.6 | 8.0 | 8.3 | 8.7 | 8.9 | 9.3 | 9.8 | 11.8 |
Discount factor, 2% | 1 | 0.98 | 0.96 | 0.94 | 0.92 | 0.91 | 0.89 | 0.87 | 0.85 |
PV (SVF) | 7.4 | 7.5 | 7.7 | 7.8 | 8.0 | 8.1 | 8.2 | 8.5 | 10.1 |
Social value (SV) | 73.3 |
5.5 Conclusions
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Attribution of impact refers to attributing or distributing shares of the impact to each of a company’s stakeholders
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Impact is defined as a change in capital (human, social, or natural capital), a change in experienced well-being or a breach of a right
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Integrated value is obtained by combining the financial, social, and environmental values in an integrated way (with regard for the interconnections)
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Materiality indicates relevant and significant information
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Materiality assessment aims to determine which S (social) and E (environmental) factors are sufficiently important for consideration in SV and EV
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Monetisation of social and environmental factors means to express them in monetary terms with shadow prices
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Quantification of social and environmental factors means to express them in their own units
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Rights refer to human, labour, and environmental rights of individuals as laid down in international treaties
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Rightsholder is a person or organisation that owns the legal rights to something
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Shadow prices or true prices reflect the ‘true scarcity’ of resources to stay within planetary boundaries or the ‘true price’ of human right breaches to stay within social boundaries; shadow prices are based on welfare theory
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Stakeholder refers to a person or organisation that has an interest or ‘stake’ in the company: customers, employees, suppliers, shareholders, creditors, and the community
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True prices, see shadow prices
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Well-being or quality of life refers to what is intrinsically valuable for someone
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Welfare is current and future value enjoyed by stakeholders