We used our Global Impact Database to investigate the value chain impact of some of the largest companies in different sectors. As data shows, more than 90% of the impact is indirect. The increasing complexity of value chains demands a quantitative and comprehensive view of impacts, including both upstream and downstream segments. Without robust data and sound attribution methodologies to minimize double counting, value chain responsibility will remain a blind spot, inaccessible to most decision makers.
Value chain impact: Going beyond companies’ own operations
Today, companies are embedded in large and global value chains, having several tiers of suppliers and clients located in multiple regions and spanning across many industries. Such interconnectedness implies a substantial exchange of business value between different organizations, sectors, and countries, and a complexity challenge for tracing companies’ impacts.
Value chain impact assessment requires considering externalities and adverse impacts on climate, biodiversity, or human rights. This impact arises not just from a company’s own operations, but also from business operations across the value chain, where most of the actual impact often lies. However, indirect impact generated by corporations is still far from being completely and consistently captured by common ESG and sustainability metrics.
Taking Amazon as an example, the e-commerce company’s primary activities involve a large network of parties, including IT infrastructure, raw materials suppliers, third party sellers, and external delivery services. Each of these parties generates a social and environmental impact alongside economic value. Such impacts, which go far beyond Amazon’s direct operations and logistic system, are often omitted when estimating the total impact of the multinational. They are omitted due to the complexity and lack of suitable impact attribution methodologies to avoid under- or over- counting impact along the value chain. The same goes for an automotive or an oil company, since in both sectors a substantial impact occurs up- and downstream in the value chain.
The complexity of portfolio value chain impact
While regulatory pressure to report increases, the world’s largest investment funds and companies are attempting to align. More and more, financial institutions are aiming to understand their portfolio’s value chain impact to strengthen reporting and due diligence, increase transparency, and measure their exposure to sustainability risks. Attempts to obtain consistent estimations of companies’ scope 3 emissions are already a step in that direction, and such efforts are likely to expand to other sustainability themes (e.g., health and safety, biodiversity, living wages).
However, when it comes to value chain impact measurement, investors encounter even more challenges than corporations, as investment portfolios may include hundreds or thousands of companies, making the analysis highly challenging and resource-intensive. While a large amount of information and metrics are available, they are often qualitative or lacking in scope and granularity. By getting the right data, the financial world can make a huge contribution to value chain integrity.
Measuring value chain impact
For the financial world to create value for society and all stakeholders within, value chain impact assessment needs to become common practice. To get a real grip on value chain impact, assessments must cover the following requirements:
Include both upstream and downstream value chains
While this holds for all sectors in financial sector value chains, some sectors show a particular need for this requirement. One example is the petroleum and coal products sector, where substantial greenhouse gas emissions occur downstream in the combustion phase. Another example is scarce water use in food processing sectors, where most of the impact occurs in the agricultural phase upstream, and not necessarily in the processing phase itself.
Most of the ESG and sustainability metrics currently in use are based on qualitative considerations, assigning scores to companies’ social and environmental factors that do not say much about the actual impact and cannot be compared to the financial performance.
Within this framework, using a monetary unit for impacts would be exceptionally useful to facilitate direct comparisons between impacts and understanding of trade-offs between several sustainability themes at once.
Avoid double counting
It is common that investment portfolios include several companies that have overlapping value chains, like one company being in the value chain of another. Impact double counting is a critical risk when including quantitative upstream and downstream data for several companies in the same value chain. For example, the value chain impact of a coal producer includes impacts arising from combustion at a coal-based electricity plant. Simultaneously, the value chain impact of the electricity producer also includes this impact. In order to obtain an accurate insight into the impact of both companies, double counting the same impact in different value chains should be avoided.