July 20, 2023

Minutes & Agenda

Meeting type: Quarterly Meeting, Q2 2023

Date: July 20, 2023

Contact: Dan Osusky (dosusky@ifvi.org)

This paper has been prepared for discussion of the Valuation Technical and Practitioner Committee (VTPC).

The mandate of the Valuation Technical and Practitioner Committee (VTPC) is to direct, validate, and approve the impact accounting research and methodology produced by the cooperation of International Foundation for Valuing Impacts (IFVI) and the Value Balancing Alliance (VBA). The VTPC has been established under Terms of Reference to ensure independence and multi- stakeholder perspectives.

This paper does not represent the views of IFVI, the Value Balancing Alliance, or any individual member of the VTPC. Any comments in the paper do not purport to set out what would be an acceptable or unacceptable application of impact valuation methodology.

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Objective:

• The objective of the meeting was to discuss a number of topics concerning the Exposure Draft for VTPC Discussion and Approval (“Exposure Draft”) of the General Methodology 1: Conceptual Framework for Impact Accounting statement prior to requesting formal approval for a 60-day public comment period. Formal approval for the public comment period was to be sought electronically following the meeting date.
• The meeting also provided an opportunity for the technical staff to receive feedback on projects concerning the architecture for the Methodology and the General Methodology 2 statement.
• A final objective was to update VTPC members on a revised workplan for 2023.

Agenda

Welcome and Introduction

• All members of the VTPC (“member” or “members” hereinafter) are welcomed to the meeting. The technical staff walked through the agenda for the meeting and the Chair of the VTPC provided introductory remarks.
• The Chair expressed gratitude to VTPC members for providing detailed comments on the Pre-Exposure Draft for VTPC and Expert Consultation (“Pre-Exposure Draft”) of the General Methodology 1: Conceptual Framework for Impact Accounting, remarked on the degree of convergence in the feedback, and expressed that the General Methodology 1 project is on track to be released for public comment in the near term.
• The Chair further spoke to the growing interest in impact accounting from prospective partners, data providers, and the investor community. The Chair reiterated that the VTPC members should maintain a bias for action as they advise and provide feedback to the technical staff. Finally, the Chair thanked VTPC members for their continued attention and dedication to the development of impact accounting.

General Methodology 1: Conceptual Framework for Impact Accounting

• The technical staff presented the agenda for discussing the General Methodology 1 statement, which included a summary of feedback received on the Pre-Exposure Draft, revisions made to the Pre-Exposure Draft, key discussion topics related to the Exposure Draft, and sharing a project timeline for the General Methodology 1 statement.
• The technical staff provided a summary of the feedback received on the Pre-Exposure Draft. Feedback was provided by 15 individuals, of which most were members of the VTPC. Additional feedback was provided by select external stakeholders. The feedback was dispersed across all sections of the Pre-Exposure Draft. The feedback did not include overarching concerns related to the scope of the statement that would have required the technical staff to reconsider its core contents, after taking into consideration the planned development of additional General Methodology statements.
• The technical staff then summarized key revisions made to the Pre-Exposure Draft. The key revisions covered the following topics.
  • The term “monetary impact accounts” was replaced throughout the statement with “impact accounts” and the term “monetary impact accounting” was replaced throughout the statement with “impact accounting.
  • The preparers of impact accounts were added to the statement and stated explicitly, which include corporate entities and investors from an external perspective.
  • The purpose statement of the Methodology was revised to describe the role of the Methodology in generating impact accounts and producing impact information that is useful for decision-making by entities and investors.
  • The relevance qualitative characteristic of impact information was revised to include three factors for assessing the relevance of an impact, which are as follows:
    • the capacity of the impact information to influence the decisions of users;
    • the need for transparency as a public good and accountability towards affected stakeholders; and
    • the significance of the impact on affected stakeholders.
  • The neutrality component of the faithful representation qualitative characteristic of impact information was supplemented by adding a clause that implicitly encourages conservatism when producing impact accounts in instances of uncertainty.
  • The perspective of impact valuation in the Methodology was clarified as being from the perspective of human well-being, taking an anthropocentric approach, and from the perspective of society, or the affected stakeholder, as opposed to the perspective of the entity.
  • Several additions were made throughout the statement to make it clear that impact measurement and valuation can used to inform an entity’s materiality assessment process and should be used to determine the impact materiality of an impact. In other words, it was made clear that impact measurement and valuation should precede the determination of materiality.
• The technical staff raised the first discussion topic related to the Exposure Draft: Do you agree with the proposed framing of the definition of impact and impact pathways, rooted in well-being of people, while nonetheless acknowledging non-human based value outside of the Methodology?
  • It was raised by a member that they had no concerns with the revised definition and that the definitions provided in Appendix A: Glossary of the Exposure Draft helped to clarify the definition of impact and the definitions of the various stages of the impact pathway. The member noted that similarities between the definitions of outcome and impact could lead to ambiguity and suggested clarifying the distinction between the two stages. The member suggested making it clear in the definition of outcome and impact that economic valuation techniques are used as a way of expressing changes in human well-being.
  • It was raised by a member that economic or monetary valuation is at the core of the Methodology, specifically that the monetization of an outcome is what we refer to as an impact. The member mentioned their support for making the use monetary valuation clearer in section 4.4 Impact Pathways of the Exposure Draft.
  • It was raised by a member that they agree with the need to take the perspective of human well-being in the definition of impact. At the same time, the member advocated for the technical staff to consider analogues to human well-being that consider the inherent value of nature. The member expressed concern that actors often think of nature as a commodity through the lens of human use value only, creating a dynamic whereby nature is not assigned a voice independent of a human perspective and suffers consequences as a result.
  • The technical staff reiterated that nature is listed as a stakeholder in the Methodology but remarked that the point is well taken.
  • It was raised by a member that they’re happy to see a reference to well-being in the definition of impact.
  • It was raised by a member that the definition of outcome and impact may not be clear and that more could be done to explain the difference between outcome and impact. The member also noted their approval for the inclusion of attribution in the Exposure Draft, including the importance of measuring how much of an outcome is due to an entity’s activities versus caused by another entity. This point was reiterated by another member.
  • It was raised by a member that the focus on human well-being can have methodological considerations in the future, such as affecting the relevance of well-being of non-human species, and this fact should be taken into consideration as the Methodology is developed.
  • The technical staff synthesized the prior remarks by stating that while it is reasonable to take a human-centric approach, there are also other approaches that recognize alternative theories of value and further that the definitions of outcome and impact may benefit from additional clarification.
  • It was raised by a member that the technical staff consider a position paper on why it takes a human-centric approach and offered to consult on the position paper to the extent helpful.
  • It was raised by two additional members that they are highly supportive of the impact definition and focus on human well-being.
  • It was raised by a member to consider the GRI definition of impact for the purpose of alignment.
• The technical staff raised the second discussion topic related to the Exposure Draft: Do you agree with the proposed approach to prudence and conservatism, as a means to avoid greenwashing? Specifically, while acknowledging the importance of faithful representation, is it appropriate to also emphasize the importance of avoiding greenwashing?
  • It was raised by a member that the principle of conservatism has been applied like this in other methods. The member also mentioned that the use of conservatism contradicts the principle of faithful representation. Further, it was mentioned that use of the principle of conservatism may result in the exclusion of certain impacts and that any application of conservatism should be noted by a qualitative explanation.
  • It was raised by a member that general purpose financial reporting has a conservatism bias built into many standards, even though a qualitative characteristic of conservatism is not always clearly stated. For instance, the recognition of gains and losses are treated differently to account for information asymmetries between managers and users of financial information. As a result, asymmetric treatment of gains and losses reflect inherent conservatism. It was further noted that financial infrastructure, including enforcement, monitoring, and quality mechanisms, has developed over many decades to reinforce the faithful representation of financial information, and that the same infrastructure does not exist for impact accounting. As a result, the member argued the Methodology should reflect the fact that such infrastructure does not exist.
  • It was raised by a member that an important difference exists between prudence and conservatism, and the technical staff should consider which concept is being deployed in the Methodology. It was noted that prudence is used by the IFRS when making judgements, whereas conservatism it not truly in the IFRS conceptual frameworks.
  • It was raised by a member to consider use of the term “misrepresentation” in the context of considering the use of the principle of conservatism.
  • It was reiterated by a member that faithful representation should by default avoid overstating positive impacts or understating negative impacts. The member encouraged alignment with the IFRS documentation.
• The technical staff raised the third discussion topic related to the Exposure Draft: Do you agree with the approach of defining impact materiality as an entity-specific aspect of relevance? Should mandatory impacts be considered? Why or why not?
  • It was raised by a member that the question of whether to include mandatory impacts is connected to the architecture of the Methodology. Further the member expressed the importance of a fixed architecture that makes clear what to include in impact accounts. The member stated that the architecture should be fixed but may evolve over a five-to-10-year period.
  • It was noted by a member that it is not necessary to include mandatory impacts.
  • It was raised by a member that for impact accounting in general, it is critical that entities and investors measure impacts in a manner that prioritizes comparability and that the only way to accomplish that is to measure the same impacts for similar entities.
  • The technical staff made it clear the Methodology is being designed to include standardized impact pathways at the topic and industry level.
  • It was raised asked by a member whether it is clear in the Methodology that impact measurement and valuation should be used to inform materiality. The technical staff replied in the affirmative and noted that this point was made clear in several points in the document.
  • It was reiterated by a member that developing a methodology that measures impacts in a manner that promotes comparability is critical for decision-making.
• The technical staff asked if any members had additional areas of feedback that should be considered prior to publishing the document for public comment. No additional feedback was raised. It was mentioned later in the meeting, but included in this section for readability, that members will be asked to approve the Exposure Draft electronically for a 60-day public comment period commencing on August 15, 2023. The outcome of the vote, as well as a description of any changes to the Exposure Draft made prior to seeking approval, will be included as an addendum to these minutes.

Methodology Architecture

• The technical staff introduced the purpose of the architecture and its relationship to the Methodology. The architecture exists at a level below the Methodology and serves to complement the General Methodology and inform the structure of topical development. The architecture helps to define the structure of the inter-topical and intra-topical relationships within the Methodology.
• The technical staff discussed why the architecture matters, including to reduce ambiguity in the development of the Methodology, even if the architecture is subject to change over time, and to clarify our vision for what qualifies as a comprehensive methodology. The technical staff noted that a benefit of a well-defined architecture is to provide clarity to stakeholders. The technical staff described examples of ambiguity in the existing sustainability-related disclosure landscape, including overlaps in impact categories, such as between human rights and other social impacts and between biodiversity and other environmental impacts. The technical staff discussed the importance of utilizing the data required in sustainability-related disclosures to develop standardized impact pathways and how a well-defined architecture helps to manage the double-counting of impacts.
• The technical staff shared the goals for the architecture, including that it be comprehensive, free from gaps, have limited overlap between topics, and is aligned with standard setters. The technical staff raised the challenge of aligning with standard setters, which do not use the same structure for organizing cross-cutting methodology, topic methodology, and industry methodology.
• The technical staff solicited feedback from members, specifically on the use of a whether a fixed architecture, as opposed to a flexible architecture, is preferred and whether alignment with any particular standard setter(s) should be considered.
  • It was raised by a member that they are strongly in favor of a fixed architecture. The member stated that a fixed architecture helps to achieve comparability, verifiability, and standardization as well as helps to limit impact washing. The member said the technical staff should define the underlying structure of the framework and methodology, knowing that in three to five years the architecture may change.
  • It was raised by a member that one of the most successful frameworks among asset managers has been the TCFD, which benefited from standardized disclosures from the beginning. The member mentioned that net-zero targets, which have not had a similar global standard, have been less successful and created the risk of sustainability frameworks losing credibility as a result.
  • It was raised by a member that the need for comparability is so high that the Methodology requires a fixed architecture. It was noted that the sustainability- related disclosure landscape is in flux, and it may make sense to see how the ecosystem evolves prior to finalizing a set architecture.
  • A member voice support for a fixed architecture as that approach will be most helpful for entities and users. The member mentioned that entities may not utilize all aspects of the Methodology at the beginning, despite the Methodology having a clearly articulated architecture.
  • It was raised by a member that the technical staff should consider various levels of compliance with the Methodology when designing the architecture to enhance the usability and accessibility of the Methodology.
• The technical staff summarized the preceding comments, noting that a consensus was clear on the need for a fixed architecture.
• The Chair asked the technical staff if they needed any additional feedback on the architecture, to which the technical staff requested additional feedback on which standard(s) to align with most closely as a follow up to the meeting.
  • It was noted by a member that the technical staff should consider alignment with the Inclusive Wealth Report of the United Nations Environment Programme and the four capitals approach utilized in that document.
  • A member voice support for an approach that takes elements from all of the major standard setters when designing the architecture. Further, it was mentioned that the technical staff should review sustainability-related disclosure work conducted by the Australian Securities and Investments Commission.

General Methodology 2 Statement

• The technical staff provided a project summary for the General Methodology 2 statement, including that the General Methodology 2 statement will complement the General Methodology 1 statement and will cover various measurement methods and valuation techniques that are generalizable across the topical and industry-specific methodologies. It was stated that the content of the statement will build on work of established and recognized frameworks in the impact management field.
• The technical staff explained that the monetary valuation techniques described in the General Methodology 2 statement will cover, at a minimum, market price proxies, revealed preference methods, and stated preference methods. Further, the technical staff explained that the component of well-being that is being considered has implications for the most appropriate valuation technique. The Total Economic Value framework was referenced as a framework for disaggregating the components of value to people. While some dimensions of value are easy to capture, others are more challenging and require the use of particular valuation techniques.
• The technical staff solicited feedback from members, specifically on whether a hierarchy in the format of a decision tree should be developed to guide the use of appropriate valuation techniques. The decision tree would take into consideration the ease and accuracy with which people can evaluate impacts.
  • It was raised by a member that a decision tree or hierarchy should be developed. The member used an example of two valuation techniques that can be used to value the ecosystem services provided by a forest, namely a production function method or a replacement value method. The member stated that the two are both useful but one may be more useful than the other depending on the facts and circumstances of the impacts being measured. The member further raised the idea of a companion paper on the ethics of monetary valuation in various contexts.
  • It was raised by a member that the technical staff should consider explaining the benefits and drawbacks of each method as opposed to developing a hierarchy that may make certain valuation techniques seem less useful when in fact they are just less applicable in certain circumstances.
  • It was raised by a member that from the perspective of companies, impact accounting is at an early stage and that a hierarchy may limit further methodological development, particularly in the measurement of impacts to consumers and nature from environmentally friendly goods and services.

Workplan Update and Next Steps

• The technical staff provided a revised workplan for 2023 (see Figure 1 below).

• The technical staff provided a summary of the timeline for the remaining VTPC sessions in 2023.
• The technical staff also presented the next steps to seek approval for a 60-day public comment period on the Exposure Draft for the General Methodology 1 statement. It was noted that the minutes for the session will be circulated to members on Monday, July 24, at which point the technical staff will provide instructions for providing formal approval for a public comment period of the Exposure Draft.

Appendix A: Attendance

Meeting Minutes Addendum

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