September 5, 2023

Minutes & Agenda

Meeting type: Quarterly Meeting

Date: September 5, 2023

Location: Virtual

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 accounting methodology.

Objective

The objective of the meeting was to discuss particular aspects of the initial Topical and Industry-specific Methodologies that are under development. In this meeting, key discussion points were presented to receive guidance as the technical staff drafts initial versions of the methodological statements.
Additional objectives included providing a status update on the workplan for 2023 and receiving feedback on conceptual ideas that are under development related to the General Methodology 2 statement.

Meeting Agenda

Welcome and Introduction

All members of the VTPC (“member” or “members” hereinafter) are welcomed to the meeting. The technical staff presented the agenda for the meeting and provided introductory remarks. The technical staff stated that the Exposure Draft of General Methodology 1: Conceptual Framework for Impact Accounting (GM1) has been published and is available for public comment.
The technical staff noted that the methodological statements that will be discussed in the session are in the development phase and that small groups will be created to address additional comments and to discuss these topics in more detail.

General Methodology 2 Update

The technical staff reiterated the release of the Exposure Draft of General Methodology 1: Conceptual Framework for Impact Accounting. After the launch of the Exposure Draft, the technical staff initiated the development of the second General Methodology statement (“GM2”). The technical staff presented two sections that are under development.
- Measurement and valuation techniques.
  - Cross-cutting guidance on methods for measuring and valuing impacts in monetary terms and principles to inform the application of those methods.
  - This content will draw substantially from established methods that have been developed in the impact management ecosystem.
- Foundational concepts related to value.
  - Foundational concepts and key terminology related to the types of value that are accounted for in impact accounting, helping to answer the question, “what value is and is not accounted for in impact accounting.”
  - This section is designed to establish critical and necessary conceptual foundations to:
    - ensure that impact on affected stakeholders reflected in impact pathways is rigorous and comprehensive;
    - minimize double counting of impact in the development and application of the Methodology;
    - enhance the understandability of impact information by clearly describing types of impact; and
    - establish connections between impact accounting and the value accounted for in general purpose financial reporting.
The technical staff discussed the challenge of clearly and consistently defining the scope of outcomes in an impact pathway that relate to well-being and provided the following examples of how outcomes are determined in the impact management ecosystem.
- OECD Well-being framework
- Stakeholder rights frameworks
- Total Economic Value framework for natural resources
- Social Value International, Principle #2: Understand What Changes
The technical staff mentioned supplemental concepts plan to be developed to complement existing frameworks in the ecosystem. The technical staff also mentioned the ongoing research to understand how concepts from economic theory may be adapted to impact accounting, primarily to delineate between impact included in the market price of goods and services and impact that is unaccounted for in markets for goods and services.
The technical staff noted that GM2 will not set out the types of impacts that must be accounted for in impact accounting. Instead, the objective is to define types of value, allowing for the application of an impact materiality perspective to determine the relevance of any type of impact information.
The technical staff then discussed an illustrative example which highlighted the categories of impact from the perspective of consumers, including impact in purchase price, consumer surplus, externalities, and internalities.
The technical staff raised the two discussion questions related to GM2:
- Do you agree that the proposed second part of a GM2 statement, focused on outlining the different types of value and connections to existing concepts, is a valuable component of the Methodology?
- Do you believe that connections between impact management and economic concepts such as consumer surplus, externality, internality, and purchase price are already well established? Are there other related resources that could be leveraged in GM2?
Members provided feedback to the discussion questions.
- It was raised by a member that the integration of economic concepts appears useful, but that any guidance should be balanced with the concept of being context specific to encourage engagement with stakeholders as well as the changing aspects of well-being. The member also encouraged use of the OECD framework. The member also stated that the overlap between economic concepts and impact management is not well established and it would be beneficial to clarify the relationship.
- It was raised by a member that they support the use of the basic supply and demand model from economics. Thereafter, the following views were raised.
  - Externalities are defined as social cost but sometimes they can be positive. The member referenced a food industry example in the Harvard Business School, Impact-Weighted Accounts framework.
  - The member asked whether the perspective would always be consumer focused. Additionally, the member stated that the memo mentions double counting but does not discuss scenarios in which double counting is a problem.
- Externalities are defined as social cost but sometimes they can be positive. The member referenced a food industry example in the Harvard Business School, Impact-Weighted Accounts framework.
- The member asked whether the perspective would always be consumer focused. Additionally, the member stated that the memo mentions double counting but does not discuss scenarios in which double counting is a problem.
  - Asymmetric timeliness of positive versus negative impacts. In financial accounting, losses are recognized on the income statement, in many instances, before gains are recognized.
  - A measurement-based approach for recognizing impacts as assets or liabilities, which would require higher evidence of proof for positive impacts.
- It was raised by a member to consider practical implications of any such further developments, to ensure the ability for successful implementation and to avoid disincentivizing usage.

Greenhouse Gas Emissions Methodology

The technical staff introduced GHG emissions as the sustainability topic that will be the focus of the first environmental methodology statement and provided an overview of the impact pathway for GHG emissions, including examples of inputs, outputs, outcomes, and impacts. The technical staff introduced the following discussion topics for the meeting:
- Strategies around Scope 1, 2, and 3 emissions reporting and attribution (Output)
- Pricing GHG emissions including a discussion of discounting future damages (Outcomes and Impacts)
- Consideration of alignment with planetary thresholds (Impacts and Reporting)

Strategies around Scope 1, 2, and 3 emissions reporting and attribution (Output)

The technical staff acknowledged the relevance of Scope 3 emissions to corporate decision-making and extant sustainability disclosure requirements and raised the challenge of using models to estimate and predict Scope 3 emissions for entities that do not publicly report the data. The technical staff stressed the importance of ensuring that the Methodology allows for comparability and decision-usefulness across preparers of the Methodology, even when Scope 3 data is not available.
The technical staff then discussed approaches to estimate Scope 3 emissions, such as using the percentage of Scope 1/2 emissions based on sector level data, machine learning models utilizing publicly available financial information, and leveraging other approaches in the ecosystem that predict Scope 3 emissions.
The technical staff discussed the perverse incentives with estimating Scope 3 emissions using industry-average data and described how GHG emissions of entities in the oil and gas sector display significant dispersion. The technical staff reinforced the principle of conservatism from GM1 and stated that an estimator tool could lead to the understatement of negative impacts.
The technical staff provided the following alternative options.
- Use a GHG emissions estimation much greater than the sector-specific mean
- Penalize the use of estimated values by using a higher monetary valuation for these emissions (e.g., higher price for the cost/tonne)
The technical staff raised the first discussion topic related to GHG Emissions:
- If a company has not calculated their Scope 3 emissions, should the methodology recommend a system to estimate those emissions for them?
Members provided feedback to the discussion question.
- It was raised by a member that all Scope 3 emissions reported by companies are estimates. Furthermore, the member emphasized the importance of this concept and that a common misconception is that reported Scope 3 emissions are directly measured. Additionally, the member said that Scope 3 emissions is an estimation process, Scope 3 emissions is a rough estimation process, and the estimation of Scope 3 emissions often leads to mis-estimation within the value chain of the organization.
- The technical staff reaffirmed the complexities of measuring Scope 3 emissions as well as the usefulness of the information for investors, companies, and SMEs.
- It was raised by a member that the aim should be a comparable and complete estimate. Many companies state that these estimations are not feasible. They also stated that the Methodology should provide clarity on methods to measure Scope 3 emissions for preparers of impact accounts.
- The technical staff linked the discussion to the General Methodology as Scope 3 includes upstream and downstream activities. The technical staff reiterated that downstream and upstream activities are required to get a complete picture of an entity’s impact and guidance should be provided through the inter-related statements of the Methodology.
- The technical staff asked if anyone had comments on perverse incentives of using industry-average data, there were no comments.

Pricing GHG emissions including a discussion of discounting future damages (Outcomes and Impacts)

The technical staff discussed the two proposed models for deriving the social cost of GHG emissions: 1) Greenhouse Gas Impact Value Estimator (GIVE) and 2) Data-driven Spatial Climate Impact Model (DSCIM).
The technical staff provided the following rationale for using the two models as compared to alternatives:
- More countries and over longer time periods
- Finer spatial resolution of damages
- Long-term damage models build in human and economic adaptation to climate events
- Damages calculated through the year 2300 (instead of 2100)
- Uncertainty can be carried through to the final estimate
- Allow for adaptive updates to cost as models change
The technical staff discussed the following approaches to discounting future damages.
- Descriptive approach: assumes that existing data demonstrates the actual choices of people. Thus, market rates of return (e.g., interest rates) are looked at to set the discount rate.
- Prescriptive approach: defines how welfare of future generations should be weighed against present generation based on social or other societal cues. In a sense, it argues that market returns are not a perfectly calibrated indicator.
- Ramsey formula: derives a dynamic discount rate over time, consider the following parameters.
  - How much we discount the future simply because it is in the future – the Pure Rate of Time Preference (PRTP)
  - Diminishing marginal utility of consumption, or the fact that richer societies value one dollar less than poorer societies – diminishing marginal utility of consumption.
  - But it still requires judgement decisions about each parameter.
The technical staff discussed the sensitivity of discount rate. The technical staff also discussed literature that argues that the Pure Rate of Time Preference should be very low or zero, and the elasticity of marginal utility with respect to consumption parameter should be greater than zero. The technical staff also stated that based off a descriptive method, the total discount rate should be no more than 2%.
The technical staff raised the two discussion questions related to discounting future damages:
- Do you have any questions, comments, or concerns about our approach to pricing GHG?
- In discounting, should we discount the future simply because it is in the future (i.e., Pure Rate of Time Preference)? Should we base discount rates on the diminishing marginal utility of income?
Members provided feedback to the questions.
- It was raised by a member that pricing is highly sensitive to the parameters and added the following questions:
  - Who plays a role in the integrity of the decisions of the reporting entity?
  - How does the public see the robustness of the decisions?
- The technical staff responded by stating that discount rate is not an entity- specific calculation, and that the discount rate should be consistent across various applications of the Methodology. Additionally, Scope 3 calculations verifications would be done by another organization in the ecosystem.
- The technical staff noted that discount rate is cross-cutting, and rationale should be applicable for decisions not only for Topic Methodology but should be included at the General Methodology level.

Consideration of alignment with planetary thresholds (Impacts and Reporting)

The technical staff discussed planetary thresholds and the notion that if certain levels of GHG emissions are surpassed, it would lead to extensive as well as compound damages to society that may not reversible. The present understanding of this concept is net-zero emissions by 2050 which will allow society to limit the irreversible nature of these impacts.
The technical staff also discussed challenges with scaling global GHG emissions down to the entity-level and as a result many organizations and thought leaders are exploring the SBTi approach. Furthermore, there are calls from stakeholders to better incorporate thresholds into methodologies.
The technical staff then discussed the following approaches to incorporate thresholds into the GHG emissions methodology:
- Setting different costs per tonne depending on if the emissions are above/below a planetary threshold, including the challenge of addressing entities that have not set a threshold?
- Embedding reporting of planetary thresholds and science-based targets into other aspects of the methodology:
  - Require disclosure of how entities are incorporating planetary thresholds
  - Report the valuation that is above or below thresholds
The technical staff raised two discussion questions related to the alignment with planetary thresholds:
- Should the GHG Emissions Methodology consider valuation relative to planetary thresholds?
- If yes, what are feasible ways to do so and the best approach among them?
Members provided feedback to the questions.
- It was raised by a member that thresholds and benchmarks are useful. However, if the GHG methodology is the first that is released, then we should be clear that the threshold approach is not as easily applied to other dimensions of the Methodology.
- It was raised by a member that they agreed with the required disclosure approach.
- It was raised by a member that they saw the importance of linking to planetary thresholds. Additionally, they thought that the concept is relatable and communicable.
- A member stated that they agree with thresholds and targets and need for assurance.
- A member stated that they saw value in differentiating between companies and sectors that are going beyond the planetary threshold limits. The member stated that the concept is simple and binary, but it is critical to figure the “how” in this approach.
- The technical staff acknowledged the comments and moved to the next topic.

Adequate Wages

The technical staff discussed that adequate wages will be the first Topic Methodology in the social category. The technical staff discussed that the adequate wages methodology will assert that all workers should be able to afford a certain standard of living and that at wages below this standard of living workers will incur damages to their well-being. The adequate wages methodology will serve to measure and value this damage. The discussion topics related to adequate wages were introduced.
The technical staff noted that the following are not covered by the present Topic Methodology in development: wage equity, the impact or quality of wages above a given adequacy threshold, and the intersection between wages and non-wage benefits. These topics require further exploration.
The technical staff briefly introduced the impact pathway to describe adequate wages. Additionally, the technical staff noted that this impact pathway can be used to describe impacts on an entity’s own workers as well as value chain workers. They also noted that the attribution to the entity’s impacts at different points in the value chain is ongoing and will require a broader discussion.
The technical staff presented the Health Utility of Income (HUI) approach for measuring in monetary terms impacts related to adequate wages. This approach multiplies the difference between actual wage and a reference threshold, such as the living wage, by an HUI factor, which represents the improvement in health for every unit increase in wage.
The technical staff discussed that the HUI factors are based on the difference in life expectancy at age 30 between people with lowest and highest levels of education, using education as a proxy for income level.
The technical staff stated the following limitations of the approach:
- Scope: HUI captures the effects on mortality of income changes. Morbidity effects and broader wellbeing effects are not included.
- Internal validity: Current HUI factors assume income is the only driver of changes in life expectancy.
The technical staff walked through an example of the adequate wage methodology, which included three steps: 1) entity level data, 2) impact pathway to estimate the change in well-being associated with underpayment of wages as compared to a reference threshold, and 3) value factor to monetize the unit change in well-being.

Wage threshold for the Adequate Wages Topic Methodology

The technical staff presented the following definitions of the different wage thresholds and proposed that poverty line and living wage are the most relevant.
- Poverty line: National poverty lines reflect the amount below which a person’s minimum nutritional, clothing, and shelter needs cannot be met in that country.
- Living wage: The remuneration received for a standard workweek by a worker in a particular place sufficient to afford a decent standard of living for the worker and her or his family. Elements of a decent standard of living include food, water, housing, education, health care, transportation, clothing, and other essential needs including provision for unexpected events.
- Minimum wage: The minimum amount of remuneration that an employer is required to pay wage earners for the work performed during a given period. A minimum legal requirement that may or may not coincide with data-based thresholds of standard-of-living like the poverty line or living wage.
- Fair wage: A more loosely used term that usually refers to the payment of a living wage, fair wage governance, collective-bargained wages, and/or equitable pay outcomes. Fair wage tends to be used more conceptually rather than quantitatively.
The technical staff emphasized “minimum” in poverty line definition and emphasized “decent” in the living wage definition. It was proposed that minimum wage and fair wage will be deprioritized in the adequate wages’ methodology.
The technical staff raised the two discussion questions related to the wage threshold for the Adequate Wages Topic Methodology:
- Which wage threshold should the Adequate Wages Topic Methodology use?
- What are some important considerations in choosing a wage threshold?
Members provided feedback to the questions.
- It was raised by a member that this topic reminded them of an example from the
- Impact-weighted Accounts project at Harvard Business School related to the airline industry. They approved of a threshold as well as the distinction between minimum and living wage. The member also highlighted the difficulty related to rates of poverty lines in different countries.
- It was raised by a member that they support a line that empirically is based on a sustainable standard of living rather than a legally derived minimum wage. The member provided an example about a situation in which they pay legal, minimum wage, but they do not pay a living wage. They also pointed out that if there is an increase from minimum to living wage, it will result in the positive effect of the worker and negative effect on the consumer in the form of higher prices. The member asked how this would be incorporated into the methodology.
- It was also raised by the member that the technical staff should consider labor informality related to wages across different countries and asked the technical staff how it approaches this ever-moving target.
- The technical staff acknowledged the comments and stated that informality would intersect across other Topic Methodologies. The technical staff stated that the second order consequences of consumer prices may be less relevant for the Methodology and that the topic should be explored further in small groups.
- It was raised by a member how impact is related to the type of economic value discussed in the GM2 section of the meeting. The member stated that there should be clarification of this connection in the Methodology.
- It was raised by a member that the technical staff should consider the literature of Tyler VanderWeele and SHINE’s Human Flourishing Program, particularly Domain 6 on financial and material stability and stated that they prefer living wage.
- It was raised by the technical staff that contractors would likely be considered similar to workers in the methodology.
- It was raised by a member that living wage is the preferred threshold, but we should be thoughtful and clear with definitions. The member also stated that the definition of living wage could depend on region, family structure, etc. The member also mentioned that passing on price to the consumer is true for any externality and this concept applies to carbon pricing as well.
The technical staff asked if anyone had further comments, there were no comments, and next topic was discussed.

Health Sector Consumer Impacts

The technical staff introduced the first Industry-specific Methodology that is under development related to the health sector. The technical staff discussed how the legacy work on product related impacts provides a valuable foundation for the Industry-specific Methodology; however, it was mentioned that most of the legacy work did not include an impact pathway logic.
The technical staff stated that all potential effects which have been identified in previous work require the development of impact pathways. The technical staff also mentioned that research is available on product effectiveness to create an impact logic for pharmaceutical products. The Industry-specific Methodology is being developed by the technical staff and industry-experts as part of the Value Balancing Alliance’s Health Cluster.
The technical staff raised the following discussion question related to health sector consumer impacts:
- Should methodology development continue to focus on product effectiveness for now until interlinkages with other downstream impacts of topical methodologies are clarified?
The technical staff asked if anyone had comments, there were no comments, and next topic was discussed.
The technical staff provided an overview of the proposed approach to assess product effectiveness in the health sector, specifically pharmaceuticals. The approach included the following points.
- Data Collection: Gathering entity-specific data including the following.
  - Number of patients reached.
  - Number of indications per medication.
  - Supplemented by external data sources, including clinical data, to close data gaps.
- Impact pathway: Employing the logic of the impact pathway to estimate the effect of medications on consumer/patient’s health.
  - Health-related impacts experienced by consumers/patients encompass enhanced quality of life and diminished mortality, as well as equivalent negative impacts.
  - Changes in quality of life due to treatments often quantified using quality- adjusted life years (QALYs).
  - QALYs frequently employed in clinical studies to test the effectiveness of a new treatment or drug.
- Value factor: Assigning a monetary value to the impacts on patient health Impacts on patients’ health can be valued in multiple ways.
  - WTP-based approaches, such as Value of a Statistical Life (VSL).
  - Productivity-based approaches, translating quality of life measures into gains/losses in terms of paid and unpaid work.
The technical staff raised the second discussion question related to the health sector consumer impacts:
- Which valuation approach would be most suitable to determine the value of impacts of medicine on patients’ health?
- What aspects should be considered to identify the right approach?
The technical staff discussed willingness-to-pay (WTP) versus productivity-based approaches.
- Willingness-to-pay approaches: This approach builds on stated or revealed preferences of individuals to estimate the monetary value of health effects. Value of statistical life (VSL) is the most frequently used WTP approach to value impacts related to health, which represents the marginal rate of substitution between income and mortality risk, i.e., the individual’s WTP for a small reduction in mortality risk divided by the risk change.
- Productivity-based approaches: This approach considers the utility for a population or entire society rather than at the individual level, which is also referred to as social utility approach.
Members provided feedback to the questions.
- It was raised by a member that the value of statistical life is hard to apply in a decision relevant context. The member stated that contextualization may or may not help. Furthermore, a large value of VSL is not anchored in experience but merely an appreciation of humanity, so it may not be decision relevant. The member voiced that decision relevance means that the decision should make sense even if the evaluation aspects have not been quantified before, and raised what valuation approach should be used for different scenarios.
The technical staff raised the following question related to industry – specific methodologies systems:
- More generally, what would be the most helpful structure for our industry- specific methodologies? Following SASB Sustainable Industry Classification System or other classification systems?
Members provided the following feedback to the question.
- It was raised by a member that SASB is the preferred classification system and another member agreed to the use of SASB.
- The technical staff voiced that industry classification has been a topic of conversation in the Impact Management Platform and the appropriate classification system has its implications on methodological work. Additionally, legacy industry classifications systems may be less helpful for determining impacts.

Workplan Update and Next Steps

The technical staff discussed press outreach following launch of public comment as well targeted outreach to stakeholders. The technical staff briefly discussed the public comment webinar scheduled the week of September 25.
The technical staff provided a summary of the timeline for the remaining VTPC sessions in 2023 as shown in Figure 1.

The technical staff also presented a summary of the VTPC meetings as shown in Figure 2.

The technical staff summarized the next steps in the following Table 1.