Not government, but society is Big Brother. Therefore companies need to know their true social value. This is how you calculate true value, blogs KPMG Manager Frits Klaver.
In his famous 1984 George Orwell portrayed the government as Big Brother. For corporates this prediction did not entirely come true. Not the government, but society is watching corporates and keeping them on their toes. Just look at Volkswagen and dieselgate.
In a world where society is Big Brother managers do themselves a favour by knowing what their company costs and delivers. Only then can they work out what to innovate in order to increase the social value of their business. The problem? A standard annual report showing turnover, costs and profit doesn’t say anything about a corporate’s social footprint.
In 2015, it was the Dutch railways company NS, that understood that a standard annual report didn’t offer any insight into the social value. As one of the first, they decided that a standard annual report will no longer suffice. The NS managers wanted to find out what NS cost and offered society, in other words, they wanted to know the impact on the environment, economy and social conditions.
In 2014 they had already calculated the environmental impact themselves. In 2015 they added economic and social impact to that, using the so-called True-Value Method. KPMG’s True-Value experts started calculating and quantifying what NS was actually worth. The complete picture offered a surprising answer.
First, the environment. Not to be neglected, because a corporate guilty of pollution may expect derision, boycotts and measures. What do the figures tell us? In 2014, NS created 90 million euros in positive value through the fact that passengers didn’t use cars. At the same time, NS cost the environment 120 million euros. This mainly came from energy consumption and the associated emission of gasses that are harmful to humans and nature, such as CO2; the rest (some 50 million euros) came from rail infrastructure and the impact of transport to and from stations and trains.
In 2015, KPMG’s experts in True Value put the social and economic impact under a magnifying glass. The core business of NS, providing transport from A to B, turns out to deliver 7 billion euros to society because the railways facilitate economic activity with transport. Losses through delays were deducted from it.
Here it comes: calculating real value means that you have to factor in everything, also how travellers get to and from stations. The experts discovered that a large part of delays is caused by the transport to and from the stations. Take travellers who cycle to the station. It turned out that they spend so much time looking for a safe place to leave their bicycles that, together, they run up the same delays as all the train delays put together. In other words, you may be able to make trains run faster, but that only takes away part of the delay.
The results gave NS the right focus for innovation. For instance, they’re now countering the negative impact of harmful gas emissions with green energy. Not by buying it from a regular energy supplier – they will then consume all the green energy in the Netherlands –, but by commissioning a new wind turbine farm. They want to be climate neutral in 2018. The calculation of the real value of NS furthermore led to a broader approach to tackling delays. NS is now using lessons learned from parking garages, such as a traffic-light sign when the garage is full, to experiment with bicycle garages.
The beauty is that measuring social impact also leads to an improvement in the financial results, which again return in the old-fashioned financial annual report. For example, reducing costs through energy conservation, or the fact that people like to come and work for you because you pursue sustainable working processes.
Through its true value, NS better understood that it is a company that connects and that it optimises the economic value associated with that for society. The top NS managers were presented with figures they had never seen before. They used to be under the impression, for instance, that their waste impact was huge. That, however, appeared small in comparison to emissions.
On the climate train in November 2015, travelling to the climate summit in Paris, the CFO of NS and I co-presented the lessons learned from calculating the true value. The summit primarily focused on CO2, but people on the train were excited by the complete picture you get by considering all the consequences in your calculation; the true value.
Author: Frits Klaver, manager KPMG Sustainability