Many companies talk about their social and environmental contributions, but very few make them visible. This is typically attributed to lack of methods and data. But ABN AMRO has taken the bold step to produce insightful impact statements, including an integrated profit and loss (IP&L), which show that it can be done. This case study analyses how ABN AMRO got to produce its Impact Report, what is in there, and what its impact could be. The main obstacles seem to be mindsets rather than data and methods.
Why is this important?
Companies are under increasing pressure to show their societal contributions, and many have become vocal on the topic. However, the vast majority of reporting has remained in the realm of anecdotes and data that happens to be available. Very few have set targets on their societal contribution. Even fewer have tried to quantify their societal contribution. That is a pity, as since we need societal value to become visible and managed for. The below table illustrates the role of impact statements in making societal value visible.
The problem is that the bottom line of the table is typically much less developed than its financial equivalent. To get environmental and social value properly integrated in financial markets, impact statements can be an important driver.
Our case study investigates how ABN AMRO’s impact statements have come about; what’s in them; what can be improved; and what we can learn from them.
We find that building impact statements appears to be a very powerful and insightful exercise for companies to do. The technical challenges seem to be less daunting than typically perceived, but attributing impact remains a major challenge. The main obstacles however, seem to be mindsets rather than data and methods.
How did they do it? How hard was it to do it?
It took ABN AMRO just six months to construct impact statements, but that was after years of co-operation and pilots with Impact Institute. And it had to overcome several challenges. First of all, it faced the conceptual challenge of making societal value visible. Second, there was the data challenge of collecting hundreds of non-financial indicators and condense them into a small set of measurable goals. Third, it brought about process complexity for the organisation, as it not only hasd to collect those data, but it needs to get ready to manage for it in a way that fits its purpose and goals. Fourth, it meant a people challenge.
The project team needed a lot of data from all parts of the bank, and for those people to actually provide the data, the team had to explain why it was needed. It also required trust. Therefore, they promised the business lines that nothing would go out without their permission, and they followed all the proper governance mechanisms within ABN AMRO that also apply to regular financial reporting disclosures. "It's important to realise that impact involves a different kind of data uncertainty than finance and accounting people are used to."
What do the ABN AMRO impact statements show?
ABN AMRO’s impact report starts with an introduction by CEO Kees van Dijkhuizen, emphasizing the goal of creating long- term value for stakeholders, and what kind of information is needed for that. The rest logically follows from that, with the impact statements as the core. The organizsation’s objectives are reflected in the five types of impact statements, which should deliver the information required to manage long-term value for stakeholders (see the table below).
The IP&L is the main statement in ABN AMRO's Impact Report. Many choices had to be made on how to present it. For example, ABN AMRO decided to give ranges instead of numbers. The reason is that the exact impact results may be subject to change as methods and data improve, and then ranges are more robust. The project team considered many ways to visualize the impact and eventually chose bubbles denoting positive (green) or negative (grey) in millions of euros.
The IP&L statement contains 43 items, with bubbles per line within each of the six capitals (financial, manufactured, human, intellectual, social, and natural), and columns per stakeholder group. For these 43 separate impact categories, the bank measures hundreds of indicators. Of course, steering cannot be done on all those indicators.
In terms of long-term value creation for its stakeholders, ABN AMRO concludes that most value was created for clients, namely in the range of €5-10 billion, which may or may not be more than for the combined value creation for the other stakeholders (€2.5-11 billion): employees (€0.5-1 billion), investors and society at large (both €1-5 billion).
ABN AMRO reports on ‘do no harm’, its external costs, on page 16, split by the types of capital. Natural capital turns out to be the biggest negative, at -€0.5 to -1bn, while intellectual capital and social capital are both in the range of -€0.1 to -0.5bn. This implies that the total external costs are in the range of €0.75 to 2bn. These are significant numbers for a bank with a net profit of €2.3 billion in that same year, i.e. the negative externalities amount to 30-90 per cent of profits.
Questions raised
The report is ground-breaking, which raises the obvious question what its own impact is and will be. What has been the impact on decision -making? What has it brought? What has the feedback been like? What are the likely drivers of uptake elsewhere? How do you know if the impact performance is good enough? That is,
how do the results of the IP&L compare to the bank’s potential and to peers? Is this a weak, okay or strong performance? That is not a conclusion for the bank to be drawn, but in the end the reader would want to understand the context to make that verdict.
What’s next?
As CEO Kees van Dijkhuizen said in his introduction, this is only the beginning. Ideally, future impact reports will see the inclusion of:
- historical and forward-looking statements that include targets and scenarios on how important social and environmental issues will evolve
- tansparency and granularity on assumptions
- more examples of how value was created or destroyed
- clearer links between the various statements
- an integrated balance sheet that allows the calculation of integrated returns.
All of this would help readers of impact reports to understand how the company creates value, and how that compares both to its potential and to others.
For the reporting organistions, such analysis would be welcome to be fed into strategy; investment decisions; board discussions; management remuneration; employee incentives and evaluation; and ultimately decision-making at all levels of the organisation. In doing so, the organisation truly embeds the objective of integrated value creation, and is more likely to be successful.
On an industry and societal level, positive changes would be:
- other banks and companies to start issuing similar reports
- auditors to become skilled at auditing such reports
- inclusion of sustainability issues into reporting standards like IFRS (International Financial Reporting Standards)
- business schools teach about the methods and thinking behind impact reports
- data providers to systematically collect such data like they do with financial data
- security analysts and investors to use such reports for assessing long-term value creation – and make educated guesses where reports are underwhelming
- investment for long-term value creation across organiszations and markets.
In this way, integrated value creation could become the standard corporate objective, leading to better societal outcomes.
