Connectivity of Financial and Non-Financial Indicators
Where We Come From:
Putting a Value on Non-Financial Performance Indicators
Putting a Value on Non-Financial Performance Indicators
At SAP, we have put a monetary value on how selected non-financial indicators impact our operating profit. For example, how well we engage with our employees and inspire them to commit to our purpose and strategy, support a healthy business culture, and succeed in reducing our carbon emissions.
To achieve this, we created cause-and-effect chains that show how specific actions we take at SAP lead to shifts in behavior. This behavior impacts our business and has a financial consequence.
By doing so, we established more than just a correlation between non-financial and financial indicators. The cause-and-effect chains also reveal why and how something such as employee engagement ultimately leads to gains or losses in business performance. We believe that such insights are a prerequisite for fully modeling the financial impact of non-financial performance.
Magnitude of Financial Impact
From 2014 to 2018, SAP used techniques such as linear regression analysis to document the financial impact of four non-financial indicators: the Business Health Culture Index, the Employee Engagement Index, employee retention, and carbon emissions. In the past, we assessed each indicator to see what a change of one percentage point (pp) (or 1% for carbon emissions) would mean for our operating profit. The results for 2018, for example, showed that a 1pp change in the Business Health Culture Index affected our operating profit by €90 million to €100 million (non-IFRS).
Having illustrated this impact with concrete numbers, we are now turning our focus to a broader perspective of impact (for example, see Our Contribution to the UN Sustainable Development Goals and A New and Broader Focus). We still strongly believe in the fundamental conclusions of the analysis, but do not see a need to continuously update specific monetary values on the well-established connections. This is because the values have not been subject to any large fluctuations over the years. Instead, they have increased steadily, as expected.
Promoting Sustainability Measures to Boost Financial Performance
Documenting the financial impact of non-financial indicators has helped us move closer to achieving our sustainability goals. Rather than simply stating the business case for social or environmental change, we also have the numbers to back it up.
Our findings have helped us shift the conversation for managers, investors, employees, and other key stakeholders, and firmly establish non-financial indicators as playing a crucial role in our financial success. As a result, engaging employees or reducing our emissions is no longer seen as a nice-to-have, but rather as essential to carrying out a successful business strategy.
By embedding this approach into our decision-making and quarterly business reviews, our sustainability performance steers our business alongside factors such as revenue and profit. Our goal is for all senior managers and experts at SAP to recognize – and be held accountable for – the fact that improving such measures as employee engagement also boosts financial performance.
Embedding Non-Financial Performance Indicators into Our Solutions
We will continue to share our approach and methodology with our customers to help them win in the marketplace. We believe that companies achieve higher profits – resulting from both greater cost efficiency as well as revenue growth – by addressing economic, social, and environmental considerations in a holistic and integrated manner. More importantly, these companies are better equipped to lead in the future, as they navigate the world’s most pressing challenges and help bring about long-term sustainable change.
Using the connectivity model as outlined above, we have been able to embed non-financial KPIs into our software solutions. This integrated approach to financial and non-financial performance is reflected in the solutions developed for climate action, circular economy, social responsibility and holistic steering and reporting.
A New and Broader Focus
In line with our purpose to help the world run better and improve people’s lives, we have moved beyond financial measures to evaluate the consequences of our actions on society and the environment as well as the wider economy. As well as exploring cause-and-effect chains within SAP’s own operations, we also measure positive and negative societal impacts across our complete value chain.
Building on our many years of experience in connecting financial and non-financial measures, we co-founded the Value Balancing Alliance (VBA) in 2019. This alliance looks at ways in which businesses can better understand their societal and environmental impacts and formulate corporate strategies to address these areas.
The VBA was founded by eight companies: BASF SE, Robert Bosch GmbH, Deutsche Bank AG, LafargeHolcim Ltd, Novartis International AG, Philip Morris International Inc, SAP SE, and SK Group. The organization is supported by the world’s four largest accounting companies: Deloitte Touche Tohmatsu Limited, Ernst and Young Global Ltd, KPMG International Ltd, and PricewaterhouseCoopers International Limited. It is also supported by leading universities such as Harvard Business School, together with stakeholders from governments, civil societies, and standard-setting organizations. As at the end of 2021, the alliance consisted of 19 companies. By participating in the VBA’s methodology development and piloting phases, SAP is playing an active part in shaping the future of impact measurement and valuation.
Meeting the Challenges of Non-Financial Value Measurement
Environmental degradation, rising societal inequalities, and the COVID-19 pandemic have highlighted the need for corporate accountability and value creation beyond financial markets. However, most corporations are failing to tackle climate change, biodiversity loss, and inequality, because – as one of multiple reasons – decisions are based on insufficient information.
Accounting systems often ignore the value of environmental and societal impacts, leading to misallocation of resources. However, as is increasingly recognized by institutions such as Harvard Business School, monetary evaluation of these impacts has the potential to change accounting systems and transform capital markets. The development of impact-weighted accounting metrics is a necessary precondition for this.
Increasing regulatory pressure has also resulted in an urgent requirement for a reporting standard for environmental, social, and governance criteria. In response, organizations such as the Sustainability Accounting Standards Board (now part of the Value Reporting Foundation) and the Global Reporting Initiative are adapting and aligning their efforts to develop reporting systems that help investors make more sustainable decisions.
We co-founded the VBA to support the development of a standardized methodology that helps companies, investors, and other stakeholders compare non-financial performance. These insights enable companies to create business value beyond revenue or profit growth while taking into consideration the long-term impacts of their business operations on the environment and society as a whole.
To help the European Union (EU) achieve its commitment to making Europe the first climate-neutral continent by 2050 as part of the European Green Deal, the VBA is acting as an advisor on EU regulatory activities. Furthermore, the VBA is working to help drive the establishment of a globally accepted system of standards for non-financial disclosure.
Piloting the Measurement of Non-Financial Impacts
Ending in November 2021, our second VBA pilot analyzed categories including GDP contribution, health and safety, training, consumptive water use, water pollution, greenhouse gas (GHG), air emissions, land use and biodiversity, and waste. We used data from our Integrated Report 2020, from our internal controlling and HR systems, and from our environmental management system. The analysis focused on our complete operations and our supply chain. An analysis of the “downstream” impacts resulting from customers’ use of our software solutions and services will be piloted in the next phase.
Wherever possible, we used primary data for the calculations. Where primary data was not available, we used proxies, modeling techniques, and assumptions that were well-defined and documented in the VBA method papers. Key stakeholders across all relevant lines of business were engaged in the pilot, which was sponsored by our CFO.
Analysis took place across multiple impact categories, and resulted, for example, in the following findings from the GHG and training categories:
- GHG: Our analysis enabled us to identify the GHG impact of each subsidiary and location, and we now have insights into which SAP locations have the highest CO2 footprints and which locations have the lowest. Negative impacts of GHG were monetized at €136 million and this has helped inform decision-making regarding our CO2-reduction strategy. It has also helped us quantify the investment required for offsetting emissions by funding alternative energy resources to achieve carbon neutrality in our operations by 2023.
- Training: Money spent on offering training to employees positively impacts their employability, earnings, skills, and knowledge. However, it also results in “softer” impacts such as enhanced confidence, self-awareness, and active listening. This can result in improved mental well-being, with benefits for our employees’ immediate social environment, as well as social and civic engagement. The analysis identified that our global employee training programs have a material positive impact and thus valuation of training is being prioritized in our future journey in shaping impact measurement and valuation.
We aim to add further indicators and share best practices and lessons learned with external stakeholders and other VBA member companies to help improve the methodology and input process. In addition, we will make results available to the public.
Shaping the Environment of Impact Measurement
Since the outbreak of COVID-19, impact measurement and valuation as a science is evolving globally. The connection between economic, social, and environmental impacts will become a guiding principle for the way businesses are evaluated and steered.
We are using insights gained during our impact valuation journey in the development of our sustainability management initiative. We strive to embed impact measurement into our corporate and relevant business unit decision-making and target-setting. Holistic steering and reporting are being developed across the value chain, incorporating our response to legal requirements and using capabilities embedded in our software solutions.
Our impact measurement experiences form a foundation for software innovations in the fields of climate action, circular economy, social responsibility, and holistic steering and reporting, helping customers on their environmental, social, and governance journey. We see the monetary evaluation of environmental and societal impacts as crucial in achieving a sustainable economy, and by simplifying, aligning, and optimizing enterprise sustainability reporting, we help customers address global sustainability challenges.
The content of the section Connectivity was not subject to the independent limited assurance engagement of our external auditor.