Introduction to the Company
BASF is an integrated chemical company based in Germany with operations in more than 80 countries. Its product portfolio includes Chemicals, Performance Products, Functional Materials & Solutions, Agricultural solutions, and Oil & Gas. More than 114,000 BASF employees support customers in nearly every industry and almost every country in the world.
The company’s strategy is driven by its corporate purpose to “create chemistry for a sustainable future.” By harnessing the company’s research and innovation capabilities, BASF develops solutions to meet the current and future needs of society. BASF also employs resource-saving production processes that help it create value for the company, its customers, society, and the environment.
Introduction to the Approach
Since 1996, BASF has been pioneering approaches to measure the sustainability performance of its products, portfolio, investment decisions, and at corporate level based on qualitative and quantitative assessments 1. These assessments are successfully implemented into its strategies, R&D, business management systems and decision making processes. The primary objective is to improve the positive contribution of the company and to minimize the negative effects of its business activities.
In its integrated annual Report 2016, the company published for the first time its efforts to value its economic, social, and environmental impacts on society in monetary terms – BASF’s Value-to-Society. With this approach, the company changes the perspective on its sustainability performance by assessing how its business activities affect the health and well-being of people. The application of monetary values for financial and non-financial metrics enables BASF to better understand the relevance of impacts and their interdependencies along the value chain2.
BASF initiated its Value-to-Society approach in 2014. The key learnings after pilot assessments at corporate, project, and product level are:
- The valuation of business impacts on society in monetary terms is a smart way to foster the dialogue with internal and external stakeholders which are not familiar with the ‘sustainability language’.
- Assessing companies’ performance in terms of benefits and costs to society informs the discussion with decision-makers with a new, macro-societal perspective.
- Before starting an assessment, the objective and scope need to be clearly defined.
- The BASF Vale to Society program has yielded substantial benefits. However, currently available data and methods are limited and restrict the application of impact valuation.
Understand social capital and its relevance to the business
BASF has a complex value chain including 75,000 tier one suppliers, 86 business units, and more than 60,000 product applications in the market. Understanding relevant social capital issues across the entire value chain is critically important to maximizing the value of the company’s contribution to a sustainable future and lively societies.
Based on its long-standing history in sustainability management and related qualitative and quantitative assessments, BASF has identified the relevant positive and negative effects of its business activities across its value chains. With the recently released Value-to-Society concept3, the company substantiated its findings from an impact valuation perspective.
Identify the business case and potential business decisions
The decision to develop a corporate-wide approach to measuring and valuing the company’s contribution to a sustainable future was driven by the company’s corporate strategy and purpose: “We create chemistry for a sustainable future”. The Value-to-Society work enables the company to identify, quantify, value, and demonstrate its economic, social, and environmental impacts on society across its value chains. BASF’s objectives are: more tangible communications, strengthened integrated thinking and reporting, improved benchmarking and identification of relevant financial and non-financial impacts, as well as better informed decision making. From the outset the company planned to share the methods and results publicly in order to support transparency and contribute to advancing the social capital measurement field.
Prioritize social capital issues
Social impact categories were selected based on the company’s published materiality analysis. Additional criteria for the selection of impact categories included the availability of robust data and accepted assessment methods. As of today, BASF’s Value-to-Society approach covers the following impacts on society: Taxes, Wages and Benefits, Human capital, and Healthy and Safety. Due to the selection criteria, impacts on human and labor rights are not addressed comprehensively.
Determine target audience and objectives
BASF’s Value-to-Society concepts can be applied at various levels within the company such as corporate, business unit, legal entity, production site, strategic decision, or product level. The various levels address different objectives and audiences. For example, the total value contribution to society is targeted at financial market players and at further stakeholders for general communication and advocacy. The assessment of strategic decisions like site development project focuses on internal management. Assessments at product level strive to improve tangible messaging in marketing towards customers.
The boundaries of BASF’s assessments were set based on criteria such as materiality of impact and importance for objective of application, availability and robustness of data and methods. For every assessment – corporate, project, or product level – a separate scoping process was conducted. The prioritized social impact categories (Taxes, Wages and Benefits, Human capital, Healthy and Safety) are covered in every assessment. From a value chain perspective, all assessments cover the full supply chain, BASF’s own operations, and customer industries. At project and product level the product use and end-of-life phases are covered on a case-case-basis.
As part of the boundary setting process, the company had a number of internal discussions on the extent of the company’s responsibility along the value chain. Important decisions included whether to include direct, indirect, and induced effects. Guided by the principle to assess the ‘real’ value contribution caused and enabled by the company, BASF’s Value-to-Society includes direct and indirect effects only.
•Corporate level: The assessment covers BASF’s own operations, direct and indirect suppliers (tier 1 to tier n), and customer industries. The scope is aligned with the boundaries of financial reporting.
•Project level: The scope of the assessment is dependent on a project’s characteristics – for example, for site development activities, the construction and production phases are included in the assessment.
•Business unit and product level: Includes BASF’s own operations, direct and indirect suppliers (tier 1 to tier n), customer industries, product use phase, and end-of-life.
The use phase and end-of-life impacts associated with products made by BASF’s customers are extremely diverse. Various approaches are available to measure and value these impacts. However, comprehensive coverage of the impacts of the entire portfolio in the use and end-of-life phase would require a detailed mapping of more than 60,000 product applications. As a practicable and feasible approach for a comprehensive assessment along the full value chain from cradle to grave is not yet available, the company conducts assessments for the use and end-of-life phase on a case-by-case basis at project and product level.
Define the impact pathway
BASF worked with PwC to develop impact pathways for Human capital, Health & Safety, Wages, and Tax. Each pathway starts with the impact driver, which could also be described as the business input or activity. For example, total tax payment and employment are included as impact drivers in the model. The second level of the impact pathway is the societal outcomes, which include the direct effects of the business activities. For example, the societal outcomes of the company’s funding of education and skills programs are improvement of skills and employability as well as productivity. The outcomes then result in societal impacts, which are changes in society resulting from the activities. This could be changes in the health of individuals resulting from reduction in accidents and injuries.
The impact pathway development process is not only used to develop a theory around the business impact on society, but also to identify what impacts are feasible to measure and what valuation techniques could be considered. Due to resource constraints and availability of methods, some impacts were not included in the scope of the assessment such as human and labor rights or donations, sponsoring and volunteering programs. The human capital assessment is only conducted within BASF’s own operations.
Select appropriate valuation technique
With the advent of the BASF Value-to-Society program the company moves from a long period of qualitative and quantitative sustainability assessments into the area of monetary valuation. Depending on criteria such as practicability, feasibility, robustness and maturity, and acceptance of data and methods; the company applies the most suitable techniques to assess its impact on society.
At the corporate level, at it became immediately clear that due to the complexity of the BASF value chain; any kind of bottom up assessment such as a lifecycle analysis over 60,000 products would not be a feasible way of assessing the upstream and downstream effects of BASF’s business model. Therefore, impacts throughout the supply chain and customer industries are assessed mainly with secondary industry data and input-output modelling approaches. Impacts of BASF’s own operations are calculated with primary, third party audited data.
This approach at the corporate level implies several limitations such as application for decision making and target setting due to: data accuracy, low level of maturity of methods, and potentially the exclusion of product use and end-of-life phases from the comprehensive assessment.
Undertake or commission measurement and valuation
At the corporate level, BASF’s Value-to-Society results are available starting from the base year 2013. The results reveal that the company’s positive contribution considerably exceeds the negative impacts generated through its business activities – this applies to each step of the evaluated value chain. The main drivers of BASF’s impacts on society are volume growth and portfolio shifts. For example, BASF sales volume increased from 2013 to 2014 leading to higher purchase volumes. In the social dimension, this volume growth effect is reflected by higher wages and taxes at customer industries and in the supply chain.
From 2014 to 2015 the sales volume decreased. This is reflected by lower social benefits to society at customer industries and the supply chain. The decrease in the supply chain social benefits was reinforced by a portfolio shift in the company’s purchase profile to items produced in less labor intensive sectors, leading to lower wage payments in the supply chain. Within BASF’s own operations the slight increase in societal benefit was driven by wages, as despite lower sales volumes, the company’s workforce was stable and salaries increased.
BASF’s Value-to-Society approach is designed to measure the ‘real’ value contribution of the company to society. Distortive, exogenous effects such as currency exchange rates or price shifts have been mitigated. Analysis of the drivers over several years demonstrates that the model reflects the objective to measure the ‘real’ benefits and costs to society.
Integrate Social Capital into Business Processes
BASF’s Value-to-Society is a pragmatic, efficient and auditable approach to measure and value the impact of business activities on society. It provides a new, macro-societal perspective on the company’s contribution to a sustainable future. By the measurement and monetary valuation of benefits and costs to society it allows a direct comparison of economic, social, and environmental impacts and a better understanding of their interdependencies.
BASF considers that assessments based on the outlined data and methods will lead to results, which are directionally correct. Based on the company’s experiences the results are evaluated as sufficiently sound to support at:
•Corporate level: Communication and reporting purposes to demonstrate the ‘real’ impact of business activities on society; the general identification of material impacts as well as risk exposure and business opportunities along the value chain; monitoring the corporate contribution to a sustainable future over time.
•Project level: Decision making through scenario modelling; additional information to existing assessments through the different perspective; stakeholder engagement and advocacy.
•Business unit and product level: Improved marketing through more tangible positioning of product impacts.
BASF does not use and apply the Value-to-Society assessments and results for KPI and goal setting. The main reasons are the availability of accurate and granular data as well as the maturity level of methods for the quantification and valuation of impacts.
2 BASF, Sustainability instruments. https://www.basf.com/en/company/sustainability/management-and-instruments.html