As the world changes, so does the valuation arena. One of the issues of interest in the international valuation community is the “value” of social value. Is it real? Is it measurable? Is it worth including in a valuation?
The concept is “in its infancy,” according to the International Valuation Standards Council’s (IVSC’s) Perspectives Paper, “Defining and Estimating Social Value.” There’s much to consider relative to an idea that “has the potential to become a more standard part of the standard reporting framework for investments and financial management decisions.”
Here are some of the issues the valuation community is considering as the discussion about this issue moves forward.
What Is Social Value?
It’s not surprising that the valuation community hasn’t yet come together on an accepted definition of social value. As with many elements of value, social value seems to depend on who’s asking. In other words, different stakeholders have different perspectives and priorities, and thus different definitions.
However, the IVSC has taken a stab at an early definition: “Social value includes the social benefits that flow to asset users (social investment) and the wider financial and non-financial impacts, including the well-being of individuals and communities, social capital and the environment, that flow to asset users.”
This means that an essential feature of social assets is that the value they generate goes not only to asset owners but also to other stakeholders, including the greater community. The council has identified three elements to be considered in the definition:
- Monetary benefit to the asset owner. Measuring the cash flows of social value to the asset owner can be accomplished using standard valuation approaches.
- Social benefit to the asset users. Measuring social benefits—or what the IVSC has deemed “social investment”—will be challenging. The IVSC suggests that this measurement might include cash flows forgone by the owner in the form of reduced or minimized access fees relative to the asset or value forgone by the asset owner in the form of “sub-optimal” uses of the asset.
- Social benefit to non-asset users. These wider social benefits include economic and non-economic elements such as increased economic activity, the well-being of people and communities, social capital, and environmental outcomes
Social Value in Practice
To illustrate the types of social value to be measured, the IVSC offers three examples:
Rail line – To connect a major city to an outlying township—and encourage use of public transportation rather than private vehicle—a not-for-profit public entity proposes to build a rail line. Fares will be subsidized, which means the public entity (asset owner) will forgo income in order to deliver reduced-fee transportation and less pollution (social benefits) to the asset users.
In this case, the social benefits to users outweigh the monetary benefits to the asset owner.
Residential development – A real estate developer wants to build a mixed-used project and intends to increase its footprint to maximize profits. However, including low-cost housing and green space will smooth approval of the developer’s plan.
In this case, the asset owner is forgoing monetary benefit and essentially transferring that benefit to the asset users, who will enjoy lower-cost housing and increased green space. Here, the primary benefit is likely to the asset owner.
Cemetery – A not-for-profit public sector entity acquires a large tract of farmland to create a new cemetery, paying market rate for the land. Because the land is re-permitted to allow use as a cemetery, a question of “highest and best use” arises, diminishing the value of the land because commercial uses are now unavailable.
Because there will be no net cash flow to the nonprofit public entity, the asset users are receiving a social benefit (reduced burial fees, a place to pay respects to community members) while the asset owner receives no monetary benefit. In this case, the social benefits to user and non-users are likely the primary objective.
Refining the Measurement
As previously noted, monetary value of social assets to their owner can be relatively straightforward. But when an asset is used primarily to promote social value, assessing its value is complicated. The IVSC points out that social assets are not typically traded in the open market, so they lack traditionally measured value that can be used as comparable transactions in valuation. In addition, measuring community benefits is not well defined.
In a subsequent paper, “Defining and Estimating Social Value Part II,” the IVSC further explores the issues raised. For example, the council attempts to discern the difference between social value and the social element in environmental, social, and governance (ESG) criteria, saying that there is “crossover” between social value and ESG. However, the council observes that the social component—the “S”—in ESG can include social value, it is typically viewed from the owner’s perspective, while social value is more about the non-owner’s perspective.
The council also discusses the issue of commercial “highest and best” use for public sector assets relative to the cemetery example, suggesting that determining social value in this context requires putting aside the typical interpretation used for for-profit entities and determining the greater number of stakeholders (versus owners) who will benefit.
Where Will Social Value Land?
The IVSC has solicited feedback on all of these issues from the international valuation community, specifically asking about the ESG and “highest and best use” questions. The council is also interested in whether the valuation community believes that nonprofit organizations should be keeping a “social value balance sheet” in addition to traditional balance sheets and what is missing in defining social value that would help quantify this type of valuation.
As markets become more aware of and possibly insist on measuring social value, there’s no doubt this discussion will continue with vigor. As it progresses and the issue continues to be refined, we will keep you up to date.
Interested in discussing this and other contemporary valuation issues? Our team of valuation experts are ready to help.
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