The long-term success and financial viability of organisations is hinged on their ability to create value sustainably over time. Value creation translates to relevance for organisations because it lies at the heart of why they exist in the first place.
Value creation is also a fundamental concept identified in the Integrated Reporting Framework. By using a mix of capitals (financial, human, intellectual, manufactured, natural, social, and relationship) to create value, organisations must also recognise that value can be preserved or eroded.
The creation of value by an organisation should also be viewed from two main perspectives. The first is identifying the value created, preserved or eroded for the organisation itself, which is of interest to providers of capital, while the second is the value created, reserved or eroded for other stakeholders across society.
The Integrated Reporting Framework also notes that providers of capital, such as investors, are interested in both the value created for the organisation itself and the value it creates for others, which affects its ability to create value for itself.
The connection between the value an organisation creates for itself and that created for others can be assessed through its activities, interactions, and relationships. This understanding is a principle applied at the heart of sustainability reporting today, focused on identifying the material activities, interactions and relationships that impact value creation over time.
Therefore, in the context of an investor interested in understanding the material activities, interactions, and relationships of organisations that impact the value created for other stakeholders and could ultimately affect the value created for the organisation itself, the principle of financial materiality is established.
Organisations also have to assess value erosion or preservation in relation to the capitals.
A business model that depletes critical capital required for long-term competitiveness ultimately affects the organisation’s financial performance.
For example, an organisation overly focused on short-termism and delivering financial returns today at the expense of adequate investment in the human capital and digital infrastructure required to compete favourably in the future might be making a trade-off that reduces its ability to create value for the organisation in the long run.
A good understanding of value creation by organisations, particularly through the eyes of investors, will ensure they provide relevant sustainability disclosures.
