For many organisations today, a significant portion of their value resides outside the balance sheet.
This off-balance sheet value is usually attributed to intangible assets, which represent an expectation that there will be future economic benefits flowing to an organisation from these assets. It is no coincidence that financial reporting takes them into account during mergers and acquisitions (M and A).
It is well established that the value of a business is a combination of the net assets reflected on the balance sheet plus any identifiable intangible assets that meet the contractual/legal or separability criterion.
Therefore, anyone acquiring a business would consider these intangible assets in the pricing negotiations. Some common intangible assets include brand value, customer relationships and contracts, patented technology, and employment contracts.
These intangible assets have a close relationship to some of the material sustainability risks and opportunities that organisations identify during the materiality process required for sustainability reporting. For example, patented technology could be related to a digitisation topic, while an employee contract could relate to a talent topic.
The relationship between an organisation’s sustainability material topic and its intangible assets presents a compelling business case for organisations to embrace sustainability.
The ability to manage and capitalise on opportunities within sustainability can help organisations increase the value of their intangible assets. It implies that how well an organisation performs in achieving its sustainability targets will have an impact on an organisation’s financial fortunes and long-term viability.
Organisations will often find that their material sustainability topics are matters that affect their long-term competitiveness and enable their business growth strategy.
Therefore, the value of intangibles is not just in the present. Still, in the long-term implications they have on an organisation, which is why they are valued and included during M and A transactions.
Sustainability enables organisations to place equal focus on both the short-term and long-term priorities of an organisation when defining time horizons for managing sustainability risks and opportunities. It also requires organisations to understand the financial effects of sustainability on the organisation.
Therefore, organisations should view sustainability as a catalyst for growing the value of the business while ensuring that long-term priorities and performance are not compromised in favour of short-term gains and focus only.
The writer a is a Partner at PwC Kenya. He is an author who writes and speaks widely on corporate reporting topics