- What is the Sustainable Value approach?
- How is Sustainable Value different?
- Can you give me an example?
- Are you only looking at CO2?
- Are there any full scale examples?
- What are opportunity costs?
- How is Sustainable Value calculated?
- What is the Return to Cost Ratio (RCR)?
- Does Sustainable Value cover the entire life cycle?
- How are the different resources being weighted?
- What's the role of the benchmark?
- Does Sustainable Value account for company size?
- Who can use the Sustainable Value methodology?
The Sustainable Value-approach is the first value-oriented approach to the assessment and management of sustainable performance. Sustainable Value deals with sustainable performance in the same way in which financial markets deal with economic performance. Sustainable Value assesses sustainable performance in monetary terms (e.g. in €).
Existing approaches to assess and manage sustainable performance are burden-oriented. They concentrate on how bad, costly or burdensome the use of a resource is. A typical question in this context is: How dangerous or costly is the emission of a ton of CO2?
Sustainable Value is value-oriented. Sustainable Value addresses the same question in a different way. How much value is created by a ton of CO2?
Sustainable Value integrates different forms of economic, environmental and social capital. Conventional performance assessments focus on economic capital. Sustainable Value is thus the first fully integrated value-oriented assessment tool.
According to British Petroleum’s environmental report BP emitted 73.4 million tons of CO2 in 2001. In the same year BP created about 15.5 billion £ Net Value Added (own estimates based on BP’s Annual Report). BP thus created about 212£ per tonof CO2.
Based on information by the UK’s National Statistical Office we estimate that the UK as a whole created 1,545£ per ton of CO2.
Each ton of CO2 that is used by the UK average is 1,333£ more value-creating.
Extrapolated to BP’s total use of CO2 a total of about 98 billion is thus lost.
Sustainable Value considers all the different forms of capital that companies use. Typically companies use economic, environmental and social capital.
We have done around 20 full scale assessments up to this point. We have assessed among others: BMW, BP, DaimlerChrysler, Danone, FIAT, Henkel, Novozymes, PSA, Renault, Repsol, Unilever, VA Tech, Wacker Chemie.
The ADVANCE project has assessed the environmental performance of 65 European companies using the Sustainable Value approach.
Opportunity costs are the return that is foregone because a resource has been used at a different place. Reading these FAQs creates opportunity costs. One cannot read these FAQs and the latest Harry Potter at the same time. The joy of reading the latest Harry Potter is lost, if one decides to read these FAQs instead. This foregone joy can be considered to be the (opportunity) cost of reading these FAQs. In the financial markets, the return that could have been created by investing capital differently is interpreted to be the opportunity cost of an investment. An investment creates value if it covers its opportunity costs, i.e. if it yields more return than could have been created by other investments. Opportunity cost thinking is used to allocate capital in a value-creating way.
Sustainable Value is calculated by determining where the resources of the company create more return: within the company or in the benchmark. Learn how to calculate Sustainable Value here or watch the tutorial here.
When companies are compared, a size effect gets in the way. Usually, large companies are expected to have larger profit, sales or cash flow figures. The same applies to Sustainable Value figures. We therefore take company size into account when comparing different companies. For this purpose, we use the so-called Return to Cost Ratio (RCR). The Return to Cost Ratio (RCR) compares the Gross Value Added of the company to the return the benchmark would have created with the resources (opportunity costs). A Return to Cost Ratio larger (smaller) than 1 indicates that the company yields more (less) return per unit of resource, i.e. the company uses its bundle of resources more (less) efficiently than the German economy or the EU15 on average. For example, a Return to Cost Ratio of 2 : 1 indicates that a company uses its resources twice as efficiently as the benchmark, a Return to Cost Ratio of 1 : 2 shows that a company uses its bundle of resources only half as efficiently as the benchmark.
Sustainable Value assesses whether a company uses its bundle of economic, environmental and social resources in a value creating way. It thus covers the activities that occur within the boundaries of each company. Methodologically, Sustainable Value is compatible with life cycle thinking. As soon as there is a complete data set on the use of resources and return covering the entire life cycle, a Sustainable Value for the entire life cycle can be calculated. Unfortunately, such data is not available to date. Therefore, Sustainable Value assessements so far have covered only the resource use within each company.
The weighting of different environmental and social resources is a problem that has attracted much attention during the last two decades. However, there is still no consensus on the weights of all different environmental impacts relative to each other. Consequently, we still have no answer to the question of how bad 1 ton of CO2-emissions is compared to 1 ton of waste generated or 1 m3; of fresh water used. With Sustainable Value we address this problem in a new way. We stop asking how bad one environmental problem is relative to another. Instead, we look at how much a resource contributes to the creation of a return relative to another resource. If, e.g., the benchmark needs 2 tons of CO2-emissions and 1 m3; of fresh water to create a return of € 1, the weight between CO2 and water is 1 : 2.
The benchmark serves to determine the opportunity cost. In financial analysis, the market average return is often used as a benchmark. If an investment yields 5% and the market return is only 3%, then the investment beats the benchmark and has earned its opportunity cost. The benchmark thus determines the alternative investment that is foregone. In the Sustainable Value Calculator, we currently use the efficiency of the EU15 and the German economy to determine the opportunity cost of the use of twelve different resources in companies.
When companies are compared, a size effect gets in the way. Usually, large companies are expected to have larger profit, sales or cash flow figures. The same applies to Sustainable Value figures. We therefore take company size into account when comparing different companies. For this purpose, we use the so-called Return to Cost Ratio (RCR). The Return to Cost Ratio (RCR) compares the Gross Value Added of the company to the return the benchmark would have created with the resources (opportunity cost). A Return to Cost Ratio larger (smaller) than 1 indicates that the company yields more (less) return per unit of resource, i.e. the company uses its bundle of resources more (less) efficiently than the German economy or the EU15 on average. For example, a Return to Cost Ratio of 2 : 1 indicates that a company uses its resources twice as efficiently as the benchmark, a Return to Cost Ratio of 1 : 2 shows that a company uses its bundle of resources only half as efficiently as the benchmark.
The results of an assessment with the Sustainable Value approach are useful for different stakeholders. For instance, managers can use the Sustainable Value approach to measure, monitor, and communicate their environmental performance. Moreover, they can use the results of the future performance scenario as early warning signals for particularly relevant environmental areas in the future. Socially responsible investors and analysts can use the Sustainable Value methodology to identify out- and under-performers. The future performance scenario is particularly interesting in the context of risk analyses: SRI-investors can determine which companies are most vulnerable to tightened regulation in different environmental areas. Socially responsible investors and analysts will benefit widely from the value-based logic of the analysis because this makes the results compatible with standard financial analyses. Finally, regulators can use the Sustainable Value approach to identify those sectors and companies that are most critical for reaching economic and environmental performance targets.