Companies are more and more confronted with the need to operate in a sustainable way and contribute to sustainable development. Catchphrases like “Eco-Efficiency” or the “Triple Bottom Line” express the idea that while striving for economic prosperity corporate decision makers should take into account the environmental and social consequences of their business. However, a closer look reveals that today’s business decisions are primarily driven by financial goals. Sustainability issues play a minor role at best. Our economic activity thus continues to reduce the environmental and social capital. However, we need this environmental and social capital – alongside economic capital – to create value in the future. Only companies that consider environmental, social and economic capital in their decisions can create truly sustainable value.
So, how can companies create Sustainable Value? There’s obviously the easy answer. Less environmental burden, less social burden and more economic value. But what happens when some emissions go up and others go down? Or the environmental burden is reduced but the social burden raises? This is where measuring sustainable performance comes into play.
There is a yet uncounted number of different approaches to measuring sustainable performance. They all have a similar goal: Make different burdens comparable, so that trade-offs can be solved. And they all face the same problem – a common denominator for all burdens cannot be found.
But why focus on burdens? Companies do not exist to produce burdens but to create value. So why not value companies regarding how good they are at using resources to create value? This logic is used by the financial markets to allocate capital. Why not extend this logic to cover more than just economic capital?
We have developed a value-oriented methodology to assess the sustainable performance of companies and other economic entities, called Sustainable Value. Sustainable Value allows to assess sustainable performance in monetary terms. It makes use of exactly the same opportunity cost thinking that dominates the financial markets. On the one hand it is the first method to use opportunity cost thinking to assess sustainable performance. On the other hand it falls back upon an idea that was circulated over a hundred years ago:
“But, when we once recognize the sacrifice of opportunity as an element in the cost of production, we find that the principle has a very wide application. Not only time and strength, but commodities, capital, and many of the free gifts of nature, such as mineral deposits and the use of fruitful land, must be economized if we are to act reasonably. Before devoting any one of these resources to a particular use, we must consider the other uses from which it will be withheld by our action; and the most advantageous opportunity which we deliberately forego constitutes a sacrifice for which we must expect at least an equivalent return.” (Green 1894, p. 224)
Sustainable Value is the first method to translate these insights into a sustainable assessment methodology. We are now able to assess the sustainable performance of companies in monetary terms. Sustainable Value allows an integrated assessment of the use of a whole bundle of different economic, environmental, and social resources. Sustainable Value thus goes beyond the assessment of economic capital of the financial markets and integrates all different forms of capital that are relevant for sustainable development. Our assessments have yielded first results and our assessments show: A single sustainable laggard can drag down the United Kingdom’s sustainable performance by 72 billion £ – almost 8% of the UK’s Gross Domestic Product. But there are other, sometimes surprising examples. For example a car manufacturer that contributes positively to Europe’s sustainable performance.