How to calculate Sustainable Value

Sustainable Value is a valuation tool that assesses the sustainability performance of companies using opportunity cost thinking. To calculate the Sustainable Value of a company (or other organisational entities), it must be determined where the financial, environmental and social resources of the company create more return: within the company or in the benchmark. As a result Sustainable Value shows how much more or less return a company created with its set of economic, environmental and social resources compared to a benchmark. In the following the assessment logic of Sustainable Value will be explained by using the example of the performance of the German consumer goods company Henkel in the year 2004.

For example, Henkel emitted 806,173 tons of CO2 in 2004. At the same time, Henkel generated a gross value added of € 3.2 billion and thus € 3,993 per ton of CO2. The German economy, however, generated € 2,534 gross domestic product per ton of CO2. In order to determine the opportunity cost of Henkel's CO2-emissions, we now have to calculate how much return the benchmark would have generated with Henkel's emissions. Therefore, we multiply Henkel's 806,173 tons of CO2 with the CO2-efficiency of the benchmark (806,173 tons of CO2 x € 2,534 per ton of CO2 = € 2.04 billion). These € 2.04 billion represent the opportunity cost of Henkel's CO2-emissions. Comparing this opportunity cost, i.e. the return the benchmark would have generated with the CO2-emissions, to the return the company actually generated with these emissions, we see that the benchmark would have generated a lower return with the resources than Henkel. In other words, in 2004 Henkel used its CO2-emissions in a value creating way. The value contribution of Henkel's CO2-emissions is therefore positive and amounts to € 1.2 billion.

Opportunity Costs and Value Contributions

To find out whether a company used its resources in a value-creating way, we apply the methodology described above to every resource considered. For every resource we compare the return that is generated by the company to the return the benchmark would have achieved with the resource (i.e. the opportunity cost). The spread between both figures is called value contribution. The value contribution thus shows how much more or less return the company has generated with the resource in comparison to the benchmark. In the last step of the evaluation the sum of all value contributions is divided by the number of resources considered in the assessment. The result of that division is called the Sustainable Value.

Opportunity Costs and Value Contributions

The Sustainable Value

In our example, Henkel generated a Sustainable Value of about € 1.3 billion in 2004. In other words, Henkel managed to generate € 1.3 billion more gross value added with its set of six resources than the average company in the German economy. The Sustainable Value as an absolute figure thus shows, how much more (positive Sustainable Value) or less (negative Sustainable Value) return a company generates with a given set of resources in comparison to a benchmark.

As an absolute monetary figure Sustainable Value depends on company size. We tackle this problem by relating the return of a company to another indicator representing the size of the company: its opportunity costs. The resulting indicator is called the Return to Cost Ratio (RCR). The Return to Cost Ratio puts the return of a company in relation to the return the benchmark would have created with the same set of resources (opportunity cost).

The Sustainable Value
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The Return to Cost Ratio

In 2004, the gross value added of Henkel was 1.7 times higher than its opportunity costs. In other words, Henkel used its six resources 70% more efficiently than the German national economy on average. The Return to Cost Ratio (RCR) shows by which factor a company uses its resources more or less efficiently than a benchmark. A RCR > 1 thus shows that a company is using its resources more efficiently than the benchmark. A RCR < 1 stipulates that a company is using its resources less efficiently than the benchmark. A RCR of 1 : 2 hence shows that a company is using its resources only half as efficiently as the benchmark. Generally speaking the RCR represents a relative measure of corporate sustainability performance in relation to a benchmark.

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