Publications
Partners
Activities
Layman's Report
Press Release
News
About the survey
Download
FAQ
Ranking
Sustainable Value
Return to Cost Ratio
Company performance
Geographical results
Sector results
Target Audiences
Dates & Locations
Workshop Programme
About the Handbook
Download
Jobs
Sitemap

We have presented the Sustainable Value approach at a number of conferences. Below we have collected and answered the most frequent questions we have been asked about the Sustainable Value approach and the ADVANCE-project. Feel free to contact us, if your questions is not addressed below.


What is ADVANCE?

What do you look at in ADVANCE?

Why are you only looking at environmental resources in ADVANCE?

Does ADVANCE take into account indirect emissions?

What is the underlying reason for choosing the particular environmental indicators that have been used in the study?

Why haven’t indicators such as electricity use and energy use been included?

Does Sustainable Value cover the entire life cycle?

How can Airbus come out on top in the study? Shouldn’t the environmental impact from a company’s products also be evaluated?

What about mergers/demergers? What if a company sells its most polluting activities?

How have the companies of the ADVANCE survey been chosen?

What is the Sustainable Value approach?

How is Sustainable Value different?

Isn’t this just another “does it pay to be green” study?

What are opportunity costs?

How are the different environmental resources being weighted?

What’s the role of the benchmark?

Why does ADVANCE use the EU15-level as benchmark?

Is it fair to compare globally operating companies to the comparatively strict EU15 benchmark?

Is it fair to compare companies from different sectors to the EU15 benchmark?

Do you look at the value a company creates apart from economic value?

Does Sustainable Value take company size into account?

Who can use the Sustainable Value methodology and the results of ADVANCE?

What about the rebound effect?

Why do you use Gross Value Added instead of profit/results to quantify the value created by the company?

What is the Return to Cost Ratio (RCR) and how is it calculated?


What is ADVANCE?

ADVANCE (Application and dissemination of value-based eco-ratings in financial markets) is an EU-co-funded project in which we apply the Sustainable Value to the assessment of corporate environmental performance. ADVANCE represents the first large scale application of the Sustainable Value approach for the monetary assessment of corporate environmental performance. ADVANCE demonstrates the applicability of Sustainable Value under real world conditions.

Click here to go back to the top.


What do you look at in ADVANCE?

ADVANCE assesses the use of seven different environmental resources of 65 European companies from 16 different countries and 18 sectors. The seven environmental resources are: CO2-emissions, NOx-emissions, SOx-emissions, VOC-emissions, water use, waste generation, and CH4-emissions.

Click here to go back to the top.


Why are you only looking at environmental resources in ADVANCE?

Sustainable Value can consider all the different forms of capital that companies use. Typically companies use economic, environmental and social capital. However, in ADVANCE, the analysis has focused on the use of different environmental resources by European companies. In our publications, there are examples for company assessments that cover economic, environmental and social resources. More triple bottom line assessments are in preparation.

Click here to go back to the top.


Does ADVANCE take into account indirect emissions?

In principle, Sustainable Value takes into account those emissions that are caused by a company in order to create an economic return. This is also the perspective taken by the traditional economic analysis. Consequently, emissions of suppliers are not taken into account. For CO2-emissions, however, in ADVANCE we take into account both direct and indirect emissions. This is due to the current environmental accounting and reporting practise of most of the companies. To date, most of the companies do not report on direct and indirect CO2-emissions separately so that we take into account both direct and indirect CO2-emissions. For all other environmental indicators, ADVANCE only considers direct emissions or impacts, i.e. the impacts that are caused by a company’s own operations and activities.

Click here to go back to the top.


What is the underlying reason for choosing the particular environmental indicators that have been used in the study?

The selection of the seven environmental indicators that have been included into the ADVANCE assessment is based on both methodological and pragmatic reasons. First of all, the main goal has been to create an accurate and in-depth picture of the companies’ environmental performance. Therefore, we decided to take as many different environmental impacts into account as possible. However, an environmental impact can only be taken into account if it is quantifiable. As a consequence, environmental impacts that are of a qualitative nature (for example impacts on habitats and sensitive ecosystems), have not been assessed in ADVANCE. This does not mean that these impacts should be left out – rather, the Sustainable Value methodology can and should be complemented by an evaluation of a company’s qualitative impacts on the environment.

In addition to that, the number of indicators assessed in ADVANCE is limited by the current practice of environmental reporting. The ADVANCE assessment is based on corporate informantion that is publicly available today, mainly through information that is published by the companies themselves, e.g. environmental reports, corporate websites etc. The selection of the seven indicators used in ADVANCE reflects the current state of the art in corporate environmental reporting among European manufacturing companies. As soon as environmental reporting of companies broadens in scope, Sustainable Value can also consider an even wider range of environmental indicators.

Click here to go back to the top.


Why haven’t indicators such as electricity use and energy use been included?

In ADVANCE, the corporate direct and indirect carbon dioxide-emissions as well as other energy-related emissions have been taken into account. An additional assessment of the electricity use and/or the total energy use of the companies would therefore result in double counting, since these emissions account for the main environmental impacts created by energy use. Furthermore, we decided to take the latter emissions into account instead of electricity use or energy use, since it is common practice in environmental reporting to report on these indicators. In addition to that, there is no fixed conversion between a company’s energy use and its emissions. Instead, the amount of emissions strongly depends on the specific technologies that are applied. Therefore, in order to create an accurate picture of the company’s actual impact on the environment, we decided to use carbon dioxide and other energy-related emissions as the key indicators of the company’s energy-related environmental performance.

Click here to go back to the top.


Does Sustainable Value cover the entire life cycle?

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, Sustainable Value can be calculated. Unfortunately, such data is not available to date. Therefore, in ADVANCE the assessment covers only the resource use within each company. However, the more companies are assessed with Sustainable Value, the more it will be possible to assess entire value chains by also covering a company’s suppliers and customers.
Another advantage of Sustainable Value is that it facilitates life-cycle analyses. A client not only buys a product or a service from a supplier but the supplier’s Sustainable Value at the same time. Unlike existing approaches this «rucksack» is expressed in a single monetary figure. This facilitates not only life cycle calculations but also allows comparisons with the traditional economic perspective.

Click here to go back to the top.


How can Airbus come out on top in the study? Shouldn’t the environmental impact from a company’s products also be evaluated?

This analysis covers the production that takes place within the companies of the ADVANCE survey. This corresponds to the activities that create value within the companies. Environmental impacts that are caused by suppliers or customers are not taken into account. Conceptually, environmental impacts along the life cycle can be considered quite easily. However, current environmental reporting does not allow to systematically account for environmental impacts of the entire life cycle, as companies do not systematically report the environmental impacts that go along with the supplies they buy and with the products they sell.
When interpreting the results of this survey we must of course keep in mind that some value creating sectors (for example the automobile sector) rely on other sectors that are not creating Sustainable Value at this stage (for example the oil & gas sector). However, the results of the ADVANCE survey can also be used to make an estimate of the overall Sustainable Value of the life cycle. Economically, the value of a product consists of the sum of the Value Addeds of different production stages. This also applies to Sustainable Value.

Click here to go back to the top.


What about mergers/demergers? What if a company sells its most polluting activities?

In ADVANCE we assess the use of environmental resources within the boundaries of a company. This means that if a company sells part of its activities or buys new activities, the amount of environmental resources used will also reflect the new scope of activities. However, at the same time Gross Value Added will change as well. If a company sells its least eco-efficient activities or buys new highly eco-efficient activities, this will have a positive effect on Sustainable Value and vice versa. In order to capture such effects, in ADVANCE we have analysed Sustainable Value over a time period of three years. This allows us to identify changes in Sustainable Value. We are then also able to distinguish between changes in Sustainable Value due to mergers/demergers or due to changes in corporate (environmental) management.

Click here to go back to the top.


How have the companies of the ADVANCE survey been chosen?

The ADVANCE assessment is based on corporate data that is publicly available today via company reports. Therefore, the choice of companies to be included in the survey depended to a large degree on how well the companies report on their environmental performance. It was initially planned to assess at least 50 European companies’ environmental performance with the Sustainable Value approach. We have now covered 65 companies. We believe that there may be about two to three dozens more European companies that report sufficiently good environmental data to be included in such an analysis. However, one of the main findings of the survey is that the quality of corporate environmental reporting has to improve significantly.

Click here to go back to the top.


What is the Sustainable Value approach?

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 €).

Click here to go back to the top.


How is Sustainable Value different?

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? For this purpose, we compare the return a company creates by using different resources to the return that a benchmark would have created with these resources (opportunity costs). Value is only created if the return of the company is higher than the return that the benchmark would have achieved.
Sustainable Value integrates different forms of economic, environmental and social resources. Conventional performance assessments focus on economic capital as a resource. With its focus on economic as well as environmental and social resources Sustainable Value is the first fully integrated value-oriented assessment tool.

Click here to go back to the top.


Isn’t this just another “does it pay to be green” study?

The ADVANCE study differs fundamentally from the “does it pay to be green” studies that have been conducted over the last decades. These studies try to find a link between good environmental management and conventional economic success. However, this leads to an instrumental view on environmental aspects. From this perspective companies have a good environmental performance when their environmental performance results in a higher return on economic capital. “Does it pay to be green” studies therefore analyse if environmental resources have been used in a way that boosts economic success. Any environmental management that does not contribute to conventional economic success is not covered.
ADVANCE and Sustainable Value does not take such an instrumental view but looks at all resources companies use in a fundamental way. It looks at the use of environmental resources in the same way the use of economic resources is assessed. As a consequence, environmental resources are not instrumental and thus subordinate to economic aspects, but they are treated on the same level. To receive a favourable rating companies must provide a higher return on their entire set of resources – not just on their economic capital. Sustainable Value thus provides an integrated measure of corporate sustainable performance that takes into account the use of economic, environmental and social resources in an unbiased way.

Click here to go back to the top.


What are opportunity costs?

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.

Click here to go back to the top.


How are the different environmental resources being weighted?

Weighting different environmental 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 and in ADVANCE 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.

Click here to go back to the top.


What’s the role of the benchmark?

The benchmark serves to determine the opportunity costs. 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 costs. The benchmark thus determines the alternative investment that is foregone. In ADVANCE, we use the efficiency of the EU15 to determine the opportunity costs of the use of seven different environmental resources in companies.

Click here to go back to the top.


Why does ADVANCE use the EU15-level as benchmark?

ADVANCE is a European study. It has received co-funding from the LIFE Environment programme. One of its major goals is to assess European industry’s environmental performance in monetary terms. In order to allow transparent comparisons between companies we have chosen the EU15 level as benchmark. This means that every company is assessed against the same benchmark. In addition, we conduct a future performance scenario. In this scenario, we use the EU15 economic and environmental performance targets as benchmark. This shows which companies use their environmental resources in a way that is inline with the economic and environmental performance targets of the EU15. With the EU15 as benchmark we can determine both, sector leaders and the potential of structural change.

Click here to go back to the top.


Is it fair to compare globally operating companies to the comparatively strict EU15 benchmark?

A benchmark is a hurdle that companies should (be able to) clear. The choice of a benchmark is therefore always a normative judgement. This applies not only to the Sustainable Value concept but also to benchmarks in financial management. An investor who chooses a stock market index as a benchmark for his/her investment, presupposes that the investment ought to outperform this benchmark.
The rationale behind using the EU15 as a benchmark is the assumption that companies domiciled in the EU15 ought to be able to outperform the economy of the EU15 with their operations – no matter if they are inside or outside the EU15.

Click here to go back to the top.


Is it fair to compare companies from different sectors to the EU15 benchmark?

The current practise of corporate environmental performance assessments is dominated by the best in class approach. This means that only companies from the same sector are compared and the best performing companies are identified for each sector. Best in class studies do not compare different sectors and thus don’t take into account the potential of structural change. However, it is uncontested that sustainable development requires our economies to change from a more resource intensive industry structure to a more knowledge based industry structure. By comparing all the companies to the EU15 benchmark, we show the potential of structural change. This clearly sets resource intensive apart from knowledge driven companies.

Click here to go back to the top.


Do you look at the value a company creates apart from economic value?

In ADVANCE we assess how much return a company creates with its environmental resources compared to the EU15 on average. We use Gross Value Added as return measure. This is a rather broad measure. It includes not only profits and interest payments – i.e. the value created for capital providers – but also the value created by the company for the state (tax on profit) and for the employees in terms of personnel expenses. ADVANCE thus covers the value companies create for a range of different stakeholders.

Click here to go back to the top.


Does Sustainable Value take company size into account?

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 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.

Click here to go back to the top.


Who can use the Sustainable Value methodology and the results of ADVANCE?

The results of the ADVANCE survey and 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.

Click here to go back to the top.


What about the rebound effect?

For many years eco-efficiency has been the big buzz-word in the discussion on corporate environmental performance. The basic idea behind eco-efficiency is that companies should strive to create more value with less resources. However, the concept of eco-efficiency has also been subject to some criticism. It has been argued that an enhanced eco-efficiency is no guarantee for a reduction of environmental impacts. In the presence of economic growth, despite an enhanced eco-efficiency more environmental resources might be consumed. This has been labelled the rebound effect. Sustainable Value takes into account the rebound effect. In doing so, it distinguishes between the corporate and the benchmark level. Sustainable Value allows that a more eco-efficient company uses more environmental resources. However, this happens at the expense of the resource use of other companies. In the valuation logic of Sustainable Value, the overall consumption of environmental resources and thus the overall environmental burden remains constant on the benchmark level. In ADVANCE, we look at two different scenarios, one with constant overall resources use and one with a reduced overall resource use. Sustainable Value thus shows the potential of a more efficient allocation of a given and limited amount of economic, environmental and social resources.

Click here to go back to the top.


Why do you use Gross Value Added instead of profit/results to quantify the value created by the company?

Companies create value for different stakeholders. Profits benefit shareholders. This is an important but incomplete indicator to account for the overall value creation of a company. In ADVANCE, we compare company performance with the Gross Domestic Product of the EU15. The Gross Domestic Product reflects the economic activity within the EU15 before depreciation of the capital stock. As the corresponding economic indicator on the corporate level we used Gross Value Added, because Gross Value Added represents a company’s contribution to the Gross Domestic Product (GDP) of an economy. GVA is a rather broad measure. In addition to the value created for the company’s providers of capital, it also takes into account the value that is created for the state (in terms of profit tax payments) and for the company’s employees (in terms of personnel expenses).

Click here to go back to the top.


What is the Return to Cost Ratio (RCR) and how is it calculated?

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 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.

Click here to go back to the top.


Printable Version

Home | Contact us!