Assessing the Sustainability of the Business Model: Firm Governance Using the Sustainable Value Creation Framework and Its Measurements

Abstract

The generally accepted definition of sustainability's has a future orientation where "the needs of the present" are satisfied "without compromising the ability of future generations to meet their own needs” (Brundtland, 1987). That sustainability is at the firm level (as in von Carlowitz, 1712) is an increasingly self-evident proposition. Yet leaders aspiring to make their organizations sustainable face a multitude of challenges, and not exactly because of a lack of choice in the CSR and ESG options available to them. Bafflement can easily turn into frustration when inconsistency, the lack of connection to the firm’s business model or poor-quality data become apparent.

On the other hand, progress towards applying sustainability has been considerable over the last decade as exemplified by the ‘big’ global ESG framework and standard-setting organizations. Yet despite the progress made by the copious number of frameworks and measurements, serious issues and blind spots persist. For instance, monopoly positions, subsidies or regulatory privileges are clearly unsustainable and yet rarely captured by existing sustainable frameworks and measurements. This is but one issue—a review of all those identified in the academic and practitioner literature is the paper's first step.

In a second step, this paper proposes requirements for sustainability frameworks and measurements. These include: (i) comprehensive capture of sustainable activities; (ii) comprehensive capture of unsustainable activities; (iii) pricing all the value creation and appropriation of the firm; (iv) measuring business model sustainability in relation to the financial statement; (v) measuring the balance of the business model’s sustainable and unsustainable activities. In the third and final step, the paper discusses two sustainable value creation measurements (VCr/VCp) anchored in a multi-disciplinary body theory while developing specific metrics for their calculation. Once empirically validated, the VCp/VCr measurements might inform managers and investors in their choices, inform public policy and could even be employed to adjust equity valuations and credit ratings.

Keywords: sustainability, value creation, value extraction, redistribution, financial reporting, ESG, CSR, metrics

JEL Classification: G1, G11, G32, G28, G38, O4, O25, Q01, Q05, Q56