The Cost of Sustainability Capital and the Creation of Sustainable Value by Companies

Journal of Industrial Ecology, Vol. 9, No. 4, 2006

Posted: 16 May 2006

See all articles by Frank Figge

Frank Figge

KEDGE Business School

Tobias Hahn

KEDGE Business School

Abstract

We develop and apply a valuation methodology to calculate the cost of sustainability capital, and, eventually, sustainable value creation of companies. Sustainable development posits that decisions must take into account all forms of capital rather than just economic capital. We develop a methodology that allows calculation of the costs that are associated with the use of different forms of capital. Our methodology borrows the idea from financial economics that the return on capital has to cover the cost of capital. Capital costs are determined as opportunity costs, that is, the forgone returns that would have been created by alternative investments.We apply and extend the logic of opportunity costs to the valuation not only of economic capital but also of other forms of capital. This allows (a) integrated analysis of use of different forms of capital based on a value-based aggregation of different forms of capital, (b) determination of the opportunity cost of a bundle of different forms of capital used in a company, called cost of sustainability capital, (c) calculation of sustainability efficiency of companies, and (d) calculation of sustainable value creation, that is, the value above the cost of sustainability capital. By expanding the well-established logic of the valuation of economic capital in financial markets to cover other forms of capital, we provide a methodology that allows determination of the most efficient allocation of sustainability capital for sustainable value creation in companies. We demonstrate the practicability of the methodology by the valuation of the sustainability performance of British Petroleum (BP).

Keywords: British Petroleum (BP), eco-efficiency, industrial ecology, natural capital, opportunity cost, sustainability indicator

Suggested Citation

Figge, Frank and Hahn, Tobias, The Cost of Sustainability Capital and the Creation of Sustainable Value by Companies. Journal of Industrial Ecology, Vol. 9, No. 4, 2006. Available at SSRN: https://ssrn.com/abstract=901594

Frank Figge

KEDGE Business School ( email )

Domaine de Luminy
BP 921 13288 Marseille Cedex 9, 13288
France

Tobias Hahn (Contact Author)

KEDGE Business School ( email )

Domaine de Luminy - BP 921
BP 921
Marseille, PACA 13288
France
+33491827313 (Phone)

HOME PAGE: http://www.kedgebs.com

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