SUSTAINABLE VALUE BASED MANAGEMENT
A. HOW VALUE-BASED MANAGEMENT WORKS
1. The first purpose of the business is to achieve economic results.
Economic results are measured as ‘value’—described often as
economic value, shareholder value, or enterprise value.
Under competition, only firms that maximise value will achieve
leadership; firms that don’t maximise value will lag, or fail.
The value of any company, or of its individual strategies and investments,
is equal to the present value of the future free cash flows that the entity is
expected to generate.
The growth in the value of the business, backward or forward in
time, is measured by its ability to generate free cash flow.
Enterprise-wide measures based on free cash flow are widely used
for framing strategic decisions, in such areas as acquisitions, joint
ventures, and divestitures, and in new product development, the
opening of new markets, capital budgeting, and human resourcing.
The Decision Rule Of VBM
Choose the business strategy, initiative or action which has been
shown by analysis to have the greatest probability of maximising
enterprise value.
2.
Concentration of resources is the key to economic results.
Different business models and initiatives allocate resources
differently, and achieve different levels of economic results.
Resources are used most effectively when they are allocated to the
business initiatives that maximise the value of the business. This is
the objective of VBM.
3.
VBM depends for its effectiveness on its ability to capture and project all
material factors that are likely to impact on the business over the period
being analysed.
All factors that materially affect business outcomes must be
identified, and incorporated into the operational business model
(the challenge of Inclusiveness).
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These factors must be quantified, and valued financially (the
challenge of Valuation).
The factor trends must be reliably projected for the period (the
challenge of Projection).
The uncertainties of factor trends must be systematically captured
and displayed (the challenge of Risk Management).
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B. HOW SUSTAINABLE VALUE BASED MANAGEMENT WORKS
B.1
THE SUSTAINABILITY FACTORS
REVENUE-LINKED
MARKET-LINKED
COST-LINKED
CLIMATE-LINKED
New products &
services
Renewables
Energy
New markets
Efficiencies:
Energy
Water
Waste
Carbon
Management:
Internal
External
Pricing
premiums
New customer
segments
Full-Cost
Accounting
Carbon Trading
Re-use
Recycling
Re-classified
waste
Differentiation
Materials:
Life-Cycle
Management
Barriers to entry
Operational
environmental
hazards
Strategy:
Political,
Economic,
Social,
Technological,
Demographic
Global Impacts &
Projections
New leverage
existing
intellectual
capital
Branding
Regulation:
Compliance
Community
demands
Strategy:
Existing
Direct impacts
Indirect impacts
Social and
cultural capital
Reputation
capital
Social impacts &
costs
Strategy:
Future business
models
New
technologies
We begin with an overview of the sustainability factors that need to be considered.
Broadly speaking, we assign them to four clusters:
On the revenue side are new products and services, generated from new
research and development, or from new technologies or new leverage of already
existing intellectual capital: the renewable energy sector is the current leader in
this area. We consider potential pricing premiums, particularly in early stages.
The re-use, recycling and reclassification of waste have already proved to be
potent generators of new revenue streams. And there may be untapped social or
cultural capital that can find its way into new revenues if identified, supported
and managed.
Overlapping revenue considerations are those of the market. New customer
segments and entirely new markets are emerging for products in the
sustainability sector. The identification of these markets leads to new value
propositions and differentiation; it erects new, durable, barriers to entry; and it
provides the foundation for new branding and reputation capital strategies.
The cost factors are the best known and, to this point, best managed.
Efficiencies in energy, water and waste are rapidly becoming standard across
most industry sectors. More challenging is the implementation of a full-cost
accounting strategy, with complete life-cycle management: as, for example,
pioneered by Nokia. Sustainability cost management now includes not only
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compliance costs, which will increase as community standards become more
demanding, and the costs of managing operational risks, but the wider social
impacts and costs: unmitigated, these may be the most expensive of all.
Finally, there are the emerging sustainability factors that are being driven by
climate change. These include the new discipline of carbon management, in
both internal and external operations, and in emissions trading. But the primary
impacts will be on strategy: on the transformations that will occur, and are
already occurring, in the global environment in which we do business, both now
and in the future. It is difficult to overestimate their scale and magnitude.
B.2 VALUATION & SUSTAINABILITY FACTORS
REVENUELINKED
MARKET-LINKED
REVENUES
ENVIRONMENTAL
SUSTAINABILITY
CLIMATELINKED
COST-LINKED
RISK MITIGATION
OPPORTUNITIES
RECEIVABLES
SUSTAINABILITY
REVENUES
ACCRUED
EXPENSES
SOCIAL RISK
SUSTAINABILITY
MITIGATION
RISK
EXPECTED CASH
FLOWS
DISCOUNTED
CASH FLOW
VALUATION
EXPECTED
GROWTH
RELATIVE
VALUATION
PAYABLES
SUSTAINABILITY
CHARGES
RISK:
DISCOUNT RATE
CONTINGENT
CLAIM
VALUATION
Each of the three recognised classes of valuation modelling approaches—
Discounted Cash Flow Valuation, Relative Valuation, and Contingent
Claim (Option Pricing) Valuation—draw fundamentally on projections of
expected cash flows, expected growth and measures of risk (in discount or
interest rates).
The main clusters of sustainability factors—linked to revenues, markets, costs
and climate change—generate financial impacts: in the new revenues deriving
from sustainability opportunities, as well as new expenses, including risk accruals;
in capital expenditures to mitigate environmental and social risk; and in the
associated impacts on working capital. Incorporating these new financial impacts
into the valuation frameworks is critical to managing them for maximum
economic value.
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B.3 STEPS OF ANALYSIS AND MODELLING
Here is the sequence of steps by which the shape of a sustainable business is
modelled, its financial results projected, its uncertainties captured, and its
potential value determined. The results of this analysis are leveraged into
sustainable management and sustainable investment.
Modelling sequence
1
Describe the existing Business Model in traditional terms (products & services,
customers, markets, etc.).
2
Expand the business model to include sustainability inputs and outputs
(environmental impact assessment, natural capital analysis). This generates the
Sustainable Business Model.
3
Capture and the implications of the Sustainable Business Model for revenues and
costs, capital budgeting, risk and opportunities, and develop an economic valuation
of these factors.
4
Carry out the standard strategic review (competitive landscape, PESTE trends etc.)
to generate business scenarios and models.
5
Incorporate sustainability scenarios into the strategic review, to capture the impacts
on the business of sustainability factors under different assumptions.
6
Develop sustainable financial models for the business, by incorporating all the results
of above steps into pro-forma financial statements across the period being
considered.
7
Analyse the impact of uncertainties and sensitivities in key variables feeding into the
financial models.
8
Generate integrated valuations of all the business initiatives being modelled.
Prioritise implementation of initiatives by valuations to maximise enterprise value.
9
For Managers: Allocate resources to priority sustainable initiatives, and plan
implementation, control systems, and measurement.
For Investors: Allocate investment funds to companies demonstrating the greatest
growth in projected sustainable economic value.
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C. SUSTAINABLE MANAGEMENT TOOLS
The demands on businesses wishing to implement SVBM go beyond the adoption
of the SVBM framework. There are a number of key management tools which are
required to implement sustainable business operationally. Here is a key set of
such tools:

Environmental Impact Assessment identifies and maps the key factors
affecting of private or public operations. EIA is critical in meeting
regulatory and compliance standards, and in evaluating the environmental
performance of existing and new businesses. In its developed form, EIA is
sometimes referred to as Ecological Footprint.

Social Impact Assessment (SIA) is usually implemented in parallel with
EIA. SIA is a formal discipline, which draws its techniques from the social
sciences, such as sociology, and utilises both quantitative and qualitative
methods. Its aim is to identify and understand the potential impacts on
groups and communities of private or public operations, and to explore
with the affected people pathways for managing or eliminating these
impacts.

Environmental Management Systems lie at the heart of certification
systems such as HACCP and ISO-14001. An effective EMS not only has to
be properly designed as a stand-alone system, but must be full integrated
with the other quality systems that govern quality certification and quality
improvement in the business.

Environmental Accounting is the best established of the new
sustainability disciplines. Embedded within it are Environmental
Management account, its application to cost control; Full Cost Accounting,
the attempt to quantify all environmental inputs into production systems,
including ecosystem services; and Life Cycle Analysis, the identification
and management of all environmental inputs and outputs related to the
firm’s products, from inception to use to ultimate disposal.

Scenario Modelling has become a central planning tool for SVBM.
Sustainability factors derive from systems that are very large, complex,
volatile and non-linear in their development. Physical, social, political and
economic dimensions of these systems interact.

Decisions Analysis is a well-developed discipline that allows for the
systematic analysis of alternative lines of action under uncertainty. When
integrated with Scenario Modelling, it provides a powerful analytic
capability for bringing alternative strategic directions to a decision point.

Climate Change Strategy is an emerging task of real urgency. It
requires strategic analysis of a global order, and utilises Scenario
Modelling, Simulation, Game Theory and other technical tools. Carbon
management has become central to this task, in understanding the carbon
impacts of internal operations, as well as the development of the external
carbon environment, in Emission Trading Schemes and Carbon Tax Policy
development.
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
Project Analysis is a well-established discipline that has for some time
been grappling with the incorporation of sustainability factors. It draws on
Environmental and Natural Resource Economics, and is constructed to deal
with market and non-market, direct and indirect, and use and non-use
factors. It is utilised in both private and public sector projects.
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