gri conference - 28 may - hahn and figge - carbon performance and measurement panel

Carbon performance assessment with the Sustainable Value approach

Dr Tobias Hahn

Euromed Management School, Marseille (France)

Euromed Management School

Marseille

Queen‘s University

Management School Belfast

Euromed Management School, Marseille (France)

Prof Frank Figge

Queen’s University Management School, Belfast (UK)

Overview

� The quest for a truly integrative analysis of corporate carbon

performance

� Measuring corporate carbon performance using the

- 2 -© Hahn & Figge 2010

� Measuring corporate carbon performance using the

opportunity cost based Sustainable Value approach

� Practical application to some car manufacturing companies

� Main implications

Different ways of looking into corporate carbon performance

Isolated Integrated

Instrumental

Focus: Economic benefit

Analysis based on: Environmental


Analysis based on: Environmental,

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Instrumental Analysis based on: Environmental OR social performance

Analysis based on: Environmental, social AND financial performance

Fundamental

Focus: Environmental or social benefit

Analysis based on: Environmental OR social performance

Focus: Economic, environmental and social benefit


Source: Figge & Hahn 2008

© Hahn & Figge 2010

Different ways of looking into corporate carbon performance

Isolated Integrated

Instrumental


Analysis based on: Environmental


Analysis based on: Environmental, Is carbon performance related to

financial performance?

Does carbon performance

improve financial performance?

- 4 -

Instrumental Analysis based on: Environmental OR social performance


Fundamental





financial performance? improve financial performance?

Is carbon performance

acceptable?

Is the bundle of carbon and

financial performance positive?


Instrumental vs fundamental and isolated vs. integrated

� Instrumental approaches subordinate environmental and social aspects to financial performance. � To which degree does environmental and/or social performance contribute to financial performance?

� From a fundamental perspective environmental and social performance is assessed independently of whether it supports financial performance. � To which degree are companies environmentally and/or socially responsible?

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responsible?

� Isolated approaches analyse environmental, social and economic performance aspects separately from each other. This means that they the environmental or social performance of a company separately from the financial performance.

� Integrated approaches to sustainable investment analysis assess environmental, social and economic aspects together. They cover and assess all three domains of sustainable performance.


Isolated instrumental approaches

� Separate assessment of the environmental and social

performance on the one hand and financial performance on

the other hand

� Assessment of environmental and social aspects conducted

Isolated Integrated

Instrumental





Fundamental





- 6 -

from an instrumental perspective:

� It is assessed if environmental and/or social performance

contributes to financial performance.

� Studies that investigate the correlation between corporate

environmental and/or social performance and corporate

financial performance (Margolis & Walsh, 2003; Orlitzky et al., 2003)


Integrated instrumental approaches

� Address the causal link between corporate environmental

and social performance and firms’ financial performance

� It is assessed if environmental and/or social performance

contributes to financial performance.

Isolated Integrated

Instrumental





Fundamental





- 7 -

� Environmental and social aspects are only considered, if and

to the degree to which they contribute to a better financial

performance.

� Approaches that analyse environmental and social aspects

as possible value drivers that enhance corporate value and

increase risk-adjusted free cash flows (Figge, 2005; Hart & Milstein, 2003;

Schaltegger & Figge, 2000)


Isolated fundamental approaches

� Assess corporate environmental and social performance

independent of their support to financial performance

� Environmental and social aspects are considered as an end

in themselves.

Isolated Integrated

Instrumental





Fundamental





- 8 -

� Fall short of integrating and balancing the different

dimensions of corporate sustainable performance

� Screening and rating approaches (between positive and

negative SRI screens) (e.g. Figge, 2000; Kinder & Domini, 1997; Schepers & Sethi, 2003)


Integrated fundamental approaches

� Assess the return on a bundle of economic, environmental

and social resources

� Environmental and social issues on a par with financial and

economic outcomes � no instrumental subordination

Isolated Integrated

Instrumental





Fundamental





- 9 -

� Environmental and social aspects are considered as

productive assets next to economic capital for the creation of

value.

� Sustainable Value approach (Figge, 2001; Figge & Hahn 2004; 2005)


Sustainable Value: An extended opportunity cost perspective

� Financial performance and shareholder value analyses are

based on the notion of opportunity cost.

� Economic or shareholder value is created whenever the

return on capital is higher than the opportunity cost of

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capital.

� Sustainable Value adopts opportunity cost thinking and

extends it to cover also environmental and social resources.


David Green, 1894

- 11 -

Green 1894


Opportunity cost based analysis of corporate carbon performance

� To create value the use of the bundle of economic, environmental and social resources must earn its opportunity cost.

� Economic or shareholder value: Capital efficiency of the company > capital efficiency of the market

� Carbon value: Carbon efficiency of the company > carbon

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� Carbon value: Carbon efficiency of the company > carbon efficiency of the market

�Fundamental analysis of environmental and social performance that complements shareholder value analysis

�Sustainable Value is created whenever the bundle of economic, environmental and social resources is used more efficiently than on the market


Allocation of economic capitalThe traditional perspective

BMW Daihatsu GM Renault

ROC 5.8% 3.7% 0.4% 2.4%

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Market 2.79%

Decision


Allocation of environmental capitalThe Carbon Value perspective

BMW Daihatsu GM Renault

ROCO2 3,230 €/t 625 €/t 111 €/t 1,950 €/t

- 14 -

ROCO2 3,230 €/t 625 €/t 111 €/t 1,950 €/t

Market 784 €/t

Decision


Here’s how we have allocated our resources

Daihatsu BMW Daihatsu BMW

“Economic” capitalists “Environmental” capitalists

Eco

no

mic

pe

rfo

rma

nce

Hig

h

Eco

no

mic

pe

rfo

rma

nce

Hig

h

- 15 -

GM Renault GM Renault

Environmental performance

Eco

no

mic

pe

rfo

rma

nce

Low High

Lo

w


Eco

no

mic

pe

rfo

rma

nce

Low HighL

ow


We are stuck!

Daihatsu BMWE

co

no

mic

pe

rfo

rma

nce

Hig

h

- 16 -

GM Renault


Eco

no

mic

pe

rfo

rma

nce

Low High

Lo

w


Assessing Economic Performance...

BMW

Car

manufacturing

sector

Capital efficiency

[EBIT / Total assets]5.81% 2.97%

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Sources: Annual Report BMW Group 2005, Annual Reports of other car manufacturers, own calculations.

Value spread 2.84%

Capital use € 62.09bn

Value contribution € 1.76bn


… and Carbon Performance, analogously.

BMW

Car

manufacturing

sector

CO2-Efficiency

[EBIT / t of CO2-emissions]3,231 784

Value spread

- 18 -

Sources: Annual Report BMW Group 2005, Sustainability Report BMW Group 2007/2008,

Annual and Sustainability/Environmental Reports of other car manufacturers, own calculations.

Value spread

[EBIT / t of CO2-emissions]2,447

CO2-emissions [t] 1,113,379

Value contribution € 2.72bn


Integrated fundamental assessment of capital and CO2 in the automobile sector

Economic profit

e2 profit

2.97%

[EBIT/Total Assets]

Econom

ic p

erfo

rmance

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e2 lossEnviron-mental profit

784 €/t

[EBIT/ t of CO2-emissions] Environmental performance

Econom

ic p

erfo

rmance


Integrated fundamental assessment of capital and CO2 in the automobile sector

Economic profit

e2 profit

2.97%

[EBIT/Total Assets]

BMW

Econ. value:

€ 1.76bn

CO2-value:

€ 2.72bn

Daihatsu

Econ. value:

€ 0.04bn

CO2-value:

€ –0.06bn

Econom

ic p

erfo

rmance

- 20 -

e2 lossEnviron-mental profit

784 €/t

[EBIT/ t of CO2-emissions]

GM

Econ. value:

€ –9.77bn

CO2-value:

€ –8.66bn

Renault

Econ. value:

€ –0.33bn

CO2-value:

€ 0.84bn


Econom

ic p

erfo

rmance


Main Implications

� With Sustainable Value, corporate carbon performance is

neither analysed separately nor are they instrumentally

subordinated to financial performance.

� Integrated fundamental monetary measure of carbon

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performance that is

(a) based on opportunity cost thinking and

(b) takes into account financial performance and carbon

performance at the same level.


Conclusions

� Sustainable Value is the first value-oriented approach for the assessment of corporate sustainable performance.

� Sustainable Value builds on well established opportunity cost thinking.

� At the same time it expands its use and application beyond the singular focus on economic capital.

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the singular focus on economic capital.

� It shares the value-orientation of existing tools and techniques of the financial markets.

� Sustainable Value allows to measure and manage carbon performance in an integrative manner with financial performance.


Thank you very much!

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Thank you very much!


Contact information

Dr Tobias Hahn

Associate Professor of Corporate

Sustainability, CSR and

Environmental Management

Euromed Management School

Professor Frank Figge

Professor of Management and

Sustainability

Queen's University Management

School

- 26 -

Domaine de Luminy

13288 Marseille

France

E-Mail: tobias.hahn@euromed-

management.com

25 University Square

Belfast BT7 1NN, Northern Ireland,

UK

E-Mail: [email protected]

gri conference - 28 may - hahn and figge - carbon performance and measurement panel

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