Frank Figge

Bio-folio: applying portfolio theory to biodiversity

Genes, species and ecosystems are often considered to be assets. The need to ensure a sufficient diversity of this asset is being increasingly recognised today. Asset managers in banks and insurance companies face a similar challenge. They are asked to manage the assets of their investors by constructing efficient portfolios. They deliberately make use of a phenomenon observed in the formation of portfolios: returns are additive, while risks diversify. This phenomenon and its implications are at the heart of portfolio theory. Portfolio theory, like few other economic theories, has dramatically transformed the practical work of banks and insurance companies. Before portfolio theory was developed about 50 years ago, asset managers were confronted with a situation similar to the situation the research on biodiversity faces today. While the need for diversification was generally accepted, a concept that linked risk and return on a portfolio level and showed the value of diversification was missing. Portfolio theory has closed this gap. This article first explains the fundamentals of portfolio theory and transfers it to biodiversity. A large part of this article is then dedicated to some of the implications portfolio theory has for the valuation and management of biodiversity. The last section introduces three development openings for further research.

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

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).

Value-oriented impact assessment: the economics of a new approach to impact assessment

Environmental Impact Assessment has gained a prominent position as a tool to evaluate the environmental effects of economic activities. However, all approaches proposed so far use a burden‐oriented logic. They concentrate on the different environmental impacts in order to ascertain the overall environmental damage caused by economic activity. This paper argues that such a burden‐oriented view is (a) hampered by a series of methodological shortcomings which hinders its widespread use in practice; and (b) is analytically incomplete. The paper proposes a value‐oriented approach to impact assessment. For this purpose an economic analysis of the optimal use of environmental and social resources is conducted from both a burden‐oriented and a value‐oriented standpoint. The basic logic of a value‐oriented impact assessment is explained, as well as the resulting economic conditions for an optimal use of resources. In addition, it is shown that value‐ and burden‐oriented approaches are complementary to achieve optimality. Finally, the paper discusses the conditions under which the use of burden‐ or value‐oriented impact assessments is appropriate, respectively.

Opportunity cost based analysis of corporate eco-efficiency: A methodology and its application to the CO2-efficiency of German companies

In this paper, we propose the return-to-cost-ratio (RCR) as an alternative approach to the analysis of operational eco-efficiency of companies based on the notion of opportunity costs. RCR helps to overcome two fundamental deficits of existing approaches to eco-efficiency. (1) It translates eco-efficiency into managerial terms by applying the well-established notion of opportunity costs to eco-efficiency analysis. (2) RCR allows to identify and quantify the drivers behind changes in corporate eco-efficiency. RCR is applied to the analysis of the CO(2)-efficiency of German companies in order to illustrate its usefulness for a detailed analysis of changes in corporate eco-efficiency as well as for the development of effective environmental strategies.

Sustainable Value creation among companies in the manufacturing sector

In this paper, we present empirical results of a study on the creation of Sustainable Value among European manufacturing companies. As sustainable development is a future oriented concept we assess the use of environmental resources in companies in the light of the EU15 performance targets for 2010. By using the Sustainable Value approach and based on publicly available company data we measure in monetary terms how individual companies perform vis-a-vis the 2010 performance targets already today. This shows the specific exposure and vulnerability of companies to more stringent policy regimes, and allows meaningful comparisons between both companies and sectors.

Ambidexterity for Corporate Social Performance

The literature on corporate social performance advocates that firms address social issues based on instrumental as well as moral rationales. While both rationales trigger initiatives to increase corporate social performance, these rest on fundamentally different and contradicting foundations. Building on the literature on organizational ambidexterity and paradox in management, we propose in this conceptual article that ambidexterity represents an important determinant of corporate social performance. We explain how firms achieve higher levels of corporate social performance through the ambidextrous ability to simultaneously pursue instrumentally and morally driven social initiatives. We distinguish between a balance dimension and a combined dimension of ambidexterity, which both enhance corporate social performance through distinct mechanisms. With the balance dimension, instrumental and moral initiatives compensate for each other – which increases the scope of corporate social performance. With the combined dimension, instrumental and moral initiatives supplement each other – which increases the scale of corporate social performance. The article identifies the most important determinants and moderators of the balance and the combined dimension to explain the conditions under which we expect firms to increase corporate social performance through ambidexterity. By focusing on the interplay and tensions between different types of social initiatives, an ambidextrous perspective contributes to a better understanding of corporate social performance. Regarding managerial practice, we highlight the role of structural and behavioral factors for achieving higher corporate social performance through the simultaneous pursuit of instrumental and moral initiatives.

Does stakeholder pressure influence corporate GHG emissions reporting? Empirical evidence from Europe

Purpose - – The purpose of this paper is to seek to shed light on the practice of incomplete corporate disclosure of quantitative Greenhouse gas (GHG) emissions and investigates whether external stakeholder pressure influences the existence, and separately, the completeness of voluntary GHG emissions disclosures by 431 European companies. Design/methodology/approach - – A classification of reporting completeness is developed with respect to the scope, type and reporting boundary of GHG emissions based on the guidelines of the GHG Protocol, Global Reporting Initiative and the Carbon Disclosure Project. Logistic regression analysis is applied to examine whether proxies for exposure to climate change concerns from different stakeholder groups influence the existence and/or completeness of quantitative GHG emissions disclosure. Findings - – From 2005 to 2009, on average only 15 percent of companies that disclose GHG emissions report them in a manner that the authors consider complete. Results of regression analyses suggest that external stakeholder pressure is a determinant of the existence but not the completeness of emissions disclosure. Findings are consistent with stakeholder theory arguments that companies respond to external stakeholder pressure to report GHG emissions, but also with legitimacy theory claims that firms can use carbon disclosure, in this case the incomplete reporting of emissions, as a symbolic act to address legitimacy exposures. Practical implications - – Bringing corporate GHG emissions disclosure in line with recommended guidelines will require either more direct stakeholder pressure or, perhaps, a mandated disclosure regime. In the meantime, users of the data will need to carefully consider the relevance of the reported data and develop the necessary competencies to detect and control for its incompleteness. A more troubling concern is that stakeholders may instead grow to accept less than complete disclosure. Originality/value - – The paper represents the first large-scale empirical study into the completeness of companies’ disclosure of quantitative GHG emissions and is the first to analyze these disclosures in the context of stakeholder pressure and its relation to legitimation.

Sustainability Reporting: The Role of 'Search', 'Experience' and 'Credence' Information

Abstract Corporate sustainability reporting quality has been frequently criticised as being unbalanced, presenting an overly positive view or failing to address material issues. The purpose of this article is to provide a fresh explanation for poor quality sustainability reporting and to propose how quality issues may be addressed. The theoretical framework combines the legitimacy and accountability perspectives using Akerlofs (1970) Market for Lemons theory. Akerlofs approach is extended by differentiating between three types of information in sustainability reports namely search, experience and credence. The article concludes that the type of information must be considered when determining measures to improve report quality.

Advancing Research on Corporate Sustainability – Off to Pastures New or Back to the Roots?

Over the last two decades, corporate sustainability has been established as a legitimate research topic among management and organization scholars. This introductory article explores potential avenues for advances in research on corporate sustainability by readdressing some of the fundamental aspects of the sustainability debate and approaching some novel perspectives and insights from outside the corporate sustainability field. This essay also sketches out how each of the six articles of this special issue contribute to the literature by going back to some of the conceptual roots of sustainability and/or by offering novel perspectives for research on corporate sustainability. As these six articles and the outlook on future research opportunities show, broadening the inquiry of corporate sustainability in terms of topics, theories, and methodologies holds considerable potential to improve our understanding of how decision makers and organizations respond to sustainability.

CEO statements in sustainability reports: Substantive information or background noise?

Highlights • We use sentiment analysis to analyze CEO statements of corporate sustainability reports.• We conduct a longitudinal analysis, of the rhetoric used in these CEO statements.• In contrast to financial reporting there is no discriminatory value of CEO statements.• Unlike in financial reporting we do not find a link between reporting and performance.• This missing link persists despite increased standardization of sustainability reporting. Abstract This paper examines the question of whether corporate sustainability reports can serve as accurate and fair representations of corporate sustainability performance. It presents the results of a sentiment analysis of CEO statements in corporate sustainability reports and corporate financial reports between 2001 and 2010. Making an analogy with corporate financial reporting it is expected that if corporate sustainability reports accurately reflect sustainability performance, then this should be reflected in the rhetoric used. The analysis shows that the rhetoric in the CEO statements of sustainability reports is indicative of impression management rather than accountability, despite increasing standardization of sustainability reporting.