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BRAIN Journal – A Review Of The Application Of The Concept Of Economic And Smart Sustainable Value Added (SSVA) In Industries Performance Evaluations

Value and wealth creation are among the most important goals of society these days. Industry performance entails the incorporation of the objectives of smart sustainable development, namely social and territorial cohesion, economic efficiency, innovation, digital and environmental performance, into a company’s operational practices. Companies that compete globally are increasingly required to commit to and report on the overall smart sustainability performances of operational initiatives. The current indicator frameworks that are available to measure overall business sustainability do not effectively address all aspects of sustainability at operational level, especially in developing countries such as Romania, Belarus or Macedonia. For the sake of achieving these goals and objectives, the corporation, investor and government need some instruments in order to measure the potential value of each investment opportunity. In this particular study the authors adopted adopted EVA indicator to Belarusian general economic conditions and specifics of available aggregate sector data by adjusting return on investment and cost of capital.

bright-business-chart-210607

The main current strategy of development Europe 2020 (A strategy for smart, sustainable and in-clusive growth) puts forward three mutually reinforcing priorities:

– Smart growth: developing an economy based on knowledge and innovation.

– Sustainable growth: promoting a more resource efficient, greener and more competitive econo-my.

– Inclusive growth: fostering a high-employment economy delivering social and territorial cohe-sion.

Growth tho, does not create value. Economic value is created by investment in excess return compared to its cost. This statement is one of the central in microeconomic theory and drives the development of a single firm through an industry to a country’s economy.

The objective of the paper is to propose a modified and more accurate model for measuring the industry economic and sustainability performance. The model integrates digital, environmental, social, economic and corporate governance indicators. It aggregates different indicators from different frameworks and allows the industries to compare their performance effectively. Two main factors of smart sustainability assessment (EVA and SSVA) are depicted. It is demonstrated the attempt to calculate EVA at the industry level using aggregate indicators according to the common business methodology. Then, materials and methods used for smart sustainability assessment are described. This is done by presenting an overview about the used indicators. The method of smart sustainability value added calculation is suggested as the main indicator of industry performance.

Economic value added (EVA) is a measure of a company’s financial performance based on the residual wealth calculated by deducting its cost of capital from its operating profit, adjusted for taxes on a cash basis. EVA can also be referred to as economic profit, as it attempts to capture the true economic profit of a company. This measure was devised by management consulting firm Stern Value Management, originally incorporated as Stern Stewart and Co. The idea behind EVA is rooted in economic income as opposed to accounting income. The concept of economic profit appeared a long time ago, around 1890 (Marshall). As economic income moves up or down, so goes the value of the business.

The theory of Economic Value Added has traditionally suggested that every company’s primary goal is to maximize the wealth of its shareholders, which should be a given since it is the shareholders that own the company and any sensible investor expects a good return on his or her investment.  In the past, however, other methods such as Return on Investment (ROI) and Earnings per Share (EPS) have been the most important performance measurement systems and have been used in determining bonus-based incentives even though they do not correlate well with shareholder value creation. Scholars have devoted considerable time and effort on investigation of the claim, whether EVA is a better measure to explain market value addition (MVA) than traditional earning based measures.

The authors also talk about the smart sustainable value added. The authors consider that Smart Sustainability Value Added (SSVA) is more effective method for sustainability assessment. Sustainability valuation plays a strategic role in decision making. It encourages the companies and industries to deal with resources more effectively and efficiently. Smart Sustainable Value Added represents the extra value created as a result of using digital, economic, environmental and social resources. It expresses in absolute monetary terms. According to the method published by the SSVA value calculation can be expressed as follows: The gross value added of the company should be calculated (in unit €). After that, the amount of each digital, environment or social resources should be determined (e.g gb., t, m3, ..etc). Then efficiency computed by dividing the gross value added on the amount of resources (unit €/t, €/m3). The same steps should be done for the benchmark. Finally, the last two values are subtracted from each other and the result multiplied by the amount of considered indicator.

In conclusion, this paper aims to propose an improved method of investment industry performance smart sustainability assessment. It employs important and widely used financial value (e.g SSVA, EVA) for evaluating the efficiency of industries development. This work can be extended to make it reflect the specific requirements of the country and industry in which the company operates. This can be implemented by calculating the weights and benchmark values for each sector (e.g. agriculture, bio-gas plants, manufacture, breweries …). Finally, the results visualization can be presented in the case study for a specific sector.

Ekaterina Filimon