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|Date: 2022-07-07 Page is: DBtxt001.php bk0004040|
The Basic Concepts of True Value Metrics
Sustainability … the Value Proposition
“Sustainability” is a popular social goal, but exactly what it means and how to measure it are not very clear. TVM articulates sustainability in relation to resources used, value created and the resulting quality of life.
The idea of limited resources has been on the agenda for several decades. The “Club of Rome” in the 1960s raised awareness about limited resources and tried to change the dynamic of development. In some ways they were successful, but only in a limited way. While the basic message that resources are limited was valid and remains valid, improvements in technology has made it possible for “proven reserves” to rise over the past few decades even while consumption of resources was accelerating. For those inclined to the view that limited resources is “not a problem” these facts were sufficient to debunk the message of the Club of Rome.
In fact there is progress
In fact there is some progress. In the early years of the industrial age, industry was a chronic polluter of the land, air and water. In the early years of the 20th century the United States established its National Park system with the unexpected support of some of the “robber baron” industrialists … but dirty industry was the norm until the 1950s and 1960s. Western Europe started to clean up its rivers in the 1950s and the United Kingdom passed clean air legislation after a “killer smog” in 1956. In the following decade the United States moved towards cleaner air and cleaner water and in the 1970s established the Environmental Protection Agency. Progress may have been slow … but there is progress.
A widely accepted framework of metrics is needed
Every company keeps money accounts and does financial reporting using universally accepted accounting principles. Money capital employed and profit are ideas that are understood everywhere.
The problem is that costs beyond money costs are not included in the money accounting and without this sustainability is a talking point but nothing more. The consumption of the “commons” is not part of any money accounting equation. It has to be in any system of metrics that aims to be meaningful as a metrics that reflects sustainability.
When toxins are poured into the local river, a business is probably saving money and increasing its profits … but the value decrement of the “commons” associated with this action is not in any money accounting record … but it is a part of the TVM framework of analysis. There is a standard cost for EVERY transaction that has an impact on the state of the community and the socio-economic activities of the community … whether or not the organization wants to take responsibility for the transaction or not!
Reducing carbon footprint
For example: Reducing “carbon footprint” is a legitimate initiative … but the value of doing this is unclear for several reasons: (1) do the costs associated with reducing carbon footprint represent value destruction in themselves that offset the value or reduced carbon emissions; and, (2) does carbon emission reduction change have any impact when there are many other factors going into atmospheric degradation. TVM uses a standard value profile for everything, and in so doing has the potential to use very large datasets to see cause and effect more clearly than merely statistical correlation. TVM also values natural resources and the lack of natural resources in ways that are important, and ignored in all money profit accounting.
Running out of oil for energy
When there is no natural oil for energy available for extraction from the earth's crust, the structure of the present global economic system will have to change dramatically. There will no longer be the highly profitable oil industry and those profitable industries that rely on oil as their feedstock. There will no longer be an easy convenient transport system driven by the petroleum consuming internal combustion engines. This industry is driven by profit and attracts huge investment in exploration and extraction because of the huge profit potential of these investments using the prevailing money profit analysis formulations. Using TVM where the value of the resource being “mined” and consumed is also taken into account, there is huge money profit, but even larger value destruction. Specifically, the costing that prevails in the oil industry and the related petroleum product consuming industries ignores the cost of maintaining the global natural resources that represents a “sunk cost” of millions of years of sun energy conversion. Oil industry costing starts with the costs of acquiring “rights” to explore and exploit, and then only adds in the costs of exploration and the well drilling and extraction and subsequent downstream activities … nothing is costed to reflect the consumption of the global natural resources. In TVM value analysis this value consumption is costed in using a standard cost that reflects the prevailing available technology to replace the natural resource being consumed.
Sustainability … money based cash flow
This is only money sustainability to pay the bills
Profit may translate into positive cash flow that makes a business sustainable ... but society can only be sustainable when economic activities are both sustainable in themselves AND are providing positive value increments for society ... for all the value elements of a society including the people and their complete physical environment.
Sustainability is “in fashion” … and would be a good idea if it were based on a value agenda with related metrics. As it is the word “sustainable” is being attached to everything and a “story” is then linked to the initiative, whatever that might be to monetize the effort … at which point “value be damned”!
Nothing is sustainable for ever … because eventually all sources of energy will be consumed …. but that ought to be in billions of years into the future. Sadly, the way we use energy now and consume raw materials … and the way we do money accounting means that we will consume the accessible resources for our present profligate economic activity in a matter of not many decades. The use of TVM will improve decision making around energy and start to make it possible to get an allocation of revenues within the energy sector that reflects true value rather than prevailing profit fiction! (see page ).
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