Economic value added and GRI Standards: Difference between pages

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(EVA).  
''Corporate reporting - ESG - GRI.''


The periodic addition to shareholder value resulting from the efficient management and allocation of resources.
The GRI Standards for sustainability reporting are designed to help organisations understand their impact on the economy, the enviroment and society.


The important insight from EVA analysis is that a whole firm, a project or a division will be <u>destructive</u> of [[shareholder value]] in the following circumstances:


(1) Whenever its returns are inferior to the relevant economic [[cost of capital]].
:<span style="color:#4B0082">'''''How to use the GRI Standards'''''</span>


(2) Even if it appears to be profitable when measured on an accounting basis (for example on an [[Earnings per share]] basis).
:"Organizations can either use the GRI Standards to prepare a sustainability report in accordance with the Standards.  


:Or they can use selected Standards, or parts of their content, to report information for specific users or purposes, such as reporting their climate change impacts for their investors and consumers."


EVA can be considered at the whole-firm level or in relation to smaller business units or projects.
:''Global Reporting Initiative (GRI), February 2021''




== See also ==
* [[Accounting for Sustainability]] (A4S)
* [[Business & Sustainable Development Commission]]
* [[CDP]]
* [[Climate change]]
* [[Corporate social responsibility]]
* [[ESG]]
* [[ESG investment]]
* [[Financial reporting]]
* [[Global Sustainable Investment Alliance]]
* [[GRI]]
* [[Sustainability]]
* [[Sustainability reporting]]
* [[Sustainability Linked Loan Principles]]
* [[UK Sustainable Investment and Finance Association]]


== EVA at the whole-firm level ==
The periodic addition to total shareholder value from the efficient management and allocation of the whole firm's resources.
EVA can be quantified at a whole-firm level as:
EVA = [Return on book capital LESS Market cost of capital] x Book capital.
<span style="color:#4B0082">'''Example'''</span>
Taking a simplified example, take an all-equity financed firm with:
(1) A market capitalisation (P<sub>0</sub>) of $130m.
(2) Book value of equity $100m.
(3) Annual after tax returns of $13m.
''To keep this illustration simple, we will assume no growth.''
''In other words the whole of the annual after tax returns of $13m are paid out as dividends (D<sub>1</sub>).''
Return on book capital = 13/100
= 13%.
Market cost of capital = 13/130
= 10%
(Using Ke = D<sub>1</sub>/P<sub>0</sub>).
EVA = [13% - 10% = 3%] x $100m
= '''$3m'''.
''In practice a number of adjustments would be made both to the market values and to the book values used in the calculation of the EVA.''
''So the application of EVA analysis is both more complicated, and arguably more subjective, than the simple calculation illustrated above.''
<span style="color:#4B0082">'''Example'''</span>
Turning back for now to our simple example, EVA is also closely related to Market value added (MVA). 
MVA is the total present value of the expected EVA in the current and future periods.
For example in this case the EVA is a simple fixed perpetuity of $3m.
The total present value of the fixed perpetuity of $3m is evaluated using:
(1) The simple fixed perpetuity formula 1/r.
(2) The market cost of capital 10%.
MVA = $3m/0.10
= '''$30m'''.
== EVA at the individual project level ==
It is also possible to calculate and analyse EVA at the individual project level.
In simple terms, EVA is positive when the project Internal rate of return exceeds the (appropriately risk-adjusted) [[Weighted average cost of capital]].
A simple decision rule when using EVA at the project level is:
(1) Reject all negative EVA projects.
(2) Positive EVA projects will be considered further.


==External link==
*[https://www.globalreporting.org/standards/download-the-standards/ GRI Standards webpage and download]


== See also ==
[[Category:Accounting,_tax_and_regulation]]
* [[Net present value]]
[[Category:The_business_context]]
* [[Internal rate of return]]
* [[Book value]]
* [[Cost of capital]]
* [[Earnings per share]]
* [[Excess Return]]
* [[Market value added]]
* [[Return on capital employed]]
* [[Shareholder value]]
* [[Wealth Added Index]]
 
[[Category:Corporate_finance]]
[[Category:Corporate_finance]]
[[Category:Investment]]
[[Category:Long_term_funding]]
[[Category:Compliance_and_audit]]
[[Category:Ethics]]
[[Category:Identify_and_assess_risks]]
[[Category:Manage_risks]]
[[Category:Risk_frameworks]]
[[Category:Risk_reporting]]
[[Category:Financial_products_and_markets]]

Revision as of 15:22, 2 February 2021

Corporate reporting - ESG - GRI.

The GRI Standards for sustainability reporting are designed to help organisations understand their impact on the economy, the enviroment and society.


How to use the GRI Standards
"Organizations can either use the GRI Standards to prepare a sustainability report in accordance with the Standards.
Or they can use selected Standards, or parts of their content, to report information for specific users or purposes, such as reporting their climate change impacts for their investors and consumers."
Global Reporting Initiative (GRI), February 2021


See also


External link

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