Economic sustainability, or what is more accurately referred to as financial sustainability, is achieved when an organization efficiently uses its available resources to maintain a profitable (or ‘stable’ in the case of non-profit organizations) operation over time.1 We will focus on the internal portion of economic sustainability within this Guidebook; the rationale for that is explained further below. Measuring economic sustainability – or at least the internal financial performance portion – is a function that every organization is legally obligated to carry out. Organizations live and die by their financial bottom line, so most already house systems, processes and expertise needed to effectively measure their financial strength. Organizations are already focused on and capable of measuring the bottom line. Rather than examining the discipline organizations traditionally employ, we will take a closer look at several considerations that suggest expanded measurement capacity is needed to effectively measure economic sustainability.2
Internal & External Impact
The governments of the world have largely standardized the financial and accounting requirements applied to measuring the bottom line. Typically, these practices don’t consider economic impact created beyond the organization itself. Although that is changing, it is still quite rare that organizations measure impact on the broader economy. A major exception to this lies with government organizations, like municipalities, that do already place emphasis on measuring external economic impact. A simple example would be the impact of a tourist coming to a town and spending money. Public organizations are likely to consider the full economic impact of a visitor including effects on job creation, tax revenues, the import and export of goods and services and more.
To learn more about how government organizations measure external economic impacts and several examples click here [link to resources above].
The discipline involved in measuring external economic impacts is not terribly accurate. Certainly, public bodies and economists have developed expertise in quantifying the impact that various stimuli have on entire economies, but this is usually only applied when the impact created is quite significant in scale – much larger than the kind of impact the operation of the vast majority of organizations can generate. Given that the focus of the Guidebook is set on small and medium sized organizations, we feel it is quite reasonable to focus efforts on building economic measurement capacity internally, where the impacts are likely material and the data produced is much more likely to make a difference.
Overall Economic Sustainability
With the sub-section above in mind, we will only be examining the internal portion of economic sustainability. At the most basic level overall economic sustainability is a function of revenues generated and costs incurred. Measuring overall economic sustainability is as simple as understanding the size and security of revenues being generated in contrast to the potential for operating costs going up or down. An economically sustainable organization would have very reliable revenue streams and a cost profile that presents little risk of changing disproportionately to revenue levels. Getting a grip on the larger picture of revenues and costs will help an organization determine how economically sustainable they are and where the greatest opportunities lie for improvement.
Sources of Economic Impact
There is a wide spectrum of economic costs and benefits projects that address sustainability can contribute. Although organizations generally have strong economic measurement capacity, it is common to focus on the most obvious costs and benefits such as reducing the use of resources like energy and water and the related cost savings, but the potential is so much greater. The following is a detailed (although not exhaustive) list of potential sources of economic impact that apply to different types of organizations:
- New sales.
- Repeat business.
- External grants and incentives.
- Loans and other unique capital financing options available.
- Carbon offsets.
- Taxes / User Fees.
- Replacement costs.
- Maintenance costs.
- Utility use.
- General use of supplies and other resources.
- Wages and benefits.
- Increasing utility prices.
- Employee turnover.
- Imposition of a carbon tax.
- Health & safety / insurances issues.
- Changing customer demographics / priorities.
- Public relations issues / reputation.
- Partnership development.
- Leadership and innovation.
- Branding and differentiation.
Not every potential source of impact will apply to every organization or to every project, but to effectively measure economic impact, it is important to seek out and consider the full range of possible impacts.
Limitations of Traditional Measurement Capacity
While universal methods for managing and reporting on finances are commonly employed, they are not adequate for measuring the full economic impact of projects that address sustainability. Traditional decision making discipline isn’t generally designed to consider the full long-term impact of an investment.
Infrastructure and technological improvements provide a simple example of these limitations. Traditionally, capital and operating budgets are managed independently. A new lighting solution, for example, may be selected based on a lower price point without appropriate weight being placed on the associated maintenance and replacement costs over time; sadly, the long-term costs are usually more significant than the purchase price. So, when evaluating higher priced and more efficient solutions, addressing operating and capital budgets separately is not only likely to favour a less sustainable solution, it often costs the organization more overall. That is especially relevant for building owners, as they are often less concerned about these higher long-term costs since they can pass these costs onto tenants.
Another example of how the measurement of economic impact lacks comprehensiveness is demonstrated by the limited consideration given to quantifying risk; for example, the impact of expected increases in energy prices or supplied materials over time.3
Because of those sorts of limitations, it is necessary to build new measurement capacity to ensure all economic costs and benefits are adequately recognized.
1. A great resource to learn more on Economic Sustainability is John E. Ikerd’s 2012 book The Essentials of Economic Sustainability. Available in print.
2. For extensive research on extending economic measurement to include the environment see Environmental and Economic Sustainability by Paul E. Hardisty. Available in print or ebook.
3. The book Beyond GDP: Measuring Welfare and Assessing Sustainability by Marc Fleurbaey and Didier Blanchet (2013) offers information on the possibility of building an alternative, more comprehensive monetary indicator that includes social and environmental benchmarks