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Abstract

Sustainability reporting has improved the visibility of climate, resource, and safety risks, but it still does not provide a measurement mechanism for separating maintainable operating surplus from income generated by depleting finite natural capital. This paper develops Dynamic Sustainability-Weighted Cost of Capital (Dynamic SWACC) as a governed shadow-accounting architecture for estimating sustainability-adjusted maintainable income. The framework begins from the Hicksian capital-maintenance view of income and the El-Serafy user-cost method, derives the user-cost charge from a finite-horizon operating-surplus annuity, and endogenizes the discount rate through auditable state variables: reserve-life constraint intensity, carbon-budget utilization, and operational safety risk. The developed contribution extends the original model in three ways. First, it introduces formal propositions for boundedness, monotonicity, reserve-life effects, and benchmark ordering. Second, it adds a Shadow Ledger rollforward with Verified Sustaining Investment (VSI), a Sustainability Capital-Maintenance Reserve (SCMR), and Sustainability Reinvestment Coverage (SRC), so the model tests not only the required charge but whether the firm actually funds the capital-maintenance need. Third, it specifies an optional state-space extension, benchmark decomposition, normalized diagnostics, and falsifiable panel hypotheses for future empirical validation. A retrospective demonstration for Freeport-McMoRan Inc. over 2013–2022 illustrates how physical sustainability indicators translate into a capital-maintenance charge against reported EBITDA. Under the baseline calibration, the 2022 user-cost factor is 58.3 percent under Dynamic SWACC, compared with 42.9 percent under a WACC-only benchmark, 51.3 percent under a static SWACC benchmark, and 72.2 percent under an SDR-only benchmark. The article contributes a reproducible theory-plus-method framework with testable implications while preserving the distinction between GAAP/IFRS earnings, investor valuation, and strong-sustainability capital maintenance.

First Page

19

Last Page

37

Creative Commons License

Creative Commons Attribution 4.0 International License
This work is licensed under a Creative Commons Attribution 4.0 International License.

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