Readers who are MBAs or corporate finance aficionados know the name Tim Koller, author of Valuation: Measuring and Managing the Value of Companies – now in its eighth edition. That text is required reading for many university business programs. I still have my copy somewhere around – an older edition, of course. McKinsey recently published a podcast and transcript of an interview with Koller – A Conversation About Valuation, in which he discusses current issues in the context of timeless principles of corporate valuation.
He talks sustainability, the importance of corporate business fundamentals and how companies may not “get” what investors want.
I’ve extracted four gems that sustainability professionals should absorb. Due to the length, I split it into two blogs. The first two are:
- On executive focus on short term financials:
“What business leaders most often get wrong—today and 35 years ago, when we wrote the first edition of our book—is that they believe the stock market is focused only on short-term earnings, and they look at accounting earnings or earnings per share as a primary metric when making strategic decisions. They are often too short-term oriented because they believe the market demands that.
Our research has shown that there are a lot of long-term investors out there. In fact, if you add together index funds, retail investors, and long-term institutional investors, they probably account for 75 percent of the market, yet it’s these short-term investors who are very noisy.”
My take: Long term investors are still the majority even though they may be quiet. In reality, executives must balance financial performance and looking beyond “accounting earnings or earnings per share.” Companies may want to assess and reprioritize the investors to whom they choose to respond.
- On climate change and materiality assessment:
“[One issue I would be concerned about if I were a senior executive] is sustainability, or climate change. But, once again, it’s a matter of how it affects my company and my industry. What are the issues that I’m going to face? Some companies are big emitters of carbon, so they have more direct concerns. Some have indirect concerns, and some have other types of concerns. Figure out what really matters and what the magnitude is for you instead of trying to do the same thing that everyone else is doing.
Companies don’t always do a good job of communicating to investors about how these issues affect their company specifically and what they’re doing about it. Instead, they panic or try to deal with—or talk about—every single thing under the sun instead of focusing on what’s relevant to their company.”
My take:
1) As Orrick’s Ashley Walter discussed in our podcast, companies should thoughtfully apply a materiality lens to sustainability and climate matters to focus on what is truly relevant. Matt Sekol and Donato Calace also preach that gospel.
2) Investor communications need improvement. Disclosing only operational sustainability metrics is part of the story, but the financial value/return associated with the metrics should also be formally communicated. Our recently-concluded research demonstrated only 27% of companies report financial value of sustainability in their 10-K reports. Only 34% report financial value in their sustainability/ESG reports.
The next blog contains the final two points.
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