Evaluating the true worth of a business

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Published: May 22, 2015 12:17:36 AM

Measurement-led approach to sustainability will be the cornerstone of all businesses in the times to come

Corporate sustainability practices have undergone a paradigm shift. Gone are the days when organisations used to set their sustainability goals in silos. Today, environmental issues have made businesses rethink about the ways in which they can create value for customers, shareholders and other stakeholders. Even though corporations have been creating societal value by paying taxes and lifting lakhs of people out of poverty by generating jobs, their role has been increasingly scrutinised and debated.

Businesses are integrating sustainability into everything they do and are redesigning their business thinking accordingly. They are using innovation and R&D practices to meet customer needs, while keeping the impact on human, economic and environmental factors in mind.

But as organisations also have to serve the interests of their shareholders, they face a challenge in increasing the shareholder value while improving their performance on environmental, social and governance (ESG) dimensions.

Investment in sustainability is seen to have a trade-off with financial performance. Shareholders are not known to reward firms for their investment in ESG programmes, as they think environment initiatives tend to erode the competitiveness of firms.

This could be because, so far, the cash flows and risk profiles of most companies had little to do with externalities.

Neither were companies paying much for environmental hazard they caused, nor were they rewarded for undertaking ESG initiatives. This disconnect between the corporate and societal value is narrowing due to increased scrutiny because of improved digital connectivity. Organisations have to choose the right set of ESG issues that can serve their sustainability goals and boost financial performance.

Efforts have been made towards this. For example, KPMG encapsulates financial, social and environmental value in a single financial figure, called True Value, which is different from the financial value figure. True Value can be integrated in the financial profit-and-loss account to help firms make better-informed decisions on strategy and investments.

We have to combine the financial and quantified externality data that can help us measure the value a company creates holistically. We also need irrefutable data about the value we create as the future belongs to those industries that can anticipate resource depletion and take corrective action. Such a 360-degree strategy to drive sustainability can enable us to maximise future profitability along with inclusive growth.

India is a nation in the balance. On one hand we are one of the fastest developing nations, on the other lie our social needs and economic distribution. This poses a unique challenge for businesses, society and policy-makers. As competition for resources intensifies, assessing the value of environmental and social impact, as well as opportunities, is vital. The business community must assess how much value it creates, as a measurement-led approach to sustainability will be the cornerstone of all businesses in the future.

The author is MD & CEO, Ambuja Cements Ltd

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