Competitiveness-Sustainability Links

Lawrence Pratt INCAE Business School

Lawrence.Pratt@incae.edu

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Customers

(current, future)

(Community)

Owners/Banks

Government

NGOs

IMPACTS COMPANY

Basic Stakeholder Framework

Workers

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Environmental Value Drivers

  Process efficiency   Buyer preferences   Access to more “ecological” international markets   Official business relationships   Environmental performance and competition in the

domestic market   Incentive for innovation   Lower-risk profiles for funding and investment

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Driver # 1: Process Efficiency

  Ecoefficiency   material used/in product material   new concept:

energy and material quantity per “service unit” ==> “dematerialization”

  Thousands of well-known examples

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Driver # 2: Buyer preferences

  Trend toward customers looking for better performance   for customers and other stakeholders (both current

and future)   due to requirements from markets   by philosophy and conviction

  Good and bad news   Challenges for those not seeing them   Exciting opportunities

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Driver # 3: Access to more “ecological” international markets

  Fairly new trend   “Market rules” set the guidelines   Non-official

  No GMOs, organic   recycled content   ISO 14001   more sustainable tourism

  More official   “product take-back” requirements

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Driver # 4: Official business relationships

  The most complex   Particularly important in relation to product

content   traces of carcinogenic substances

  Also process issues   WTO role? UNFCC?   Obviously, governments can protect the

population

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Driver # 5: Environmental competition in the domestic market

  Local companies are already worried   Multinational companies in industrial countries

have up to 30-year experience in creating and using environmental development as a market position.

  They are not afraid to use it against local rivals.

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Driver # 6: Incentive for Innovation

  Less evidence than other areas   Companies under environmental pressure

innovate faster (“Porter Hypothesis”)   cases: Bacardi, de-icing, paper and pulp

  Rate of change is accelerating   few companies have experience in this area

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Driver # 7: Lower-risk profiles for funding

  International banks acknowledge risk   Evidence for serious problems due to a lack of

in-depth evaluation   Up to 50 basis points premium with ISO 14001

(10% of leading banks?)   Relation with IFC and The World Bank,

multinationals

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Opportunities in “Products for the Future”

  Good and bad news   Favored versus un-favored sectors   However, performance is important in all   Alternative energy

  willing to pay up to 15% extra for non-fossil energy   Agriculture -- organic has 20% annual increase   Tourism -- fastest growing segments?

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Are companies creating value from their environmental performance?

  Solid supporting evidence   Case studies   Solid theory   Evidence in research on historical performance

at market level   Emergence of “Ecoefficient” or “Sustainable”

Funds

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Cash Flow

Costs

Earnings

Risks

Cost of Capital

Company Valuation

Source: Adapted from Rappaport1976

Strategic And

Policy Decisions

Change In

Value

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Cash Flow

Costs

Earnings

Risks

Cost of Capital

Strategic And

Policy Decisions

Change In

Value

• Energy Efficiency • Material Efficiency • “Dematerialization” • Reduction of Toxicity

Valuation: Environmental Elements

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Cash Flow

Costs

Earnings

Risks

Cost of Capital

Strategic And

Policy Decisions

Change In

Value

• New products • New markets • New clients •  Price premium

Valuation: Environmental Elements

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Cash Flow

Costs

Earnings

Risks

Cost of Capital

Strategic And

Policy Decisions

Change In

Value

•  Regulatory Risk •  Risk of Direct action • ”Social license” •  Site contamination

Valuation: Environmental Elements

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Cash Flow

Costs

Earnings

Riskis

Cost of Capital

Strategic And

Policy Decisions

Change In

Value

• Special credit lines • Company image •  Lower risk profile •  Venture Capital (high growth companies)

Valuation: Environmental Elements

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