Week 1
Chapter 1: The Company within Social and Planetary Boundaries
When our valuation models were made, natural resources seemed abundant. Only labour
and capital were scarce. However, if we continue like this, natural resources are unavailable
in 100 years --> sustainable development = needed. We are in transition to a low-carbon and
more circular economy.
Sustainable development: development that meets the needs of the present without
compromising the ability of future generations to meet their own needs.
Externalities: Problems associated with production and consumption of goods. Cost of i.e.
climate change, pollution, human rights issue imposed on others (not buyer or producer).
True price (gap): Market price + social and environmental cost, externalities often not
included in market price. Goal: increase market price slightly and decrease true price gap.
- Environmental external costs: air/soil/water pollution, climate change, scares
energy/water/material use
- Social external costs: health & safety risks, underearning, gender discrimination
Calculate true price by looking at damages, quantifying them and putting a price on it
Simple solution: the polluter pays (internalization)
- Some people say that internalization is impossible due to high competition (priced
out of market), however impact is not static & can be internalized: they could give up
some of their margins.
‘The waiting game’: most agree that something must be done, but all want others to take
the first step, and promise to follow after (governments, EU, consumers, companies etc)
Transitions & steps taken
Planetary boundaries: safe operating space for humanity within ecological
capacities. Big risks associated with crossing these boundaries, especially
concerning non-renewable resources and the overuse of the Earth system as a
natural sink. Can also be turned around (ozone ijskast voorbeeld)
Social foundations: based on human rights, the twelve top social priorities,
focused on enabling people to be:
- Well: food security, adequate income, water and sanitation, housing and healthcare
- Productive: education, decent work, and modern energy services
- Empowered: networks, gender/ social equity, political voice, peace and justice
Sustainable Development Goals
- UN initiative to guide the world to a sustainable &
inclusive economy, guide global government strategies
- Firms can respond to this transition in 4 ways:
1. Preparing for it (future makers)
2. Waiting for it to happen and then act (future takers)
3. Companies that are unaware (business-as-usual)
- Goals are interlinked integrated social-ecological system
perspective needed to make change & looking from system perspective is important
,Some sustainability transitions currently at play are:
- Climate-energy transition: fossil fuels to renewable energy (grey green)
- Raw Materials-Circular Economy: Redesign and recycle products
- Biodiversity-Healthy Food and Regenerative Agri- and Aqua-Culture: Move towards
healthy, sustainable food production to preserve land quality and biodiversity
- Labour practices-social transition: safety, working poverty living incomes for all
Other transitions: AI, (further) globalization or regionalization, Blockchain
Focus on the role of companies, two reasons
- Morally right thing to do
- In companies’ well-informed self-interest
Assumptions
- The sustainability transition will (continue to) happen
- Internalisation will happen, and it will hurt unready firms
Value creation matrix: used to identify value creation on SV/EV
Assumptions:
- Many companies are now in quadrant 1
- They cannot stay there (internalization will happen)
Either they move to quadrant 2 or drop to quadrant 3
Currently, market fails: unable to see difference Q1&Q2, because of little reporting on SV/EV.
Transition:
- Transformational change and not incremental change:
breaking off the old regime and building a new one.
- Major implications for company value: companies that
adapt can realize its integrated value potential, companies
that do not can lose value and go bankrupt.
Transition X-curve:
In case of serious value destruction, firms should be able to outline a credible transition
pathway (blueprint) aligning with social and planetary boundaries to shift towards positive
value creation.
Expected Transition Losses (ETL of company i in sector j)
- Vi = company value
- b = part of company value that is exposed to transition
b = 0: transition doesn’t really affect sector
b = 1: the full sector j is in transition
- PTj = probability of a transition in sector j
PTj = 0: no transition expected
PTj = 1: certain of transition
- LGT = loss given transition = (1-ai)
- ai = adaptability of company i
a = 0: no adaptation, maximum losses
a = 1: perfect adaptation, no losses
, ai depends on management quality with regard to sustainability through the following levels:
1. Unaware of sustainability as a business issue
2. Acknowledging sustainability as a business issue -> sustainability policy is adopted
3. Building capacity: company develops its basic capacity, management systems and
processes, and starts reporting on sustainable performance
4. Integrating into operational decision-making: the company improves operational
practices, assigns board responsibility and provides comprehensive disclosure on its
sustainability performance
5. Strategic assessment: the company develops a more strategic and holistic
understanding of risks and opportunities related to the sustainability transition ->
integrated into business strategy and capital expenditures decisions.
Corporate governance (chapter 3)
Corporate governance: mechanisms, relations, and processes by which a company is
controlled and directed. It involves balancing the many interests of a company’s stakeholders
Different corporate finance models that describe company’s purpose
- Shareholder model says companies should maximize shareholder value
o Agency problem (does management do everything to create value for the
shareholders?)
o Solutions in contracts for limited term and incentives (performance pay)
Manager might be incentivized to focus too much on short-term value
- Refined shareholder model views stakeholders’ interest as a means to the end goal of
shareholder value maximization.
- Stakeholder model says companies should act in the interests of financial as well as
social stakeholders & optimize stakeholder value.
- Integrated model states that companies should optimize integrated value, which
combines financial, social and environmental value.
! Companies cannot just improve FV to compensate for negative EV and SV
Whatever model you chose influences your investment decision making
- B and c are the weights given to SV and EV (currently around 0.1), can be >1
Chapter 1: The Company within Social and Planetary Boundaries
When our valuation models were made, natural resources seemed abundant. Only labour
and capital were scarce. However, if we continue like this, natural resources are unavailable
in 100 years --> sustainable development = needed. We are in transition to a low-carbon and
more circular economy.
Sustainable development: development that meets the needs of the present without
compromising the ability of future generations to meet their own needs.
Externalities: Problems associated with production and consumption of goods. Cost of i.e.
climate change, pollution, human rights issue imposed on others (not buyer or producer).
True price (gap): Market price + social and environmental cost, externalities often not
included in market price. Goal: increase market price slightly and decrease true price gap.
- Environmental external costs: air/soil/water pollution, climate change, scares
energy/water/material use
- Social external costs: health & safety risks, underearning, gender discrimination
Calculate true price by looking at damages, quantifying them and putting a price on it
Simple solution: the polluter pays (internalization)
- Some people say that internalization is impossible due to high competition (priced
out of market), however impact is not static & can be internalized: they could give up
some of their margins.
‘The waiting game’: most agree that something must be done, but all want others to take
the first step, and promise to follow after (governments, EU, consumers, companies etc)
Transitions & steps taken
Planetary boundaries: safe operating space for humanity within ecological
capacities. Big risks associated with crossing these boundaries, especially
concerning non-renewable resources and the overuse of the Earth system as a
natural sink. Can also be turned around (ozone ijskast voorbeeld)
Social foundations: based on human rights, the twelve top social priorities,
focused on enabling people to be:
- Well: food security, adequate income, water and sanitation, housing and healthcare
- Productive: education, decent work, and modern energy services
- Empowered: networks, gender/ social equity, political voice, peace and justice
Sustainable Development Goals
- UN initiative to guide the world to a sustainable &
inclusive economy, guide global government strategies
- Firms can respond to this transition in 4 ways:
1. Preparing for it (future makers)
2. Waiting for it to happen and then act (future takers)
3. Companies that are unaware (business-as-usual)
- Goals are interlinked integrated social-ecological system
perspective needed to make change & looking from system perspective is important
,Some sustainability transitions currently at play are:
- Climate-energy transition: fossil fuels to renewable energy (grey green)
- Raw Materials-Circular Economy: Redesign and recycle products
- Biodiversity-Healthy Food and Regenerative Agri- and Aqua-Culture: Move towards
healthy, sustainable food production to preserve land quality and biodiversity
- Labour practices-social transition: safety, working poverty living incomes for all
Other transitions: AI, (further) globalization or regionalization, Blockchain
Focus on the role of companies, two reasons
- Morally right thing to do
- In companies’ well-informed self-interest
Assumptions
- The sustainability transition will (continue to) happen
- Internalisation will happen, and it will hurt unready firms
Value creation matrix: used to identify value creation on SV/EV
Assumptions:
- Many companies are now in quadrant 1
- They cannot stay there (internalization will happen)
Either they move to quadrant 2 or drop to quadrant 3
Currently, market fails: unable to see difference Q1&Q2, because of little reporting on SV/EV.
Transition:
- Transformational change and not incremental change:
breaking off the old regime and building a new one.
- Major implications for company value: companies that
adapt can realize its integrated value potential, companies
that do not can lose value and go bankrupt.
Transition X-curve:
In case of serious value destruction, firms should be able to outline a credible transition
pathway (blueprint) aligning with social and planetary boundaries to shift towards positive
value creation.
Expected Transition Losses (ETL of company i in sector j)
- Vi = company value
- b = part of company value that is exposed to transition
b = 0: transition doesn’t really affect sector
b = 1: the full sector j is in transition
- PTj = probability of a transition in sector j
PTj = 0: no transition expected
PTj = 1: certain of transition
- LGT = loss given transition = (1-ai)
- ai = adaptability of company i
a = 0: no adaptation, maximum losses
a = 1: perfect adaptation, no losses
, ai depends on management quality with regard to sustainability through the following levels:
1. Unaware of sustainability as a business issue
2. Acknowledging sustainability as a business issue -> sustainability policy is adopted
3. Building capacity: company develops its basic capacity, management systems and
processes, and starts reporting on sustainable performance
4. Integrating into operational decision-making: the company improves operational
practices, assigns board responsibility and provides comprehensive disclosure on its
sustainability performance
5. Strategic assessment: the company develops a more strategic and holistic
understanding of risks and opportunities related to the sustainability transition ->
integrated into business strategy and capital expenditures decisions.
Corporate governance (chapter 3)
Corporate governance: mechanisms, relations, and processes by which a company is
controlled and directed. It involves balancing the many interests of a company’s stakeholders
Different corporate finance models that describe company’s purpose
- Shareholder model says companies should maximize shareholder value
o Agency problem (does management do everything to create value for the
shareholders?)
o Solutions in contracts for limited term and incentives (performance pay)
Manager might be incentivized to focus too much on short-term value
- Refined shareholder model views stakeholders’ interest as a means to the end goal of
shareholder value maximization.
- Stakeholder model says companies should act in the interests of financial as well as
social stakeholders & optimize stakeholder value.
- Integrated model states that companies should optimize integrated value, which
combines financial, social and environmental value.
! Companies cannot just improve FV to compensate for negative EV and SV
Whatever model you chose influences your investment decision making
- B and c are the weights given to SV and EV (currently around 0.1), can be >1
