Emerging Sustainability Accounting Standards
The accounting industry has now started down the path toward developing accounting principals that account for a company’s environmental footprint as an accounting liability that should be report as a liability on the balance sheet or deducted from operating income. Here’s why if this is adopted it will dwarf the impacts from Sarbanes Oxley:
KPMG reported in their 2088 “Expect The Unexpected” white paper that the world’s 3,000 largest public companies by market capitalization were estimated to be causing $2.15 trillion of environmental damage. This currently off-balance sheet liability is equivalent to seven percent of their combined revenues and 50 percent of their EBITDA (earnings before interest, taxation, depreciation and amortization).
In late 2012 a Sustainability Accounting Standards Board was launched with funding by the Bloomberg Philanthropies and the Rockefeller Foundation. The organization’s main goal is to establish and maintain industry-specific sustainability accounting standards for use in Form 10-K and 20-F. What this means for investors is that sustainability is now a CFO issue. A Deloitte white paper entitled Sustainable Finance: The risks and opportunities that (some) CFOs are overlooking reports that half of surveyed CFOs are planning capital investments that support the implementation of sustainability initiatives.
Here is the new reality facing every CEO and CFO:
You are naked, so you better get buff!
In today’s digital and connected world nothing a business does goes unnoticed or unreported by consumers, workers or investors. Whether it is a deadly garment factory fire in Bangladesh, pink slime or the BP oil spill, the evidence is overwhelming that corporations are facing unprecedented global public exposure that is impacting their stock valuations especially in a stock market so dominated by daily traders reacting to the first hint of bad news. Getting business-“buff” means re-engineering a business to focus on the authenticity and transparency expectations of customers, investors and workers. This is a C-suite imperative for protecting a company’s stock valuation. Underlying the green stock investment revolution is this analysis by SCA:
In 2011, 38 percent of businesses surveyed by SCA had a sustainability initiative.
Today that number is 64 percent.
Sustainability Makes Money
Sustainability is now being adopted by the C-suite as a valuable tool for growing profits and competitive advantage. Walmart’s CEO, Mike Duke, has embraced a corporate strategy to advance Walmart’s everyday low price competitiveness through sustainability. He hosts two milestone meetings per year for his leadership team focused upon adopting sustainable best practices in operations and merchandise procurement. Similar to achievements by Ford and DuPont, Walmart’s CFO, Charles Holley, reported at a recent milestone meeting that Walmart now earns $230 million annually through its waste management program.
Consumers Are Demanding Smarter, Healthier And Greener Solutions
This is the megatrend of megatrends for the sustainable economy and the underlying basis for a green stock investment revolution.
The Yale Project on Climate Change Communications reports that 74 percent of Americans now believe climate change is real and harmful to them. And consumers are taking action. Here are a few examples:
The number of Americans who say they “always” or “often” walk or bike instead of driving is at its highest recorded level.
57 percent of Americans now report that most or all of the light bulbs in their home are higher efficiency CFLs – up from 40 percent in November 2008
Three Americans in ten say that in the past 12 months they have given business to a company as a reward for their steps to reduce global warming.
This is the megatrend no business or investor can afford to ignore. The revenue success of every company is now being determined by its ability to offer price competitive sustainable products that satisfies the consumer’s search for “in me, on me and around me” solutions.
Economies Of Scale Creating Sustainable Stock Investor Opportunities
Smarter, healthier and greener solutions are now winning price competitiveness through manufacturing economies of scale. Much maligned solar power is an example:
If oil had dropped in price as much as solar panels it would be selling for $10 per barrel. A report by ILSR projects that unsubsidized solar will grow from .1 percent of U.S. electricity supply to 10 percent by 2023 as it wins price parity against utility supplied electricity.
Hawaii provides a current example where the price of rooftop solar is now lower than utility supplied electricity resulting in a 75 percent leap in construction applications to install rooftop solar electricity systems. The key importance of this example is not to suggest investing in solar power. The importance of this example is to highlight that the price of sustainability (in this example an energy technology with zero site emissions) is falling. As importantly, the price of “unsustainability” (in this example, utility generated electricity from fossil fuels) is increasing in price.
This pricing mega-trend where the price of sustainability is failing while the price of “unsustainability” is rising is the key driver of a Green U.S. Stock Investment Revolution.
Bill Roth is the Founder of Earth 2017. He coaches business owners and leaders on proven best practices in pricing, marketing and operations that make money and create a positive difference. His book, The Secret Green Sauce, profiles business case studies of pioneering best practices that are proven to win customers and grow product revenues.