This document discusses the links between competitiveness and sustainability for companies. It outlines seven environmental value drivers that can benefit companies: 1) process efficiency, 2) buyer preferences, 3) access to more ecological international markets, 4) official business relationships, 5) environmental performance and competition in domestic markets, 6) incentive for innovation, and 7) lower risk profiles for funding. The document then examines how environmental performance can be incorporated into company valuation by affecting costs, earnings, cash flows, risks, and cost of capital.

1. Competitiveness-Sustainability
Links
Lawrence Pratt
INCAE Business School
Lawrence.Pratt@incae.edu

2. Basic Stakeholder Framework
IMPACTS
COMPANY
Customers
(current, future)
(Community)
Owners/Banks
Government
NGOs
Workers
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3. 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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4. 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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5. 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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6. 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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7. 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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8. 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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9. 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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10. 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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11. 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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12. 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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13. Company Valuation
Costs
Strategic
And
Earnings
Cash
Policy
Change
Flow
Decisions
In
Value
Risks
Cost of Capital
Source: Adapted from Rappaport1976
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14. Valuation: Environmental Elements
• Energy Efficiency
• Material Efficiency
• “Dematerialization”
• Reduction of Toxicity
Costs
Strategic
And
Earnings
Cash
Change
Policy
Flow
In
Decisions
Value
Risks
Cost of Capital
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15. Valuation: Environmental Elements
• New products
• New markets
• New clients
• Price premium
Costs
Strategic
And
Earnings
Cash
Change
Policy
Flow
In
Decisions
Value
Risks
Cost of Capital
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16. Valuation: Environmental Elements
• Regulatory Risk
• Risk of Direct action
• ”Social license”
• Site contamination
Costs
Strategic
And
Earnings
Cash
Change
Policy
Flow
In
Decisions
Value
Risks
Cost of Capital
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17. Valuation: Environmental Elements
• Special credit lines
• Company image
• Lower risk profile
• Venture Capital (high growth
companies)
Costs
Strategic
And
Earnings
Cash
Change
Policy
Flow
In
Decisions
Value
Riskis
Cost of Capital
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