The creation of corporate value and the creation of value for society at large are increasingly becoming connected as companies are being forced to take into account costs that were previously passed on to society, according to a study by KPMG.
Companies are increasingly forced to deal with externalities such as pollution and other costs instead of passing them on to taxpayers or ignoring them entirely, KPMG says. Rising demands from investors and other stakeholders, tightening laws and regulations and ‘changing market dynamics driven by economic, social and environmental megaforces’ are now obliging companies to either reduce these externalities, or cover the cost of them.
KPMG says the trend ‘is bringing new risks and opportunities with significant implications for corporate value creation in the 21st century.’ Climate change, resource shortages, water scarcity, degradation of eco-systems, rising wealth inequality and other ‘megaforces’ will accelerate this trend in coming years, the firm adds.
‘Externalities have been largely excluded from the measurement of corporate value historically, but today corporate and societal value creation are becoming more closely connected,’ says Adrian King, global head of KPMG’s climate change and sustainability practice, in a statement. ‘Externalities are now part of every company’s value creation story. Business leaders and their investors need to be aware of these new dynamics in order to unlock value creation opportunities and manage risks.’
As part of the study, KPMG analyzed the returns of a gold mine in South Africa, a brewery in India and a plastics plant in the US. It finds that the trend against keeping costs down through the use of externalities would make the currently profitable gold mine unprofitable by 2030. The brewery would swing from an earnings margin of 4 percent to a loss of 5 percent in that period. Sector-specific conditions and location, however, would ensure little change for the plastics company.
