Sustainability
Bursa Malaysia has always advocated corporate responsibility as key to sustainability. Today, sustainability, which supports stakeholder value creation, should be the main focus of every responsible company.
Tip of the Week: Approximately only 10 percent of every landfill can be cleaned up.
Measuring & Reporting
- Overview
- Process and Impact Measures
- The Impact of Sustainability on Financial Valuation
- Accounting for Sustainability
- Current Industry Practices
- Maturity of Sustainability Reporting
- Overview of Sustainability Reporting Process
- Sustainability Reporting
- Regulatory-Driven Sustainability Reporting
- Role of External Assurance Providers
- Assurance Standards
- Role of Stakeholder Panels
- Case Studies
- Questions for Management
- Role of the Board
The Impact of Sustainability on Financial Valuation
Quantifying a company's performance and benchmarking it against the performance of its peers enables measurement of the impact of its engagement efforts by monitoring the changes over time. There is increasing evidence on the positive correlation that exists between sustainability and share price performance although this is an area subject to much debate. Some have highlighted good sustainability is good governance and well governed companies already fetch a price premium.
Some organisations measure sustainability impacts on their free cash flow to the firm (FCFF) and weighted average cost of capital (WACC). FCFF is the amount of free cash flow a company is likely to generate and WACC is the discount rate used to calculate the present value of these future cash flows. There are many factors that influence a company's FCFF and WACC, but with good sustainability activity, the risk premium associated with the cost of capital is likely to
A company's operational efficiency translates into cost savings, such as reduced energy and water costs which are influenced by the sustainability activities undertaken. Sustainability activities also enhance the value of a brand, which can increase sales growth with environmentally conscious consumers. All these factors drive a company's FCFF and WACC. Based on empirical evidence and theoretical understanding from SAM's study1, emphasis is placed on the three sustainability value drivers:
- The risk premium on both equity and bonds that impacts WACC
- The operational efficiency of the company, i.e. its return on invested capital (ROIC) that impacts FCFF
- The sales growth profile of the company that impacts FCFF
One might argue that the costs of implementing sustainability activities would adversely impact a company's performance, but contrary to that, short term investments, if done well, can lead to long term gains.
Sustainability Can Outperform1
1 SAM and PricewaterhouseCoopers, "The Sustainability Yearbook 2010", 2010