Can We Rely On Coca-Cola’s Water Use Disclosures?

Have you read the recent investigative news story regarding Coca-Cola’s water use? Apparently, the firm has been reporting data in an incomplete (and potentially misleading) manner.

The news story focused on the company’s claim that “For every drop (of water) we use, we give one back.” Why the concern? Because, even though clean water has become a scarce and precious resource around the world, Coca-Cola utilizes massive amounts of the liquid to produce its eponymous product.

The company claims that its water conservation efforts fully replace the volume of liquid that it draws out of the natural environment. But the investigative reporter revealed that the company “… does not count water in its supply chain — including the water-guzzling sugar crop — in its ‘every drop’ math.”

The reporter also noted that a company researcher once revealed that he was pressured to “ … adopt a ‘net green’ accounting method that would have lowered the water footprint of its agricultural supply chain.”

Huh? A “net green” accounting method? Any Certified Public Accountant or Chartered Accountant can confirm that no such method is defined by Generally Accepted Accounting Principles or International Accounting Standards. Coca-Cola concocted it to serve its needs.

Interestingly, the investigative reporter failed to note that Coca-Cola arranges for the Big Four global accounting firm Ernst & Young LLP (EY) to attest to the accuracy of its Water Replenish and Water Use Ratio metrics. The statistic is one of seven sustainability measurements that are assessed by the external accountants.

Sadly, industry critics will likely refer to this situation as an illustration that “corporate sustainability reporting (is) a great waste of time.” But even though it’s possible to regard the Coca-Cola brouhaha as an exemplar of misleading reporting practices, it’s important to keep in mind that — as a result of the company’s disclosures — its water use practices can now be scrutinized by external parties who care deeply about the environment.

Would Irving Fisher continue to defend the Net Present Value model in our era of sustainability?

Do you remember Irving Fisher? He may have been America’s first celebrity economist. A professor who taught at Yale, he doled out pearls of investment wisdom to the business press during the early years of the twentieth century.

But one interview, in particular, wreaked irreparable damage to his reputation. In 1929, at the height of his fame, Fisher attempted to reassure the jittery investment markets by declaring that equity values had reached “a permanently high plateau.” He implied that investors would be wise to hold onto their stocks and ride out any period of market volatility.

Those who followed his advice were in for a very long ride. The Dow Jones Industrial Average fell 89%, and didn’t recover until the 1950s. An entire generation of investors was wiped out, the nation plunged into a Great Depression, and Irving’s followers suffered a very harsh blow.

Nevertheless, Fisher did leave an impressive legacy. His classic 1907 book The Rate of Interest and 1930 text The Theory of Interest helped popularize the Net Present Value (NPV) model of Discounted Cash Flows. It remains the dominant valuation method of modern finance.

How does it work? In essence, it incorporates the Time Value of Money into an evaluation of an investment opportunity. Cash flows that occur in the near future are worth more today than cash flows that occur in the distant future. In essence, the burden of “waiting for one’s money” cheapens the latter type of cash flows.

Although Fisher didn’t invent this model, he did as much as any other individual to establish it as the cornerstone of modern valuation theory. And by doing so, he may have helped launch our society on an unsustainable path.

Why? Because, quite simply, it discounts the future. It ensures that we’ll always choose to receive a dollar today over a dollar tomorrow.

But what if we find a business opportunity that can yield billions of dollars of profits today? An opportunity, perhaps, that would trigger the impoverishment of our descendants one century in the future? Along with the utter degradation of our planet?

At any reasonable rate of interest, the impact of that future catastrophe would be discounted to zero by the NPV model. Indeed, any event that far in the future would be insignificant from an NPV perspective.

That’s the sustainability conundrum that faces our contemporary investment community. Although we may care about our distant future, our long-established investment methods fail to place any significant value on it. And yet, as the effects of climate change increasingly impact our environment, events that were initially expected to occur in the distant future are beginning to be felt in the present.

If Irving Fisher were alive today, would he still choose to defend the NPV model in our era of sustainability? Although he gave such wrong-headed advice to “stay the course” in 1929, we can only hope that he would offer more sensible advice to “change our course” today.

Climate Change: Tipping Points

For the past few years, environmentalists have voiced concern that we’ve passed a tipping point of climate change. Even if we achieve drastic reductions in emissions, they fear, the current levels of carbon dioxide in the atmosphere may inexorably increase its temperature by more than two degrees. And meteorologists warn us that such warming may create catastrophic damage to our global weather patterns.

But before you lose all hope for our planet, you may wish to consider a different tipping point. Namely, public awareness of the problem — and demand for solutions — may have passed the point where polluters can safely continue their behavior.

Consider, for instance, the Financial Stability Board. It’s the global consortium of central regulators and banking institutions that was formed during the global economic crisis of 2009 to establish universal financial standards. It launched the Task Force on Climate-Related Financial Disclosures eighteen months ago to address environmental concerns.

Last week, the Task Force issued its final report. It recommended that publicly traded corporations issue more detailed disclosures about their governance practices, business strategies, risk management processes, and metrics and targets involving climate change.

Let’s think about that for a moment. The banking institutions that finance our global economy are establishing a universal expectation that corporations must integrate climate change considerations into all core business activities.

Although the Task Force announcement didn’t receive a fraction of the attention that was generated by the United States’ decision to withdraw from the Paris Accord, this new expectation may explain why many leaders are now optimistic that America will still meet the Agreement’s emission reduction targets.

So if you’re feeling depressed about the possibility that the environmental impact of climate change is irreversible, please keep in mind that our society’s awareness of the problem — and our determination to address it — may be irreversible as well.

In other words, one tipping point is confronting a countervailing one. And because so many individuals around the world are racing to manage both elements, it’s possible to hope that our planet has a fighting chance of survival.

A Tale Of Three Nations

This is a tale of three nations, with each writing its own unique story.

Or are they? After all, appearances can be deceiving. There are times when ostensibly unique stories are woven together into a common narrative.

So let’s review our trio of tales and ask ourselves whether the three nations are indeed writing their own distinctive histories. Or, conversely, whether they are each playing a different role within a single universal saga.

First, let’s discuss Great Britain. During Victorian times, the Industrial Revolution roared to life, powered by the coal mines of Newcastle. Did you know that the phrase “London Fog” often referred to smog events? With a heavy manufacturing economy based on burning fossil fuels, the British air was filthy.

But last week, the fifth largest economy on the planet enjoyed its first full day of coal-free energy in its industrial history. This epochal event was made possible by the nation’s embrace of renewable energy sources.

Now let’s discuss China. Two weeks ago, Greenpeace East Asia released a report that predicted that Chinese renewable energy production would replace 300 million tons of coal by the year 2030. They attributed this projected transformation to the planned quintupling of the size of China’s wind and solar power industries between 2015 and 2030.

Finally, let’s discuss the United States. How is America responding to emerging trends in the global energy industry?

Well, four weeks ago, President Trump signed an executive order to repeal his predecessor’s prior actions to minimize carbon emissions. With a group of West Virginia coal miners standing beside him, Trump justified his desire to support “the truly amazing people … our incredible coal miners … (who) love to mine …

To a certain extent, these are three distinct actions by a trio of unique nations. Each one resides on a different continent, and each one is confronting its own set of social and economic priorities.

But each nation shares our common planet, and each is managing its interests within an increasingly globalized society and economy. If it’s possible to weave together a common story from these individual tales, it might also be possible to anticipate which nations will prosper, and which will become impoverished, as this tale unfolds.

Playing God With Animals

Have you heard the great news about the California Channel Island Fox? Due to the conservation efforts of the National Park Service, the Nature Conservancy, and other groups, the species with the “naive, adorable little personality” was removed from the endangered list last week.

That success represents the fastest ever recovery of an endangered species, as measured by the time that elapses from the day of its inclusion on the protected list to the day of its removal. So to what cause can we attribute this impressive success?

Regrettably, the species’ path to sustainability has been a bit brutal. The foxes were being hunted by golden eagles, carnivorous birds that were initially attracted to their habitat by tasty wild pigs. So wildlife officials slaughtered thousands of pigs, depriving the eagles of a significant food source and compelling the birds to search for prey elsewhere. The foxes then thrived once more.

But the environmental trail of death didn’t end there. The federal government also killed more than one hundred wild turkeys that bred freely on island turf, after their porcine land competitors were eliminated. And the elimination process occurred in a spectacular manner, with hunters hired “to track down the (animals) using helicopters with snipers, traps, dogs, and electronic collars.”

It all makes you wonder why we chose to support the foxes instead of the pigs and the turkeys, doesn’t it? And instead of the majestic eagles too, given that the elimination of their porcine diet staple undoubtedly led to the diminishment of their population. Perhaps the conservationists decided that the foxes deserve the land more because they inhabited it first, though their “adorable little personalities” surely didn’t hurt their cause.

Indeed, the entire affair raises a troubling ethical question about whether we have the right to play God with any animal species. After all, if we’re not about to eliminate the descendants of the European settlers of the American continents in order to return their lands to the Native American peoples who preceded them, why should we slaughter the innocent pigs and turkeys of California in order to return their territories to the island foxes?

Climate Change: Winning While Losing

Is it possible to win while losing?

Yes, of course it is. Think about Sylvester Stallone’s character Rocky Balboa, for instance. He actually lost the championship match in his very first film. But the loss established and enabled the character — not to mention the actor who played him, the Academic Award winning movie, and the sport of boxing itself — to repeatedly win throughout the forty year run of the Rocky franchise.

And how about this year’s Presidential primary season? Bernie Sanders may soon be ready to cede the Democratic Party nomination to Hillary Clinton, but the progressive movement that he spearheads will probably thrive for years to come. Likewise, even if Donald Trump loses the November election, many experts believe that he will permanently transform the Republican Party.

This “winning while losing” phenomenon occurs in the business world as well. Consider, for example, what happened last week to Chevron and Exxon Mobil, the two global energy giants that are headquartered in the United States. Shareholder activists at both firms lost very similar fights at their corporate annual meetings. But while losing their immediate battles, they may have managed to achieve a victory for the long term.

So what were they fighting about? According to MarketWatch, the activists wanted to require the firms to perform annual “stress tests to determine the risk that … climate change pose(s) to their business.” Just as global banks in the United States perform stress tests to address risks in the world’s economy, these individuals hoped to require global energy companies to conduct similar tests to address climate change factors.

Their proposals were voted down by shareholders, but Chevron’s proposal drew 41% support, and Exxon Mobil’s drew 38% support. Apparently, these represent the highest climate proposal voting totals in the history of the firms. In fact, according to Sustainable Brands, Chevron’s 38% support total occurred after their “investors overwhelmingly rejected the (same) proposal at last year’s meeting with a 96.8 percent “no” vote.”

An increase in support from 3.2% to approximately 41% in one year? Now that is a win, even though any vote total less than 50% is recorded in the corporate records as a loss.

Either way, there’s an important lesson to learn from these events. Whether or not you believe that climate change represents an existential threat to the global environment, the number of investors who express concerns about the topic seems to increase each year.

And let’s face it. A stress test is merely, by definition, a hypothetical exercise. So why wouldn’t any global energy company (or any other organization, for that matter) consider engaging in such an activity? If there is no harm in doing so, and if 40% of its investor base might approve of it, why not give it a try?

Sustainability And Net Present Value

How can an organization possibly know whether an investment in an economically, environmentally, or socially sustainable project is worthwhile? For instance, how can it place a value on a flex time policy that reduces rush hour traffic? Or on an energy policy that shifts from a carbon based fuel to a renewable source? Or on a charitable contribution that supports a local hospital?

That may have been the question that generated the most “buzz” among the attendees at last week’s First Annual Conference on Sustainability in the Big Apple. Co-sponsored by the New York Hedge Fund Roundtable and the New York State Society of CPAs, the Conference attracted financial professionals from around the world to ponder such weighty concerns.

It’s a very important consideration because, if organizations aren’t able to value such expenditures, they may easily decline to make them. And without such expenditures, we might find ourselves confronting numerous situations of economic decline, environmental crisis, and social unrest.

Many organizations are addressing this question by defining complex models and metrics for measurement purposes. The Global Reporting Initiative, for instance, has now issued its fourth generation (i.e. its G-4) of sustainability standards. And the Sustainability Accounting Standards Board is doing similar work for more than eighty industries throughout ten organizational sectors.

Sometimes, though, it can be helpful to rely on traditional approaches to solve contemporary problems. After all, even if such approaches cannot provide comprehensive solutions, they can offer the universal tools and techniques that we can utilize to address our challenges.

So, with this in mind, here is a question: can the simple Net Present Value method help us place values on sustainability expenditures? The NPV calculation was first formalized in Irving Fischer’s landmark 1907 text The Rate Of Interest. Although it is more than a century old, it still serves as the contemporary investment industry’s favorite valuation method.

Basically, NPV values an investment as the sum of the (discounted) future cash flows that can be attributed to it. Cash flows that occur later (i.e. in the relatively remote future) are discounted by a greater extent than cash flows that occur earlier (i.e. in the near future) in order to account for uncertainty and the ability of investors to accrue interest income over time.

So how would we apply this concept to investments in sustainability projects? Well, organizations that invest in flex time programs, renewable energy sources, and local hospitals would be helping people, societies, and organizations conserve and generate resources. The future value of such resources, discounted appropriately to the current year, would represent the Net Present Value of such expenditures.

Is there anything wrong with such an approach? Of course, reasonable people may raise all sorts of concerns about it. For instance, individuals with a deep sense of morality and religiosity may protest that this technique (perhaps disturbingly) expresses charitable impulses in purely financial terms.

But if we need to start somewhere, why not start with NPV, the most commonly utilized valuation metric of the past century of financial analysis? On the one hand, it may strike us as a somewhat simple option. But on the other hand, as Friar William of Ockham once taught us, it may be wise — as a general rule, or “razor” — to prefer simpler scientific constructs to more complex ones.

Sustainability and Valuation

April 26 was a painful day for the global energy industry, wasn’t it? First BP announced that it was adding yet another $917 million dollars to its cumulative cost charges for the 2010 Deepwater Horizon explosion. And then Standard & Poor’s declared that it was downgrading the credit rating of Exxon Mobil from the pristine AAA level at which it had resided since the Great Depression.

Investors are obviously concerned by these events, but should they be surprised by them? After all, BP’s charges are necessitated by the continuing environmental clean-up of its massive oil spill in the Gulf of Mexico. And Exxon Mobil is struggling to adjust to low commodity prices, a challenge that is at least partly attributable to a shift in consumer demand towards the increasingly cost competitive options of renewable energy.

Ironically, on April 22, environmentalists around the world celebrated Earth Day. And then, just a few days later, investors were forced to digest this pair of dismal corporate announcements that implied a causal relationship between sustainability considerations and investment value.

One can hardly imagine a more timely moment to focus on the nexus of sustainability and value, eh? Impressively, on May 1, the Rhode Island Society of CPAs launched its Professional Certificate Program in Sustainable Value. The accounting organization “believe(s) (that it) is the world’s first such program that focuses on the impact of sustainability factors on organization and project valuations.”

I plan to help the Society as it develops the intellectual content of its Program. And later this week, I plan to speak at the Hedge Fund Roundtable’s and the New York State Society of CPAs’ Sustainability Investment Leadership Conference in New York City on the same topic.

The goal? It’s to address the reality that sustainability factors cannot be ignored by the investment community. They are required to understand the causes of statistical variations that must be identified and then quantified by investors and traders.

Indeed, as financial analysts continue to develop standards and metrics that incorporate these factors into their models, organizations will continue to incorporate sustainability considerations into their operating decisions. Not out of a sense of altruism towards the global community, perhaps, but out of a sense of responsibility to their own investors.

The Sustainability Octopus

Does any one know what the word “sustainability” really means? We all believe that it signifies long term viability, but its definition varies from application to application. And for people who care about our environment and our society, it connotes an implication of healthiness as well.

But how can one assess the sustainability of organizations? Don’t they simply try to maximize their immediate profits every year? Or is it possible to broaden one’s analysis of a business entity to evaluate notions like stability and fitness too?

The International Integrated Reporting Council (IIRC) has created a model that defines the extent to which organizations achieve the twin goals of financial stability and sustainable development. Believe it or not, the Council refers to this framework as an octopus because of its round central body and its many tentacles. If you download the primary image of the model, you’ll see that it is entitled Octopus.jpg.

So … what should we make of it? First and foremost, the central body of the model focuses on business activities. It highlights how organizations acquire inputs, transform them, produce and sell outputs, and then create outcomes that extend well beyond the generation of immediate profits.

The tentacles refer to all of the internal and external resources that businesses utilize to conduct their activities. Financial, manufactured, and intellectual resources appear on their balance sheets as money, as tangible assets, and as intangible assets, respectively. And although their human, social / relationship, and natural resources do not appear on their balance sheets, they are nevertheless utilized for business operations.

These six categories of resources are called “capitals” because accountants quantify them as: (a) the direct value of the assets, minus (b) the value of the liabilities that are incurred to develop and maintain them. Because Assets minus Liabilities equals Capital in the classic accounting equation, these net asset values have become known as “capitals” by users of the framework.

Not yet impressed? Then consider the fact that an author named Jane Gleeson-White emphasizes this model in her non-fiction book entitled Six Capitals, or Can Accountants Save The Planet? She believes, for instance, that our society will only be able to regulate the private sector’s use of the earth’s limited set of natural resources by devising methods to measure the value of those resources. And this type of task can only be completed by accountants.

That’s why the New York State Society of Certified Public Accountants will join the New York Hedge Fund Roundtable next month to present its first annual investment leadership conference on sustainability. Ms. Gleeson-White will appear at that conference, and will presumably exhort the accountants in the audience to proceed with the task of saving the planet.

In other words, the Sustainability Octopus is more than a complicated theoretical model. It helps us understand how businesses develop, utilize, and deplete or pollute valuable internal and external resources. And serious authors like Ms. Gleeson-White are asserting that accountants are uniquely qualified to measure the extent to which these activities are sustainable over the long term.

The next time you join a conversation about the Sustainability Octopus, by all means, please feel welcome to smile at the slight absurdity of the visual reference. But after you do so, then please respect the gravity of the subject matter. After all, the planet’s future might be at stake.

Is MasterCard Really Changing The World?

Have you ever noticed that business and news organizations love to compile lists?

The U.S. News and World Report, for instance, draws the attention of the education industry each year with its Best Colleges lists. Forbes generates attention and envy with its World’s Billionaires list. And Dow Jones influences the global markets whenever it changes the composition of the thirty corporations in its Industrial Average list.

Fortune has repeatedly indulged in list compilation activities as well. Its annual Fortune 500 list of the top American companies, for example, has been garnering significant press coverage and scrutiny for decades. And last month, Fortune extended these activities by publishing its first Change The World list.

Change The World? What does that mean? In its Methodology and Credits statement, Fortune explains that the list consists of “companies that have made a sizable impact on major global social or environmental problems as part of their competitive strategy … (and that are) doing good as part of their profit-making strategy … (in order to) improve the human condition.”

That sounds quite noble, doesn’t it? The companies on Fortune’s list should be engaged in extremely impressive activities. And yet, considering its own methodology, at least one of Fortune’s choices may strike us as a bit odd.

Take Mastercard, for instance, which appears at #11 on the list. Along with Visa, American Express, Discover, and every bank that issues debit cards, Mastercard helps people avoid paper currency by paying with plastic instead.

Of course, people have been carrying plastic in their wallets since Diners Club issued the first charge card in 1950, and since Bank of America followed with the first general consumer credit card in 1958. The BankAmericard later went global during the 1970s and was spun off into the firm that became Visa.

But this decades-long progression of e-commerce didn’t deter Fortune from heaping praise on today’s MasterCard for services that simply “distribute social benefits on debit cards … (and thus help people) switch to electronic payments…” In addition, Fortune didn’t mention the ongoing controversies about excessive service fees that some financial institutions have placed on such cards.

To be fair, Fortune does note appropriately that the use of plastic cards in place of paper money can reduce cash theft and deter untaxed “off the books” transactions. But Fortune does not acknowledge that electronic payment systems are often plagued by hackers, thieves, and tax cheats as well.

On the one hand, it might indeed be true that the transition from paper to electronic payment transactions is helping to change the world. But isn’t it a little odd that Fortune has decided to focus its plaudits solely on MasterCard? After all, this is an evolution that has been progressing for well over half a century, and that has been jointly driven by numerous financial institutions.

Don’t they deserve some plaudits too?