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The sdEffect(TM) - New Framework Puts Hard Dollar Value on Corporate Sustainable Development Practices
The sdEffect(TM) - New Framework Puts Hard Dollar Value on Corporate Sustainable Development Practices
Published 02-01-06
Submitted by Yachnin & Associates/Sustainable Investment Group Ltd./Corporate Knights Inc.
The Pilot Analytical Framework applies five standard financial valuation techniques -Ratio Analysis, Discounted Cash Flow (DCF), Rules of Thumb Valuation, Economic Value AddedTM (EVA) and Option Pricing -to SD metrics such as energy use and community involvement, to demonstrate how business aspects traditionally viewed as "soft" by analysts can be translated into hard valuations. Data from the public sustainability reports of five Canadian-based mining companies are used to illustrate the translation -Alcan, INCO, Noranda/ Falconbridge, Placer Dome and Teck Cominco.
In the Foreword to the report, Donald Reed, President and CEO of Franklin Templeton Investments Corp., states that "The report provides the first steps in using financial language to measure the impact of sustainable development on the bottom line. This report, and its pilot framework, may be able to help lay the foundation in linking sustainable development to company performance and provide another tool for financial professionals to use in their on-going analysis."
Applying the framework helps isolate the sdEffectTM which, using data from individual mining companies and built in assumptions about the influence of SD on such aspects as license to operate", reveals results such as:
| SD METRIC | VALUATION TECHNIQUE | RESULTS |
| INCO Solid Waste Diversion | Discounted Cash Flow (DCF) Valuation and Price to Cash Flow Per Share Ratio (P/CFPS) | Cost reductions translate into increase of between $0.06 and $0.16 in total value per share. |
| Noranda/Falconbridge Energy Savings/Greenhouse Gas Emissions Reductions | DCF and P/CFPS | Cost savings translate into increase in total value per share of between $1.62 and $2.44. |
| Placer Dome Community Involvement | DCF | Fast tracking of project approvals leads to increase in stock value estimated at US$0.81 per share, a 5.5% valuation lift. |
| Teck Cominco Community and Employee Relations | Rules of Thumb (Price to Net Asset Value) | Associated risk reduction estimated to be valued at $4.24 per share |
| INCO SD Awards | Option Pricing Valuation | Positive corporate track record results in company being given an option, which it otherwise would not have been given, which makes project economically viable - Change in Net Present Value from -$400 million to + $312 million. |
| Noranda/Falconbridge Improved Reportable Injury Frequency | Economic Value Added | Enhanced safety (not including insurance claims or long term disability payments) adds incremental value of $0.21 per share. |
| Noranda/Falconbridge Six Sigma Projects | DCF and P/CFPS | Value of projects equivalent to price improvements of US$0.14/lb in nickel, US$0.02 in copper, $US0.03 in zinc. |
The study also reveals some significant opportunities for strengthening corporate disclosure and reporting requirements to better enable translation into financial valuation. "Only 10-20% of the publicly reported SD metrics we reviewed are somewhat straightforward to translate", said Ron Yachnin, Principal of Yachnin & Associates, one of the report's authors. "Also, relevant data is scattered in these reports - what we need is a more focused approach to reporting this type of information", he said.
Yachnin & Associates/Sustainable Investment Group Ltd./Corporate Knights Inc.
Yachnin & Associates/Sustainable Investment Group Ltd./Corporate Knights Inc.
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