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How Does Environmental Strategy Affect The Numerator Of A Company's Valuation?

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Environmental strategy can affect both the numerator of the company’s valuation (increased cash flows), as well as its denominator (lowering cost of equity and debt) provided that this strategy affects either or both future financial performance and risk profile. This is particularly relevant to an industry which will be directly affected by a slowdown in the Australian housing market (April 2017 building approvals are down 17.2% in one year ), and has significant environmental risks. Capitalising on risks by turning them into business, regulatory or financing opportunities may help steer the company through a downturn in the market by keeping the valuation higher relative to competitors. Firstly, the numerator improvements to company…show more content…
As building standards and code increasingly require more green materials in buildings, with no reversal in trend likely, these relationships will continue to become more important ultimately benefiting long term sales. Conversely, companies with poor green technology capital will likely suffer an attrition of customers as environmental building regulation changes. Finally, by keeping a watchful eye on environmental policy there will be opportunities to avoid or minimise future costs. Policies that involve reducing emissions below current levels to avoid incurring penalties inherently do not favour buildings material companies. Any steps to avoid these types of costs are highly desirable for the company. Additionally, staying on top of materials quality research is important. For instance the cost of asbestos lawsuits and ongoing contributions to the Asbestos Injury Compensation Fund (AICF) could have been avoided or minimised, especially for first movers, had they stopped using these materials earlier when ‘the science’ first came to light decades earlier. James Hardie Industries now annually pays 35% of operating cash flows into the AICF and has paid millions in damages. Similar parallels can be drawn to carbon policy today, the science is known and those first to react have a better opportunity to minimise future sanctions and litigation costs. Next, the valuation denominator also improves from corporate
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