For some time I have been thinking about the realism of society moving towards a sharing culture. What happens when we “borrow” instead of “buy”? I was reminded of this recently while reading an article in the Economist (March 3, 2013): Peer-to-Peer Rental, the rise of the sharing economy.
Why can’t this way of thinking be transferred to industry? Increasingly, mining companies and many other industries, are gradually viewing sustainability as one of the most, if not the most, important business variable.
Sustainability – economic, environmental and societal – was viewed as a constraint to growth. Only large companies were concerned about it, and it was delivered in a reactive state around avoiding harm, rather than conveying a positive impact. It was viewed as being seen to be support sustainability and understand the standards, than to actually implement programs. Action was mostly left to governments and communities.
However, during the last couple of years, sustainability has taken a drastic turn. Customers and shareholders are as concerned about buying and investing in sustainable companies as governments and communities.
Whole industries, not just the large companies, are concerned about sustainability. Non sustainable companies are finding it more and more difficult to obtain the social license to operate.
Therefore sustainability today is not only a must to operate, but a growth and differentiation variable. Customers will buy, and investors will invest, in companies that are the most sustainable.
Suddenly sustainability is a growth and differentiator component, and some day may become one of the most important “financial” indicators. Will the day come when we see a common variable defined to measure sustainability in relation to the growth of a company, a common sustainability index?
Such an index could tell more about a company’s stability and security than financial indicators only, such as owning fewer assets, paying less taxes, avoiding penalties and accidents and so on.
Companies will adopt a proactive approach to sustainability, and stakeholder management, moving away from a focus in corporate sustainability development and shift to the creation of shared value. By creating proactive shared value for our communities, governments, their customers and shareholders, companies will benefit from increased growth rates and differentiate themselves from the competition. This stems from Michael Porter’s ‘Creating Shared Value’ concept, creating economic value by creating societal value (The Role of Business in Society: Creating Shared Value by Professor Michael E. Porter).
Sustainability, among other things such as the return of capital employed, is transforming the mining world from CAPEX to OPEX. Companies are no longer concerned on becoming bigger, instead shifting to becoming better. This drives the optimization of assets employed ROCE (Return on Captial Employed), one of the most important financial variables to measure the health of a company.
Consequently, either for sustainability reasons or for pure financial reasons, the maximization of the ROCE is an imperative financial variable.
The ROCE is a ratio that indicates the efficiency and profitability of a company’s capital investments. To increase it, EBIT should be increased (at equal asset amount) or assets should be decreased. In summary, the fewer assets a company has, the higher the ROCE will be (at equal EBIT) and therefore able to outperform competitors.
So, back to the topic of “sharing” rather than “buying”. Why do we want to own assets if we could borrow or lease them? Why couldn’t we share production assets as we share a book or accommodation as described in the Economist article?
Would we not have a more sustainable world with fewer assets (machines, equipments, etc.)? How could companies improve financial performance with fewer assets?
How can we push forward a focus on investing more in technology and R&D to optimize the assets utilization and to foster the sharing of production assets?