Category Archives: Sustainability

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.