Are financial and economic metrics enough to measure the valuation and long-term sustainability of a company? If a company is highly profitable, does that mean it should be considered as a good investment opportunity? What are the non-financial elements that are driving investment decisions today?
Undoubtedly these are the biggest questions companies and investment firms are asking as they shift towards smarter investment decisions.
After the 2006 financial crisis, we have seen expectations from companies growing to extend their performance beyond financial profitability. We have noticed a clear growing interest in performance that capitalizes on environmental, social and governance practices in addition to classical financial profitability metrics. Companies themselves understand that they are part of a value chain, and that relying on outdated and traditional practices will not guarantee the continuity of their business and prosperity in a smart, sustainable and green economy.
Conducting business in an inclusive manner has become a term pinned at the heart of every ambitious organization. These organizations adopt multi-dimensional models that consider metrics related to financial rate of return, social return on investment, carbon footprint assessment and sustainability reporting as invaluable information sources that drive key strategic decision making.
This has led to an increase in appetite from the investment community when it comes to seeking non-financial data from companies. This enables them to gain a holistic overview of how the business is evolving and help them in making more informed investment decisions. Other stakeholders have also turned to the same data confirming the interest in more disclosure and transparency. This not only puts additional pressures on organizations to disclose more to address investors and stakeholders’ expectations, but also to ensure credibility, reliability and accuracy of the data shared.
The trend of disclosures and transparency through public reports and assessment raises interesting questions on valuations. Organizations are still struggling in conducting holistic valuations that extend beyond their financial performance. This is mainly because the financial metrics have very few links with social impact, environment and governance. Non-financial performance metrics are often measured in silos and celebrated as achievements separate from financial performance. This prevents companies from gaining an overall comprehensive understanding of their value.
At Sustainable Square, we understand that there are multitudes of aspects that contribute to the creation of a profitable, sustainable and resilient business, that the impact on society is what makes the brand image of a company, and that it is essential for companies to communicate their financial and non-financial value to their stakeholders. For these reasons, we have developed what we call – The Enterprise Genuine Value(EGV).
EGV is a valuation process that analyzes and assesses the overall financial and non-financial value creation of an organization. It makes up for the shortcomings of existing conventional models and their metrics. It is an inclusive method that does not ignore the importance of traditional financial valuation standards while introducing metrics related to environmental, social and governance performance. It provides organizations and investors with genuine insights on performance and highlights every positive and negative implications for every operation.