Leveraging Household Consumption to Upgrade Firm PE

Leveraging Household Consumption to Upgrade Firm PE

 

  

Prasad Rao, Director

AltKuznets Sustainability Advisors Pvt Ltd

altkuznetsadvisors.com

 

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Introduction

The economy of the past, characterized by volumes, prices, costs, taxes, and profit margins, sales-based competition has by and large, turned less important as a new economy, characterized by monetizations, multiple currencies, hedges and insurances, as well as Sustainability performance and Product niches takes centre stage. The new economy runs on different rules – rules that the Equity Market seemingly doesn’t mind, even is comfortable with. Finance has taken precedence of fundamental economic parameters.

This new economy is characterized by global competition for CC Capital that is arbitraged through the PE multiple at which the EPS of competing Growth firms are negotiated and traded. Large FIIs, Mutual funds & Pension Funds, Sovereign Funds, and Sector Interests might arbitrage Firm equities against their Economic fundamentals, Finance metrics such as EPS and EPS Growth, Earned Reserves, Competition metrics, as well as other measures, notably, Global Presence, Public image, and Sovereign Support. Competition around Sustainability Indices, too, has begun to take root in global Finance markets. Firms are increasingly rated for their Environmental & Social Sustainability, and the same find expression in investments made by large financial houses. The Sustainability agenda at times takes a Sovereign Strategic hue when backed by Sovereign Governments that seek to extend opportunities and markets for home-grown Talent and Technologies, and export their economy to foreign shores.

Whereas much attention has been focused on Corporate ESG performance, there is relatively, if any attention paid to Sustainability incentives faced by Households-Consumers in their Consumption habits. Households make Consumption decisions based on Preferences, Income, and Prices. Most budget-constrained Households make Consumption-decisions that balance Product Quality/Lifestyle Quality against the Consumption share of Disposable Income. Attention to In-use and post-consumption externalities are brushed away in part because the waste is of the ‘Not in my Backyard-Out of sight- Out of mind’ kind. This schizophrenic focus on value of Consumption basket and transitory Consumption Utility contrasted with the inattention to associated in-use and post-use externalities turns many a Customer flagrant abusers of the environment as they shop for affordable, Utility-maximizing, environment-consuming, hygienic and high-quality consumable goods. Consumption by Households, across years and decades, spread across Precincts and nations, cumulates externalities either as concentrated Landfilled Waste, or as diffusely-distributed waste in the Commons. These wastes, while they despoil the local environment and engender neighbourhood and downwind externalities, cause significant harm to Biodiversity when distributed diffusely in the Commons. More to the point, they are so costly to remedy, as to be deemed impractical, and put away for a future generation of Externality Abatement Technologies. Consequently, the externality cumulates, leading Nature to a Biodiversity catastrophe, and Humanity to the verge of environmental disaster. It is hence just as necessary to take cognizance of Consumption externalities as it is to focus on Production externalities. In fact, and given the inordinate attention and resources to the latter, it is high time to act to remedy In-Use and Post-use Consumption externalities.

Alt-Kuznets has, in its recent publication[1], proposed a credible strategy to engage In-Use and Post-Use Consumption externalities in the form of a Household Consumption Externality Coefficient, HCEC. In essence, it calibrates an Externality Coefficient associated with Household Consumption over a period of time from data on Revenues, Product Line Shares, and Purchase history, to obtain an incrementally-updated Household-specific HCEC measure. Firms that buy in to Households with superior Consumption records, ie, a record of buying Full Costed Products, (including the external purchase of Externality Abatement Certificates), would secure an incrementally higher Market PE for owning the fully-internalized Consumption bundles of high PQ Households with superior HCEC (due which the prospective Externality burden suffered by Nature, Bio-diversity and Global General Insurance is lessened). Since ESG Sustainability Investment Managers at Financial Institutions factor in Corporate ESG (equivalently, Firm CCS) in computing their Firm-specific Target PEs, firms with HCEC-modified CCS would be advantaged in the market with a PE-Premium over other Sectoral- and Market Competitors.

Such PE incentivization triggers cascading incentives, both to Households and to market-listed Corporates. Whereas Households upgrade their HCEC to secure Corporate favour, Corporates seek Households with high HCEC in their pursuit of PE maximization. The Pareto incentives to profit from their mutual association, expands the concept to other Households and Corporates within and beyond the Precinct. Extended across time and space, Precincts, Sectors and Markets, the HCEC-incentivization of PEs offers the potential to enlarge the numbers of Sustainability-Believers in both Households and Corporates, dramatically shrink Consumption Externalities, and return the Earth to Sustainability that is conducive to the further expansion of Human society and CC Economy.  

There is a global opportunity in leveraging this strategy financially. Credit and Debit Card offers from financial institutions are ubiquitous globally. Card Issuers, Promoters and Sponsors offer rebates and discounts to attract Consumer purchases and increment their Business Volume, Image and Prospects. Promoters of Financial instruments could leverage the idea broached here and branch in to a new line of Business. They’d issue ‘HCEC Cards’ to a pre-filtered list of Households, record their Consumables Purchases as well as purchased Externality Abatement Certificates, and either negotiate a Lifetime-Payoff against their HCEC, or pay away HCEC Card-holder Externality as Proxies and make Corporates deals for the transfer and credit of aggregated HCEC-tagged Consumption baskets. Corporates, post acquiring aggregate Household Consumption, could motivate and justify their claim for a PE-Upgrade of their listed Equities from Financial Institutions and Investment Houses. The Consumption Externality-attenuating, Sustainability-enhancing strategy obtains payoffs to Households on one hand, and a PE Upgrade to participating Corporates on the other. This Sustainability-enhancing proposal is compatible with existing financial infrastructure, and has unparalleled global potential to dovetail Sustainability with Corporates PEs, and the same is offered by AltKuznets on a negotiable, non-exclusive basis.

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[1] https://drive.google.com/file/d/17UYt9GDGNyA2kMYxXO0XKpoDoqOELYdM/view?usp=sharing