Leveraging Household Consumption to Upgrade Firm PE
Leveraging Household Consumption to
Upgrade Firm PE
Prasad Rao, Director
AltKuznets
Sustainability Advisors Pvt Ltd
altkuznetsadvisors.com
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.
Comments
Post a Comment
Email us at director@altkuznetsadvisors.com