Sustainability and Rewriting the Book on Valuation: An Interview with Tim Koller

Abstract

In this interview that took place at the inaugural symposium of the Sustainability Accounting Standards Board (SASB) in December 2016, McKinsey's Tim Koller, the co‐author of what many finance practitioners take to be “the book” on the subject of valuation, discusses how accepted principles of valuation apply to corporate investments in sustainability. One clear message of Koller's book is that creating shareholder value is not the same as maximizing short‐term profit, and that inability to distinguish between them is a prescription for failure. This message is particularly important for companies attempting to assess the value of their sustainability initiatives and programs, since such programs can involve significant ongoing investments of capital that tend to reduce near‐term earnings. Koller's main message for corporate managements in these pages is that sustainability initiatives should be evaluated as strategic investments that, when viewed over sufficiently long periods of time, have positive expected net present values. Such values can be created by increases in corporate profits from cutting waste or finding new climate‐friendly sources of revenue—or by reductions in corporate business or regulatory risks that lead investors to assign higher P/E multiples to the firm's current earnings and cash flow. But whether the increases in value are expected to come from more profit or less risk, corporate managements are urged to help investors understand the expected payoffs from such investment by providing more and better information about the environmental and social risks facing their companies, their plans to deal with such risks, and the expected effects of both their risks and plans to manage them on their long‐run profitability and value. To the extent they succeed in this, Koller argues, managements will find their companies attracting more sophisticated and longer‐term “value” investors—investors whose presence and influence should increase management's confidence in and ability to carry out its long‐run business plan, and the sustainability initiatives that are a critical part of it.