An aspect of business finance that is poorly understood is the time value of money. Today’s profit stream is naturally worth more that a future profit stream. The problem lies in the fact that this puts no credible value on the quality of the profit stream.
Let us put it another way. The three gorges dam was likely financed with twenty and thirty year term loans with government guarantees. These loans are paid back by dam revenues. The value of the dam is seen within those time horizons. Yet the dam will operate for perhaps a couple of hundred years. What is the present value of that two hundred year revenue stream? We have no way to judge that in terms that makes sense in a human lifetime or scale.
A similar problem arises when attempting to evaluate environmental issues. The whale harvest was an incredibly profitable business that impacted on thousands. We have since paid the price of diminished herds that are taking decades if not centuries to recover and it is difficult to put much value on the slaughter today.
Again a dam can provide power for generations but also destroys arable land that provided incomes for millennia.
The business of business is short term profits. The business of the nation is to create regulatory guidance in order to socially allocate resources properly. The error of government is to lag events instead of getting ahead of events. Shutting down the cod fishery after the stock has terminally collapsed is a classic example. Had it been shut down several years earlier, we might today be managing a restored harvest. Instead the stock is slowly limping back into existence and this may take a century if the present pace means much.
My own ax to grind is the reality that forest management needs to be underwritten over decades and centuries and fully integrated into agricultural activities. This must be done by community structures set up to last through the centuries. Doing it properly has a huge human benefit in sustained employment and valuable outputs.
Imagine giving someone the right to go unto a feedlot, slaughtering all the beef and selling the carcasses for cash at the gate and keeping the cash. That is how we presently mange out forests.
Was Milton Friedman Greentech’s Biggest Enemy?
Mr. Free Market encouraged companies to solely look at profits, which retarded the growth of sustainable business practices, says one CEO.
Why don't CEOs of major corporations think about things like sustainability or take creative approaches to reducing waste and energy?
"My answer is two words: Milton Friedman," said Ray Anderson, founder and chairman of Interface Global, a billion dollar-plus carpet manufacturer, during the question and answer session at the Sustainable Industries Economic Forum in San Francisco today. "He said business exists to make a profit, but that is so upside down. There must be a higher purpose."
Anderson, though, was not calling upon the corporations of the world to become philanthropic organizations, so don't spit up on that latest copy of Forbes yet. His larger point was this: Corporations and the executives who run them can and need to take a broader view of how they achieve their profits.
If a company spends extra money on erecting a LEED office space, and that money in turn leads to greater productivity and lower employee churn, it's a good investment. In Friedman's view, that investment could easily be viewed as frivolous.
If anything, Interface stands out as an example of how sustainable business practices can help the bottom line. In 12 years, the company has reduced greenhouse gas emissions by 71 percent. Energy intensity in operations is down 41 percent. Water consumption is down 74 percent. Interface now uses 24 percent renewable materials and will move to 100 percent by 2020. One third of its smokestacks have been closed.
Yet, sales have increased by 67 percent "and profit margins are up," he said. The company has also had quite a bit of success with biomimickry. After studying patterns in nature, company designers came up a new line of carpet tiles, called Entropy. The tiles are all similar, but not exact. When the tiles are installed on a floor, you get a harmonious whole. However, if one wears out, you can replace it without ruining the overall effect: with homogenous tiles, the new one can glaringly stand out.
Entropy has become one of their biggest sellers. It is also studying the adhesion in geckos to see if there are ways to replace glues.
To move toward sustainability, one of the best things a company can do is concentrate on reducing waste because the results can be obtained and measured quickly. "By attacking waste first, we got ahead of the cost curve," he said.
