Working Report, 2/2005 – Environmental Shareholder Value

Environmental Shareholder Value

11 Value Growth Duration

11.1 Environmental risks and opportunities

Value Growth Duration concerns the future value creation in the company. In pricing shares, the market implicitly assigns a finite time period to the company's expected ability to create Shareholder Value. This is the period in which the return on an investment or a product is higher than the cost of capital. This period is called Value Growth Duration (VGD), and according to Rappaport (2002), the period ranges from 15-25 years for companies with proven competitive advantages to a duration approaching zero for poorly positioned competitors or those in highly competitive industries. A very clear example of a VGD period could be a patent period where the competitive advantage disappears when the patent expires.

11.1 Environmental risks and opportunities

Like WACC, VGD will be dependent on future risk aspects. This may include future environmental legislation or changes in consumer attitudes which could affect production costs or earnings.

Companies that do not include environmental conditions in their risk management thus risk being overtaken by companies that have prepared for these risks.

Since VGD concerns the future and thus many unknown factors, it is more complicated to quantify the impact of the environment on Shareholder Value, but there are examples of assessments of the impact of future legislation on the competitive conditions of a business sector.

Repetto & Austin (2001) have prepared a method for analysing the impact of future legislation on companies' financial position and the competitive situation of the business sector. The method has been applied in the American paper industry (Repetto & Austin, 2001) and in the oil industry (Austin & Sauer, 2001). In a number of environmental areas within each industry, scenarios have been set up for possible legislative initiatives, and the costs of such initiatives for the individual companies have been assessed. The analyses clearly indicate which companies are best prepared to manage future legislation and thus the company's future risk profile.