A company’s externalities have, historically, had little or no impact on its cash flows or risk profile. For this reason, externalities have been largely excluded from the measurement of corporate value.
But as economic, social and environmental megaforces transform the operating landscape for business, the disconnect between corporate and societal value creation is disappearing. New regulations, growing stakeholder influence and changing market dynamics are driving the internalization of business externalities at an increasing rate. Externalities are now part of every company’s value creation story.
Business leaders and their investors need to be aware of these new dynamics in order to unlock value creation opportunities and manage risks. They need to identify and quantify externalities, recognize what is driving internalization and understand the implications for corporate value.
They will then be in a stronger position to develop response strategies that protect and create value both for shareholders and for society.
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