Sunday Brunch: the building blocks for a good strategy
Sustainability, Strategy & Finance

Sunday Brunch: the building blocks for a good strategy

Financial accounts might sound like they are only for financial specialists. But that would be wrong. The financial Annual Report should also be about sustainability.

"It is difficult to get a man to understand something, when his salary depends upon his not understanding it." probably first said by William Jennings Bryan in 1893

Strategy is about preparing for change, something that lies at the heart of making any company successful in the long run. But good strategy doesn't just appear in a vacuum. We need to prepare for a different future. And that can be challenging.

But how can companies be preparing for the future changes that the sustainability transitions will bring if they are not even thinking about the possible impacts and outcomes. Just recently a report from Carbon Tracker that showed that "140 companies with some of the world’s highest emissions are collectively failing to explain how the climate crisis affects their existing business, with major auditors found to be equally ineffective".

An important step in creating a business that lasts is to understand what changes the sustainability transitions will likely bring, and how they will impact our company. And then obviously, how do we anticipate and prepare for these changes in a way that allows us to continue to generate a fair financial return for our investors.

And to be clear, this analysis is complementary to efforts by investors and other groups to get companies to commit to net zero, 1.5 degree pathways, and to report in accordance with standards such as TNFD. It's just coming at the problem from a different direction.

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Understanding the problem is the start of finding a solution

Financial accounts might sound like they are only for financial specialists. But that would be wrong.

It's sometimes easy to forget that the basic purpose of financial accounts is to enable investors to identify if the company is being well managed, and to give them the information they need to identify what the company is worth.

Over hundred's of years accountants have fine tuned the information that is provided in companies audited Report & Accounts. An important element of my role, first as an analyst and then as a fund manager, was to keep up to date with the changing rules. Which meant reading, and understanding, the various standards from organisations such as the International Accounting Standards Board (IASB).

It was sometimes a hard slog, but a necessary one. Because a companies Report & Accounts, properly interpreted, gave me much of the information I needed to decide if we wanted to invest in a company (or not). And it gave me the tools to identify if the company was well run, and if it had a viable future.

More recently, we have added sustainability into the evaluation. Because lets be clear, the sustainability transitions are going to dramatically change most companies operating environment. Think change on a massive scale.

Because of this, ensuring that the company anticipates and prepares for the future, and that it properly estimates the impact of the sustainability transitions on the companies future financial performance, is an important role of the company's board of directors. Perhaps their most important role.

Sunday Brunch: good faith is no defence for lack of foresight
Are directors properly discharging their fiduciary duty by taking into account the changing landscape in which they operate?

Understanding the impacts of the sustainability transitions on a company is not just about helping deliver societal expectations around net zero or protecting our environment. It's also about ensuring that a company can change and adapt to these new operating requirements.

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