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Companies are not just about the bottomline

By Dinah A.Koehler (China Daily) Updated: 2015-10-07 09:26

'Intangible assets' are playing an increasing role in defining the value of listed firms

Sustainable investing is transforming the business world. Simply put, companies that successfully manage environment and sustainability-related issues stand to see the benefits of that strategy reflected in their share price.

By the same token, analysts equipped with the skills to evaluate a company's commitment to sustainability will be better placed to make more precise financial projections.

Working out the value of a company is more complex than simply calculating its fixed and floating assets. "Intangible assets" have become an increasingly important part of the equation and a component that analysts can not afford to ignore.

Two decades ago, analysts in the United States faced similar problems when interpreting accounting data from companies based in foreign jurisdictions. Typically, they adhered to accounting standards which did not have the rigor of those in their home market.

"Intangible assets" place a balance sheet value on brands, including "goodwill". This in turn, is based on underlying factors such as reputation, culture, research and development, and human capital.

Today, only 20 percent of the market value of S&P 500 companies resides in their tangible assets, compared to more than 80 percent in 1975, according to data by the intellectual property experts Ocean Tomo in the United States. Below are four key factors in this new era of "intangible assets":

Power of data

The evolution of non-financial data, which now takes in information on sustainability, has increased the valuation of "intangible assets". During the past 15 years, the world's largest corporations have started to disclose sustainability data on supply chain risks, health and safety records, and environmental pollution.

They have been guided by the Global Reporting Initiative, an international independent standards organization, which lists more than 400 indicators on corporate non-financial performance.

The launch of the Sustainability Accounting Standards Board in 2011 has helped companies identify what environmental, social and governance issues they need to adhere to in various industrial sectors. The European Union will mandate disclosure of non-financial information from 2017 for all public companies with more than 500 employees.

Worst-case scenarios

Negative environmental and social issues can cut projected cash flows and threaten the survival of a business. The tragic consequences of the collapse of a clothing factory in Bangladesh in 2013 had a negative effect that spread quickly across the international clothing and textile industry.

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