The Pilot Analytical Framework applies five standard financial valuation techniques – Ratio Analysis, Discounted Cash Flow (DCF), Rules of Thumb Valuation, Economic Value Added (EVA) and Option Pricing – to SD metrics such as energy use and community involvement, to demonstrate how business aspects traditionally viewed as “soft” by analysts can be translated into hard valuations. Data from the public sustainability reports of five Canadian-based mining companies are used to illustrate the translation – Alcan, INCO, Noranda/ Falconbridge, Placer Dome and Teck Cominco.
In the Foreword to the report, Donald Reed, President and CEO of Franklin Templeton Investments Corp., states that “The report provides the first steps in using financial language to measure the impact of sustainable development on the bottom line. This report, and its pilot framework, may be able to help lay the foundation in linking sustainable development to company performance and provide another tool for financial professionals to use in their on-going analysis.”
Applying the framework helps isolate the sdEffect which, using data from individual mining companies and built in assumptions about the influence of SD on such aspects as “license to operate,” reveals results such as:
The study also reveals some significant opportunities for strengthening corporate disclosure and reporting requirements to better enable translation into financial valuation. “Only 10-20% of the publicly reported SD metrics we reviewed are somewhat straightforward to translate”, said Ron Yachnin, Principal of Yachnin & Associates, one of the report’s authors. “Also, relevant data is scattered in these reports – what we need is a more focused approach to reporting this type of information”, he said.