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ESG Focus: 21st Century Business Models

ESG Focus | Mar 09 2020

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Increasing focus on ESG criteria is feeding into emerging new business models, and investors will be forced to pay attention

ESG Focus: 21st Century Business Models

-Changes in social trends are predicting changes in business and reshaping the global business landscape
According to PGIM, these changes have led to the emergence of three on-the-rise business models; the weightless firm, the superstar firm and the purposeful firm
Changes to business priorities may reshape the criteria investors use to calculate future investment choices

By Danielle Austin

Social trends continue to predict business trends according to PGIM, with new research showing that large corporations globally are increasingly in tune with the need for business models to demonstrate a focus on having a wider social impact.

With business models deprioritising physical capital and assets and refocusing on utilising technology, data and network effects, and renewing a commitment to a wider social purpose, the global business landscape is undergoing a redefinition as pressure mounts from investors and consumers for big business to be more accountable.

New Business Models On The Rise

Global asset manager PGIM, owned by US-based Prudential Financial, has identified that shifting trends have led to the emergence of three new business models which are quickly on the rise; weightless organisations, superstar organisations and purposeful organisations are saturating the markets and changing the way investors make decisions.

Research from PGIM indicated that corporates are shifting business priorities away from traditional tangible assets such as factories, machinery and equipment to move toward investing in ‘capital-light’ business models where investments in intangible assets such as data, software and brands take priority. 

These weightless organisations tend to require less capital than tangible-asset heavy organisations, and so rely less on public markets to increase their scale. The report showed that globally 64% of large organisations had plans to increase intangible asset investment, while 44% of small businesses were looking to increase their intangible asset investment.

The report also showed that superstar firms are on the rise with savvy companies able to leverage on emerging technology, data and networks to increase scale and productivity and outperform peers. The emergence of superstar organisations encourages a winner-takes-all environment across the business landscape, ultimately narrowing the field of big business.

It was found that while half the earnings of US public corporations came from a total of 109 companies in 1975, the same percentage of earnings in 2019 was generated by only 30 organisations.

PGIM describes these organisations as more effectively deploying available technology than their peers in order to drive growth in productivity. Through buying out or assimilating competitor startups, superstar organisations are capitalising on market domination and markets are becoming increasingly concentrated.

Driven by social pressure to be more accountable, corporates are also increasingly including a commitment to social change in their business models in response to pressure from customers, employees and shareholders with a vested interest in broader community values in the “profit for purpose” era.

20% of the companies surveyed by PGIM reported looking to strike a balance between profit maximisation and broader goals that tapped into wider social impacts as corporate boards recognise that positive social and environmental outcomes strengthen long-term enterprise value.

Among the arguments for increased ESG goals within business models was the ability to attract top talent, with surveys showing millennial employees valued a purposeful workplace over a higher salary. Other reasons included increasing profits through building a positive reputation and establishing long-term business viability in a contemporary market.

It's Happening In Australia Too

Australian corporates are already demonstrating a similar lean towards a profits with purpose goal. Companies including Koala, Biome Eco Stores and Australian Ethical are positioning themselves as agents of social change.

Similarly, Australian gig economy companies such as Airtasker and Freelancer ((FLN)) are paving the way for labour-light, tech-forward business models, while research conducted by global workspace provider Regus suggests that Australia’s coworking office space is set to triple by 2030 as employer and employee preferences shift.  

With lower capital requirements and a lower fixed-cost base, weightless organisations are less dependent on public markets, enabling them to stay private for longer. With a focus outside of traditional, tangible assets, these companies may not align with traditional risk models.

Those businesses leaning towards a profit for purpose approach may have ESG guidelines that no longer fit traditional risk models. For investors these factors have the potential to create opportunities in public and private debt markets and encourages them to reconsider their public-private evaluations.

Changes To Consider For Investors

According to PGIM these shifts in the business landscape should signal a change in asset allocation, valuation, risk assessment and investment framework for investors. Some things to consider:

  • Investors looking to profit from rising efficiencies in companies focused on intangible asset investment should consider big business over smaller start-up companies;
  • Capture growth opportunities by investing in larger, scaled companies that have proven effective in assimilating and acquiring new technologies, products and services;
  • Alternatively, when investing in smaller startups, consider the landscape of the existing sector and how superstar organisations may impact startup growth;
  • Look to sectors including digital payments, corporate security services and gaming for next generation superstar organisations;
  • Purposeful business models may not align with current ESG metrics; with research showing that increased social commitment improves business reputation and longevity, investors should consider how current criteria to calculate investment choices factors in risk-adjustment in relation to ESG goals.

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