Incurable Assets – Why our ability and willingness to change cannot be held hostage to unsustainable financial valuations

Companies have assets and expertise we already know will significantly decrease in value, yet are stubbornly kept in the books at high valuations. Similar to a failing organ in an aging body, there is a nasty surprise in the waiting on the balance sheets as well. 

”Stranded Assets” is a term known and used by many to describe the current reserves of the oil industry. The rightful question has been why the reserves, that would make the IPCC 1.5 degree climate objectives impossible, are still included in the financial valuations of the industry titans? Won’t the unsustainable, must-be-ended dependency on fossil fuels in any case rewrite the valuations of some of these world’s largest companies?

In our view, the phenomenon isn’t a problem only for the oil industry or fossil fuels, but a challenge facing many more companies and organizations. We argue that a large number of companies have assets and expertise we already know will significantly decrease in value, yet are stubbornly kept in the books at high valuations. Similar to a failing organ in an aging body, there is a nasty surprise in the waiting on the balance sheets as well.

Thus, we call this phenomenon Incurable Assets. A situation where assets are seemingly of high value but in reality soon to be worth a lot less and beyond repair or cure in some cases. And it will hit hard those companies that keep on relying on the successes of the past, and not re-arranging their business models fast enough.

“Today’s success factors can be the incurable assets of the future.”

Brand value replaces factories

Over the last forty years, a growing majority of the corporate market capitalization has been based on intangible assets. Brand value, patents, IP-rights, reputation and disruptive digital innovation have all sailed past factory ownership. Nike started the era when the most important asset that a company can manufacture on its own is their brand. For instance, the potential stock exchange listing of Uber would make it more valuable than Ford, Chrysler and GM, combined.

The question remains, which value driver factors will substantially grow in significance over the next decade? Are the world’s leading companies and brands in 2030 still the digital giants we know or something completely different? Will the heightened discussion around the negative features of the platform economy affect the future valuations of the actors? Will some of the success factors of these companies – such as the unlimited commercialization of private data – prove to be Incurable Assets. Might still look healthy on the outside but, in reality, about to collapse.

ESG is important, but it doesn’t predict the breadth or velocity of change

Sustainability and responsibility have become central criteria for any future-proof businesses. Preventative climate change actions, social justice, supply chain transparency as well as open and good governance are already directing financial assets and capital flows. ESG (Environmental, Social & Governance) indicators are compared side-by-side to traditional company analysis and have brought clear added value for investors. Studies have shown risk-adjusted returns to rise in the long-term, when portfolios have focused on companies at the top of different ESG-rating systems.

ESG-indicators clearly improve the holistic understanding of a company’s health, but by definition are still rear-view information. What this information does not depict is how fast existing assets can turn incurable. In our view, probably faster than we can now imagine.

ESG does not tell us how quickly the textile and fashion industry has to completely get rid of single-use, throwaway culture and unsustainable manufacturing methods. Or how quickly the climate change and the subsequent changes in the mobility sector will make traditional combustion engine expertise simply out of date. Or when the widely spreading nutritional awareness will make it impossible for Coca-cola to sell its sugared water with 10 sugar cubes in a can?

This is why we need to think further and more radically than ESG.

Let’s consider the following statements. Flying will become one third more expensive. The automotive industry will take responsibility for the emissions of a car’s entire life-cycle. Smartphones are not upgraded every year anymore. The fossil fuel subsidies are reduced.

Only a couple of years ago, all of these sounded either far-fetched or too radical – shouting from the sidelines. Not anymore, and many of these are already a step closer to reality. And with that, many familiar names and brands may fall victims to incurable assets.

When values change, regulation follows

We have only now woken up to the wider discussion of the societal effects of various digital platforms and innovations. The monopolistic nature of the platforms and privacy concerns have undoubtedly led to a healthy re-evaluation. The Economist, known for its liberal economic worldview, recently published a thematic issue on how increasingly centralizing assets and profits of the technology giants paralyze the hard core of capitalism, open and fair competition.

If our privacy and fair competition are suddenly more valuable than the free services we all enjoy, conversation around the digital disruptors will shift. Mark Zuckerberg wasn’t explaining Facebook´s questionable data handling practices for the last time, we believe.

It is absurd to think that only a few years ago there was an ongoing and seemingly valid discussion whether climate change is a serious enough threat to warrant for increased and tighter legislation. Now the EU has strong plans to slow down climate change. Whilst there is plenty of resistance remaining, many progressive corporations, start-ups and entrepreneurs see this as the largest business opportunity of our lifetime.

The ban on plastic products did not surprise those at the forefront of the circular economy and there is more to come. The ten-part EU Sustainable Finance action plan aims to accelerate the change, albeit it is too early to tell, how efficient it will be in its entirety.

But the conclusion is clear. When values change, regulation changes. The task for companies, boards and management is to decide on which side of history – and climate change – they want to be. The sustainable side or the incurable side?

“Cure cannot be achieved alone. It needs new, even surprising partners and coalitions.”

New coalitions and collaboration needed

In its essence, Incurable Assets is a call to look the future directly in the eye and make decisions that may be hard in the short term, but ultimately unavoidable.

Strategic and systematic use of foresight is every sustainable company’s responsibility. In our experience, qualitative methods from backcasting to scenario analysis and the dialogue they generate within the organization is a good place to start envisioning new and better futures.

The foresight work is at its strongest, when it serves as a springboard and framework for active co-creation and partnerships with external stakeholders. The world cannot be changed alone, and new types of coalitions and alliances are needed to push the agenda and actions ahead. The systemic challenges of climate change, the tracking of global supply chains and re-steering of financial assets require collaboration models that are markedly different from the past. Collaboration with competitors as well as new operating models between the public and private sector are both needed.

No longer can we delay writing down the old world. If the roadmap and the vision for tomorrow are lacking, the incurable nature of many existing assets will suck the oxygen out of household name companies and brands, leaving behind economic turmoil and wasted opportunities. Our ability and willingness to change cannot be held hostage to financial valuations and world views that are simply incurable.

Now is the time to act. Together.

Petteri Lillberg (M.Phil) is a Senior Consultant at Demos Helsinki, focusing on strategy, foresight and societal impact across industries and organisations. Peter Lindström is responsible for sustainable finance side development. His main activities include sustainable finance and responsible investing projects.

Photo: Asa Rodger