A recent piece on Bloomberg.com by Peter S. Green notes a fascinating new line of inquiry some investment managers are starting to take. Notes the piece:
Jonas Kron is worried about water. The investment adviser at Trillium Asset Management, a $900 million fund manager that focuses on environmentally sustainable investment, fears the world’s dwindling supply of fresh water is hurting the companies he has invested in. For most of the year, Kron has led a shareholder challenge to J. M. Smucker, the strawberry jam maker that also owns Folgers coffee. Kron says the company hasn’t demonstrated it’s prepared for the market changes that are sure to come as climate change reduces the size of the world’s coffee growing area. The conversation has been difficult in part because corporate leaders still seem unaware they need to factor water risk into their financial projections, says Kron. “We’re not talking about charity here,” says Kron. “These are investors seeking to have the company address the risks in its supply chain.”
Of course finance theory has long held investors consider risk when valuing a stock but the reality of my experience is that few investors really understand the operational/supply chain risks inherent in most companies. Indeed, at the basic level one may argue that to value a stock one should understand (a) where their cash flows comes from and (b) what can put those cash flows at risk. Most ordinary investors can barfly manage the first task and most are woefully unaware of the second. The phenomenon Green alludes to is long overdue. After fifteen year working in operations and operations strategy at some of the largest, best-known companies in the world, I can sadly say that few are the analysts (and fewer still the individual investors) who truly grasp the risk that impact the supply chains at the world’s most famous brands. I suspect that supply chain risk will become a more explicit calculation and line of inquiry for investment analysis in the future – a change, as noted, long overdue.