The effect of externalities | KPMG | KE

The effect of externalities

The effect of externalities

Companies need to understand the external impact of what they do in order to effectively manage the corporate and societal value they create

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The effect of externalities

To succeed in today’s business environment, companies increasingly have to
measure, understand and proactively manage the value they create or reduce for society, the environment and shareholders. To achieve this, companies need to better understand what is termed as ‘externalities’. What was previously understood to be external is rapidly being internalised whether through regulation such as taxes or pricing, changing market dynamics including resource shortages, or more frequent and impactful stakeholder pressure. Historically, externalities have had little or no impact on the cashflows or risk profiles of most companies. For this reason, externalities have been largely excluded from the measurement of corporate value.

However, this disconnect between corporate and societal value is disappearing. The operating landscape of business is being transformed by economic, social and environmental mega-forces such as globalisation, digital connectivity, the financial crisis, population growth, the growing global middle class and climate change. As a result, externalities are increasingly being internalised, bringing new opportunities and risks with significant implications for corporate value creation in the 21st century.

© 2017 KPMG Advisory Services Limited, a Kenyan Limited Liability Company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

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