Metric analysis

A look back at climate and the environment: a new ROCE metric for the next 2,000 years

  • Traditional ROCE metrics have been in common use for 2000 years. On the other hand, the idea of ​​a new type of ROCE (Return on Climate and the Environment) is still in its infancy.
  • The new ROCE criteria will have huge implications, not only on what and how companies produce, but also on how they are valued in financial and societal terms.
  • There is overwhelming evidence suggesting a clear correlation between environmental considerations and business performance.

Products, profits and returns have been the language of business for decades. And rightly so; providing attractive goods at a competitive price remains existential for business success. These fundamentals have not changed.

But society has done it – and the search for an alternative to the traditional criteria for evaluating business performance, return on capital employed, takes on new meaning. A new type of ROCE, Feedback on Climate and Environment, is evolving.

ROCE has always been a preferred metric for understanding business performance holistically, across all metrics. Unlike return on equity, for example, ROCE measures the return on all capital invested in a company, not only through its shares, but also other sources of funding such as loans, grants and contributions (beyond equity), as well as any asset depreciation that has been used for “refueling” operations during the period in question.

Unlike the simpler net income ratio – revenues minus costs – ROCE also considers the volume of inputs used to make a certain profit. That’s why its evolution towards Climate and Environment Feedback makes sense, a simple metric that records how a business uses all the resources at its disposal.

Implications of the new ROCE criteria

Today, these considerations go far beyond the realm of finance. Society (and, increasingly, investors, employees and consumers) apply a new set of criteria to companies, reflecting not only the quality of their products and services, but their use and impact on all resources at their disposal.

These “new” ROCE criteria will have huge implications not only on what companies produce and how they produce, but also on how they are valued in financial and societal terms. There is overwhelming evidence suggesting a clear correlation between environmental considerations and business performance.

My favorite example is as convincing as it is simple: in 2014, Harvard Business School calculated that a dollar invested in a select portfolio of public companies whose stated objective was growth, 20 years earlier, that dollar was worth $14.46 at the time of the research. A significant return, certainly. However, if that dollar had been invested in companies focusing on the most environmental and social issues while growing their business, that same dollar would have grown to $28.36!

This is the new ROCE in action; and it is perfectly compatible with the traditional acronym of the same letters.

A process of learning and evolution

Like many other companies, my own company – The Mahindra Group – already applies some of these principles to our operations. It is a learning and evolving process, but important milestones have been reached.

Our Formula E team, Mahindra Racing, for example, pioneered this new idea of ​​ROCE. The team has achieved net zero emissions across all of its operations since its inception – an experience that will prove fundamental to our group as a whole as it strives to achieve carbon neutrality by 2040.

Business leaders in mining, metals and manufacturing are changing their approach to integrating climate considerations into complex supply chains.

The Forum’s Mining and Metals Blockchain Initiative, created to accelerate an industry solution for supply chain visibility and environmental, social and corporate governance (ESG) requirements, has released a unique proof of concept to track emissions across the value chain using distributed ledger technology.

Developed in collaboration with industry experts, it not only tests the technological feasibility of the solution, but also explores the complexities of supply chain dynamics and defines requirements for future data use.

In doing so, the proof of concept responds to stakeholder demands to create visibility and accountability “from mine to market”.

The World Economic Forum’s Mining and Metals community is a high-level group of peers dedicated to ensuring the long-term sustainability of their industry and society. Learn more about their work and how to join us via our impact story.

This experience underpins our commitment to all aspects of sustainable transportation. We have implemented more than 100 ESG projects since 2014, which have generated an average return on capital of 24% over a period of just two years. Energy accounts for 12-15% of overall vehicle manufacturing costs (cars and tractors). Over the past three years, through the adoption of renewable energy and energy efficiency improvements, we have reduced our energy costs by approximately $6.5 million per year.

Traditional ROCE metrics have been commonly used since the Greek and Roman times, so we had a lot of time to get used to it. On the other hand, the idea of ​​a new type of ROCE, Return on the Climate and the Environment, is still in its infancy.

Hopefully these new principles last and help shape and define the business as long as the original ROCE. It’s 2,000 years and counting!