Sustainability can start affecting new age businesses - like fossil fuel businesses

Preamble

New age businesses like renewable energy, electric vehicles, social media technology giants, etc. are the talk of the world with their businesses attracting very high valuations.

These new businesses are expected to usher in a new business models attarcting high valuations. However, these business might start facing different type of sustainability issues in the days to come very similar to the issues faced by traditional fossil fuel firms

In this article, I explore some issues and trends relating to sustainability for these new age business.

Invite critical views

Main Article

A few weeks back I was attending an online webinar on Electric Vehicles and got connected with a retired gentleman who had worked in the automobile industry in his entire career. When I quizzed him about his views on the advent of electric vehicles and especially on its effect on climate change, he said he wasn’t sure! I was perplexed. After all, EV`s were supposed to be the panacea for the pollution that we all face from normal combustion vehicle engine car!!!

He told me a story. When cars were first introduced more than a century back, they were actually solving a pollution problem!! Before cars, horse carts were used by people to travel, in which the biggest issue was the cleaning and disposal of horse dung! Hence when combustion vehicles cars were introduced, people were happy that the dung problem will be a thing of the past. Now when the world is talking about solving climate change issues by replacing fuel powered cars with electric vehicles, he said he wasn’t sure of the downside effects of the EV`s !!

Recent sustainability concerns with new age businesses

The above story made to think about some of the sticky events across the world involving the new age businesses – especially the global digital technology giants.

• Recently, the famous Chinese company, Alibaba was fined $2.8bn by the Chinese government as the Chinese government wasn’t happy with the monopolistic tendencies wielded by Alibaba`s digital reach!

 

• China recently introduced a Personal Information Protection Law (PIPL) that lays down a comprehensive set of rules around data collection and protection. Along with a new antitrust law, the data protection law is seen as part of a broader effort by Beijing to rein in the power of its technology giants such as Alibaba and Tencent and creating a regulatory model for the next-generation internet.

• European Union (EU) introduced the General Data Protection Regulation (GDPR) in 2018 to regulate citizen`s data collection and privacy concerns. Many of the EU countries have also implemented a digital tax levy on digital services at point of consumption which has added to the controls on the global digital firms.

• Closer home in India, the Indian government recently had a faceoff with Twitter over blocking some accounts associated with the farmers protest. Twitter had to take some quick action to avoid facing a total blockage by the Indian government.

 

• Google and the Australian government have had a tiff on whether news on Google feed needs to be paid for by Google or not. It was resolved only after Google acceding to the Aussie governments concerns.

 

• USA law makers are so highly concerned about the power wielded by the technology giants like Google and Facebook, that they are talking about breaking up the companies like the telecom major AT&T many years back. Regular Congress sessions, in which the digital technology majors CEO`s are grilled, give an insight into the seriousness with which the USA government is looking warily at the influence of these companies over the general public.

 

• Cobalt and Lithium, which are the essentials to make batteries for Electric Vehicles’ face mining labor issues especially in Africa which can constrict the supply of these products in the days to come.

All the events described above, might be seen as discrete events in a common man`s eyes but the common thread is that all the new age businesses will very soon face a sustainability wall block very similar that the fossil fuels businesses have faced. The movie “The Social Dilemma” portrayed how the digital companies use algorithms to manipulate the general public`s thoughts and purchasing decisions.

Oil and Gas companies were global economic stars till sustainability backlash...

Oil and gas propelled the growth of global economy in the second half of 1900`s with geopolitics too affected by oil business dynamics. Downstream products of oil like fuels and plastics gave a boost to industries like automobiles, heavy machinery, and consumer products. However, soon these businesses were accused of being primarily responsible for the various society ills like global warming, climate change, oceans pollution, emissions, etc. Importantly capital markets too have been highly influenced by these trends with markets according higher valuations to firms with better compliance to environmental norms.

Backlash has been higher in Europe as compared to the USA, till last year which has forced European oil and gas firms like BP, Eni, Total, etc. to announce aggressive zero carbon target dates and move to renewables. In fact a leading company like BP sold of its prized chemical business assets in 2020 in order to be seen as a “green” and “environmentally compliant” company.

New age companies have phenomenal valuations Vs traditional firms…

Comparison of valuations of new age firms like Tesla, Google and Exxon over the last 10 years shows that new age firms have far greater valuations with the key reasons being - wider geographical reach and highly scalable, asset light models.

 What lies ahead?

With the recent sustainability backlashes facing the new age firms, will this run of higher valuations continue? Will there be roadblocks like what the oil and gas firms faced? Will capital markets start reducing the future cash flows as business model scalability becomes a question mark?

Interesting times ahead.