90  Valuation of ESG and Digital Initiatives Farsighted companies pay heed. Consider General Mills, which works to ensure that its ESG principles apply “from farm to fork to landfill.” Walmart, for its part, tracks the work conditions of its suppliers, including those with extensive factory floors in China, according to a proprietary company score- card. And Mars seeks opportunities where it can deliver what it calls “win- win-wins” for the company, its suppliers, and the environment. Mars has developed model farms that not only introduce new technological initiatives to farmers in its supply chains, but also increase farmers’ access to capital so they are able to obtain a financial stake in those initiatives.16 Investment and Asset Optimization A strong ESG proposition can enhance investment returns by allocating capi- tal to more promising and more sustainable opportunities (for example, re- newables, waste reduction, and scrubbers). It can also help companies avoid stranded investments that may not pay off because of longer-term environ- mental issues (such as massive write-downs in the value of oil tankers). Re- member, taking proper account of investment returns requires that you start from the proper baseline. When it comes to ESG, it’s important to bear in mind that a do-nothing approach is usually an eroding line, not a straight one. Continuing to rely on energy-hungry plants and equipment, for example, can drain cash going forward. While the investments required to update opera- tions may be substantial, choosing to wait it out can be the most expensive option of all. The rules of the game are shifting: regulatory responses to emissions will likely add to energy costs and could especially affect balance sheets in carbon- intense industries. And bans or limitations on such things as single-use plas- tics or diesel-fueled cars in city centers will introduce new constraints on an immense number of businesses, many of which could find themselves having to play catch-up. One way to get ahead of the future curve is to consider re- purposing assets right now—for instance, converting failing parking garages into uses with higher demand, such as residences or day-care facilities, a trend we’re beginning to see in reviving cities. Foresight flows to the bottom line, and riding sustainability’s tailwinds presents new opportunities to enhance investment returns. “Consider China, for example. The country’s imperative to combat air pollution is forecast to create more than $3 trillion in investment opportunities through 2030, ranging across industries from air-quality monitoring to indoor air purification and even cement mixing. 16 K. Askew, “‘Extended Supply Chains Are Broken’: Why Mars Thinks the Commodities Era Is Over,” Food Navigator, June 6, 2018, www.foodnavigator.com. Digital Initiatives  91 Digital Initiatives The definition of digital is fuzzy. Some view it as simply the upgraded term for what their IT function does. Others focus on digital marketing and sales, pro- viding digital services to customers, or connecting devices. The applications of digital technology in organizations involve all of these and probably ideas that haven’t been thought of yet. Several of our colleagues examined a typical consumer packaged-goods company to see how many ways digitization and digital applications could be used to improve performance. They identified at least 33 possibilities, including digital marketing, optimizing trade spending, improving sales force coverage, predictive maintenance, supply chain plan- ning, and robotic process automation in the back office. Given the wide scope of potential digital initiatives, it is no surprise that most companies are launching them. In a 2018 survey of 1,733 managers, about eight in ten said their organizations had begun a digital transformation. However, just 14 percent said their efforts had made and sustained perfor- mance improvements. What’s more, only 3 percent reported complete success at sustaining their change.17 Evidently, digital is an area where management discipline is much needed. Measuring the Value of Digitization It’s not surprising that companies struggle with how to evaluate the myriad “digital” initiatives being proposed. Yet the fundamental principle still ap- plies: evaluate digital projects based on the cash flow they are expected to generate. While it sounds simple, getting it right requires some thoughtful strategic analysis. Ideally, all investment decisions should be analyzed against an alternative course of action. For digital projects, the alternative may be to do nothing. But the do-nothing case doesn’t mean zero cash flows. In fact, the do-nothing or business-as-usual case is often the key to evaluating digital projects. Banks have faced this challenge several times over the past 40 years. In the 1970s and 1980s, banks introduced automated teller machines. In the 2000s, banks set up online banking. In the 2010s, banks developed mobile-banking apps. It seems obvious that banks needed to introduce all these innovations. But these innovations probably didn’t generate new revenues, because cus- tomers expected them. Thus, although a mobile-banking app makes strategic sense, it appears to create a negative present value due to its additional costs with no added revenues. 17 J. Deakin, L. LaBerge, and B. O’Beirne, “Five Moves to Make During a Digital Transformation,” McKinsey & Company, April 2019.