The misunderstanding of ‘asset’ and its relation to the environment
First published here.
You may have heard the saying that as soon as a car leaves the showroom, it has dropped in value. And although many ‘get it’ there still remains a misunderstanding of what an asset really is and thus a misplacement of value.
The dictionary definition of an asset is a useful or valuable thing. So in that case the car is useful, whether it is valuable is entirely subjective. Asset is also an item or property owned that is regarded as having value and can be used to meet debts and commitments. This means that it is a thing that constantly creates. If we put the two together, an asset is a useful or valuable thing that constantly creates.
I’m not defining what it creates but clearly its creation can be used for something (meet debts and commitments). Therefore, it can be understood that an asset is not an end product but a conduit in making the process possible to make that end product. And thus, if you don’t have this asset (that to make the product) then the process doesn’t happen.
This is a very basic explanation of asset but I think it is quite important.
A simple way of thinking about it in business is: can you resell for more than you bought? Or, does it make me money? Here ‘make money’ is clearly in terms of an on-going basis. A car neither makes more money than bought (there are tiny exceptions) and it does not make money.
However, our economic system places asset at the end — the product, the thing.
By misplacing the understanding of where and what the asset is, creates a loss of understanding as to what needs to be protected and sustained, especially if you still want to continue making gains.
Let’s take electric cars. The asset is not in the car. And yet, as demonstrated by a certain brand’s board meetings, many investors are stuck on the car (i.e. car sales) being the asset. This demonstrates a short term investment value.
If the asset is understood as the process — the research and development — then long term value is the focus. It is not the car but the most important part of the car that will keep on giving down the line. In this case, it is the battery and all the technology that goes with it.
This also means that the asset rests in every single element that makes it possible — the environment. And when I write environment, I do not differentiate between people and natural resources, because these are the same. A living human is nature; we are not separate from nature. And thus, the research and development of the technology for the batteries includes the people and the natural resources who make it. Take any of these elements away and you don’t have a good battery.
If we understood better our assets then we would also be able to focus on what is really important.
Take the article about the Austrian Ötztal glacier, a story that had me furious and also was a perfect example of how people understand what is going on (of which many don’t). They have placed the asset in the hotels and other tourist products. But the asset is the glacier itself. If you don’t have a glacier then you don’t have a resort. Short term thinking is focus on the end product. Long term thinking is focus on what keeps on giving for the product to exist.
Put asset and sustainability together and you have: does it make money for a long time? If what you are doing makes you money until what is needed to make that money runs out, then that is not sustainable.
If companies and people noticed this then perhaps they would get what it means to be sustainable. This would also drastically change our economy and our perception of what is valuable.
A pair of jeans does not keep on giving. But the ability for a denim factory to keep on making denim and doing so with minimal environmental damage is what keeps on giving. Let’s stick to the denim example.
The asset is not in the rolls of denim the factory produces and sends to a brand. The asset is in how these rolls of denim are produced. The more work put in to reduce environmental damage in the production of this denim the more valuable the factory is, for many reasons. The first is that it protects its natural resources it needs in order to produce the denim, so it is a business that can continue for a long time. Second, the production of this denim is an asset to those brands that use the denim as they can use this as a marketing tool. Third, the factory is resilient because of the development in its operations: healthy workforce that works at its best because they are taken care of (there are many studies about this) and when they work at their best they contribute to protecting and sustaining, through improvements, the business.
By seeing assets in a different light, from a different angle, one then naturally has an environmental approach to business. The factory is an asset that continually gains in value. How? By having a positive impact on society, that impacts the economy. It achieves this by having a positive reputation that in turn continues to attract business. And thus when looking into investments, the asset of a business is how it is managed and operated.
When this is done right this is then what is called sustainable investment, because management and operations are the foundations of a running business. If done right then the foundations will last for the long term and will be able to support continual development as long as it is in the right direction looping back to sustainability, i.e. long term asset building. Sustainability mitigates the damage to the asset-based risks. This is why it makes for good business.
COVID has revealed in so many ways where the real asset lies. And yet, because asset is still perceived and understood as that of short term gains (i.e. revenue of sales of an end product), the real asset which is long term gains will fall foul. The placement of asset on short term gains will continue to lead the way to environmental pollution and degradation.
