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(Product) Portfolio Management

In The Brussels Effect(2020), Columbia Law professor Anu Bradford convincingly presents the European Union as a ‘peaceful and quiet’ regulatory global superpower.

 

If the United States relies on private litigation and tort liability to regulate economic actors' behavior, Europe has culturally employed regulation to achieve the same objective. In the specific case of the European Union, regulation has been strategically used to create a single market while lifting standards.

 

The export of EU regulation takes place because non-EU firms cannot afford to ignore the vast EU consumer market and are keen to avoid complying with multiple jurisdictions. Non-EU firms may also adopt the EU’s ‘gold standards’ for marketing or broader reputational reasons.

 

Anu Bradford discusses these global regulatory trends in conjunction with consumer rights (incl. those in technological sectors) and environmental stewardship. I would specifically add to her examples the required disclosure of non-financial data by EU asset managers (SFDR) and corporates (CSRD) since they drive the evolution of corporate finance globally (see Fixing The Market Mess.’)

 

Another example of such EU power is the new Ecodesign for Sustainable Products Regulation.’  Compared to the previous regulation, it vastly expands the range of product groups and, by extension, the number of affected firms. Its ultimate object is to decouple economic growth from the use of natural resources. Ephemeralization is the name of the game.

 

The regulation requires that targeted products undergo a product lifecycle assessment (PLA) to evaluate their environmental impacts, from raw material extraction to disposal or recycling. Imagine a sustainability facts label attached to a product* detailing the greenhouse gas emissions, air pollution, waste generation, and water use through its lifecycle.

 

Like many others, this new EU regulation will be exported through competitive forces and engagement through the value chain across jurisdictions, as discussed in A Multi-Stage Engagement Rocket.’

 

The World Business Council for Sustainable Development, an organization with many high-profile member companies (incl. US firms), has built and expanded on the PLA concept to create a methodology to create sustainability ratings for specific products. Like corporate ESG ratings, product ESG ratings are inherently flawed. However, if developed by leading industry participants in a sector, such as chemicals, they can gain helpful relevance to stakeholders and be used in sustainability statements or reports.

 

An even better analytical and communication tool would examine a product along a two-dimensional matrix: (i) a ‘footprint’ based on an LCA-based resources intensity analysis; and (ii) a ‘handprint’ based on its contribution to a positive environment or social impact. This approach would help identify four broad product categories: high/low resource intensity vs. high/low impact. It would support the analysis of an entire product portfolio and drive pricing and innovation decisions.

 

Such product-level information could then be aggregated to assess each of a firm’s divisional units within a similar matrix, driving capital allocation (including M&A) and IR communication to maximize a company’s appeal to investors.

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