January 3, 2008

Financial Practices Could Hinder Green Innovation

A cap on carbon emissions is all but inevitable, however the details of those caps have yet to be determined. As a result, some companies are moving slower rather than faster towards green investment. But according to Marketing Green, a recent Harvard Business Review article sheds light on three common financial practices that could be suppressing investment in green innovation in such a way that causes severe long-term harm on a company.

The first pitfall comes from cash flow modeling. Many companies assume that their current cash flow will remain consistent, but the Harvard article points out that the absence of continuous “innovation investment” often leads to a decline in performance of existing operations, which reduces the cash flow.

Another mistake financial managers make is to assume that continued use of an existing asset, which does generate more return in the short-term, is better than investing in a new asset, whose benefits are long-term. This is what happened to U.S. Steel, whose production costs remained so high that Nucor, its competitor, eventually out competed it because of its long-term investments in innovative technology.

Lastly, companies that focus solely on quarterly earnings are inclined to under invest in new technology.

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