The United Nations Framework Convention on Climate Change (UNFCCC) âNet Zero Financing Roadmapsâ indicates that worldwide corporates will need to invest about $960bn per year until 2025, about $1,400bn annually between 2025 and 2030 â equivalent to the annual GDP of Mexico. Whatâs more, they will need to spend significantly more every year after that to achieve net zero greenhouse gas emissions by 2050.
But do corporates have resources on this scale to deploy? Seen differently, how much money would there be for governments to tax away to tackle this and other societal and environmental challenges?
Our economic profit measures are ideally suited for answering these questions. In departing from regularly reported accounting profit calculations by adding back voluntary firm expenditures like R&D and subtracting the weighted average cost of capital for publicly listed firms in 21 sizeable economies, we essentially determine the maximum resources available to the commanding heights of our capitalist economies to address compelling social, environmental, and other imperatives.
Our economic profit metrics add to the indicators available to decision-makers. Here we highlight three novel findings we can draw from these bottom-up data for 2005-2022.
First, our analysis reveals how much money is available for the pressing challenges of our time. Looking across the economic profits generated by all 40,000 or so of the firms we study, we can compute an aggregate net economic profit measure, which ânets outâ positive and negative economic profits across firms. This could be interpreted as a variant of the maximum additional corporate tax yield for governments (assuming they allow for loss carry forward provisions). Figure 1 shows that the publicly listed firms in the 21 countries we study produced net economic profits of about $2.4tn in 2022 (green bars) or $5.4 of every $100 in revenues (grey line). Stripping out the impact of inflation, these profits have grown considerably since 2005 but fluctuate a lot during crisis years. If we strip out value-destroying firms, on the other hand, we can compute a gross measure of economic profits. The green dotted line in Figure 1 highlights that these gross profits are even higher. More than $2.8tn would have been available in 2022 according to this metric. This measure tends to be more stable over time than the net measure, perhaps reflecting the sustained performance of value-creating firms even in challenging times.
Second, our economic profits data reveals how much publicly listed firms in different regions and sectors could contribute to financing societal imperatives. Table 1, which only looks at firms with positive economic profits (i.e., our gross economic profit measure), shows that between 2018 and 2022 more than half of these profits were generated in the US. The IT sector created the most value during that time frame (19% of the total gross economic profit), followed by the consumer discretionary (17%), industrial (14%), and healthcare sectors (14%). Table 2, which analyses net economic profits, paints a similar picture. The much lower values in the energy, utilities, materials, and industrial sectors, however, imply that there were âvalue destroyingâ companies with negative economic profits in these sectors.
Third, our analysis highlights that some sectors, countries, and sector/country pairings were particularly strong at generating economic value relative to corporate revenues during the 2018-2022 period. Table 3 shows that the IT, healthcare, and communication services sectors have featured especially high net economic profits/revenues ratios. For example, $13 of economic profits earned in the IT sector out of every $100 in revenues were economic profits and could, in principle, have been used to finance societal improvements. Switzerland, the US, and the Netherlands hosted the companies with the highest economic profit margins in the world. Nine dollars of every $100 in revenues earned in publicly listed Swiss firms, for instance, were economic profits. Within these sector/country pairings, Swiss healthcare firms as well as Dutch and US IT firms were particularly strong value creators. Thirty dollars of every $100 earned by Swiss healthcare and pharma behemoths were economic profits.
Overall, the worldâs largest publicly listed firms seem to be well-positioned to contribute to financing the most pressing global challenges of our time. However, our analysis also shows that their ability to do so varies across countries, sectors, and time. Successfully navigating the tension between vastly different capacities for economic profit generation across countries as well as sectors and the pressing need to jointly solve urgent global problems may become a litmus test for corporate and political leaders. And to the extent that recessions, higher interest rates, and poor government policies towards business erode economic profit levels, no one should take it for granted that the corporate goose keeps laying golden eggs.
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