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Aswath Damodaran: How to manage catastrophic risks for corporations

In this article, Aswath Damodaran, Professor at NYU, discusses how we as investors can factor in the risk of catastrophic events for the companies we either already own or are considering adding to our portfolio.

One of the examples he cites is the company, Blue Lagoon, a well-regarded Icelandic spa with a history of high profitability, which found its existence threatened by volcanic activity in southwest Iceland. Another interesting example is the climate change/ESG risk when investing in oil and gas companies.

To the extent that all businesses are exposed to catastrophic risks, some company-level and some having broader effects, there are actions that businesses can take to, if not protect to themselves, at least cushion the impact of these risks. A personal-service business, headed by an aging key person, will be well served designing a succession plan for someone to step in when the key person leaves (by his or her choice or an act of God). […]

Embedded in this discussion are also the limits to sustainability, since the notion of sustaining a business at any cost is absurd. Building in adaptability and safeguards against catastrophic risk makes sense only if the costs of doing so are less than the potential benefits, a simple but powerful lesson that many sustainability advocates seem to ignore, when they make grandiose prescriptions for what businesses should and should not do to avoid the apocalypse.

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The above has been prepared by Børsgade ApS for information purposes and cannot be regarded as a solicitation or recommendation to buy or sell any security. Nor can the information etc. be regarded as recommendations or advice of a legal, accounting or tax nature. Børsgade cannot be held liable for losses caused by customers’/users’ actions – or lack thereof – based on the information in the above. We have made every effort to ensure that the information in the above is complete and accurate, but cannot guarantee this and accept no liability for errors or omissions.

Readers are advised that investing may involve a risk of loss that cannot be determined in advance, and that past performance and price development cannot be used as a reliable indicator of future performance and price development. For further information please contact info@borsgade.dk

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