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Capital allocation and resilient portfolios

Insights based on a global survey by Deloitte

Capital allocation is a critical issue for all companies. It is a difficult discipline to master, capable of either unlocking value for a business or destroying value if not performed well.

Not long ago, money was effectively free. Markets expected interest rates to remain lower for longer and equity was taking on greater risk seeking higher returns. However, the cost of capital has increased at a time of geopolitical instability, energy market disruption, bank failures and rising inflation. This is redoubling pressure on businesses to make better capital allocation decisions, both in where current capital is kept allocated and determining where next to invest.

Difficult considerations include: should businesses focus on near-term profits or longer-term strategic objectives? Pursue organic or inorganic growth? Should they shore up the balance sheet, or invest in innovation and the future of the business? And how to embed environmental, social and governance (ESG) objectives as a matter of urgency?

Deloitte interviewed business leaders across the globe from a wide range of industry sectors to better understand current practices and aspirations in relation to capital allocation. While capital allocation is relevant to all organizations, the survey focused on corporations, with an emphasis on publicly listed organizations and large private groups.

This report uncovered four key insights:

  1. Capital discipline requires a formal plan
    Despite the urgent need to instill greater capital discipline, many organizations admit they still lack a formal capital allocation framework.
  2. If you are not scenario planning, you must urgently start
    Effective capital allocation requires assessment of portfolio risk, which the best capital allocators use scenario analysis to understand.
  3. ESG is no longer an optional extra
    More organizations are factoring ESG into their capital allocation decision-making driven by boards and investors – but they are struggling to figure out where to start.
  4. Allocating capital to ESG initiatives creates value
    ESG and shareholder value creation are not in conflict, ESG is increasingly central to this objective.

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