As long-term investors, we spend a lot of time trying to calculate a company’s potential, sustainable free cash flow. Companies that operate unethically or do not appropriately manage their societal and environmental externalities face a greater risk of cash flow erosion over the long term. This can manifest in multiple ways, including regulatory fines, loss of an environmental permit or a company’s social licence to operate, or even reduced demand for its products due to reputational damage or shifting societal preferences.

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