Formalising capital allocation strategies

Not long ago, money was effectively free, and markets expected interest rates to remain lower for longer. Yet, as businesses continue to face geopolitical instability, energy market disruption and rising inflation, the decision of where to keep capital allocated and where next to allocate comes at a difficult time. As the pressure increases for businesses to enhance their capital allocation discipline, organisations are facing difficult questions: should they focus on near-term profits or longer-term strategic objectives? Pursue growth through organic or inorganic means? Prioritise shareholder returns? Shore up the balance sheet? Or invest in innovation and the future of the business? And how do organisations balance environmental, social and governance (ESG) objectives?

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 organisations, the survey focused on corporations, with an emphasis on publicly listed organisations and large private groups.

This report uncovered four key insights: 

1. Formalising capital allocation framework is essential 
   All those surveyed recognised the importance of disciplined capital allocation, but many suggested they do not yet have a formal capital allocation framework
   
2. Capital allocation requires detailed risk assessment and scenario planning
   Effective capital allocation requires an assessment of portfolio risk, which the best capital allocators use scenario analysis to understand
   
3. A growing role for ESG in capital allocation
   More organisations are factoring in ESG – but they are finding it hard to quantify the benfits
   
4. A positive correlation between ESG and financial returns 
   ESG and shareholder value are not in conflict, in fact they are inextricably linked Download the report.