Investment Appraisal of Sustainability Projects: An Assortment of Financial Measures

Investment Appraisal of Sustainability Projects: An Assortment of Financial Measures

Ria Sinha (TERI School of Advanced Studies, India) and Manipadma Datta (TERI School of Advanced Studies, India)
DOI: 10.4018/978-1-7998-1033-9.ch003

Abstract

This chapter is an attempt to review the existing approaches in appraising sustainability projects using the conventional approaches of net present value (NPV) and introduce the modified forms of NPV (i.e., net present sustainable value [NPSV]). The chapter also elucidates on the prominent characteristics of sustainability projects and the inadequacy of traditional financial tools in appraising the same. Consequently, the need to transition from using only time value of money as in payback period approach to include opportunity costs as in NPV and furthering this approach to broaden the capital theory of sustainability by including both the time value of money and the opportunity costs has been strongly advocated. In addition to controlling the time value of money, risk-adjusted NPV measures are effective in evaluating sustainability projects. For assessment of renewable energy projects, real option analysis is suggested as an effective measure.
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Introduction

Sustainable factors such as environmental, social and governance pose huge risks to business. KPMG (2008) categorises these risks into regulatory, physical, litigation and reputational risks. According to UNEP, extreme weather events, increased GHG emissions, increased exposure to chemical products, decreased water availability, increased water pollution, biodiversity and land conversion might have impacts in the form of market shifts to lower carbon products, operational and supply chain disruptions, higher cost of energy, food, and other commodities increased cost of operations and materials, damage to shared public infrastructure, increased demand for reconstruction services, increased demand for pollution control devices and systems, increased cost of water treatment, increased demand for healthcare services to treat health impacts, new markets for water-efficient products, constraints on growth due to water scarcity, operational and supply chain disruptions, increased market, reputational, and regulatory pressure to reduce biodiversity impacts, reduced opportunity for new product breakthroughs, limitations on access to land, new and growing markets from urban expansion, restricted access to land-based resources, loss of ecosystem services, competition for arable land and increasing pressure to protect critical natural resources (UNEP, 2013). The risks emanating from ESG factors thus affect businesses in a large number of ways, affecting investment decisions, consumer behavior and government policies etc. In fact businesses are likely to suffer in the longer run if they fail to recognize these factors.

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