Capital investments and environmental issues

The purpose of this paper is to promote deliberation and prompt discourse on, the issues associated with analysis capital budgeting opportunities to assist in complementing financial and environmental management objectives. The function of capital markets is to signal scarce resources, economic and also environmental. Given increasing community concern with sustaining scarce natural resources and corporate responsibility, investor interest in social and ethical market securities has grown - together with a considerable body of environmental legislation. A management strategy that maximises shareholder wealth and environmental management objectives will also involve capital investments. Methods used to evaluate capital investments have a major distinction in that benchmarks are primarily measured in shorter-term profits - yet environmental performance has a longer-term focus. Primarily the paper includes a general review of the available methods and techniques, including the advantages and disadvantages of net present value calculations. The paper also contains conceptual examples which highlight the problem and offer another perspective to the determination of cash flows that link environmental issues. There are no specific findings to this paper. Nevertheless the paper highlights the marginal external benefits or costs of considering the environment during the normal managerial decision making process, may be not be congruent with yielding the preferred profits. The traditional hurdles associated with capital investments do not include consideration or understanding of the longer term utility associated with sustainable natural resources. Unless the firm is evaluating a new investment that provides ongoing cash flows while providing clean technology or substitution of natural resources, the externalities or social costs may not take priority in decision making. The time value of money includes a discount rate associated with risk relevant to the future cash flows. Priorities may also include the firm’s utility associated with sustainability to the community which may be outside the time horizons for a traditional cost benefit analysis. Consequently the decision-tree analysis becomes more complicated. While large corporations can access expertise to evaluate game theory and option pricing models to assist in their decision-tree analysis, the smaller firm may not have (a) the in-house expertise, or (b) the funds to access the knowledge. The discount rate to be applied differs depending on the regulatory and compliance costs, and the preference for utility associated with environmental benefits. The content of the paper draws on a diversity of text and journal publications. These are discussed in order to prompt reflection on internalizing the costs and benefits of environmental issues when evaluating capital investments. Nevertheless it is critical to consider the public and private aspects of environmental issues in relation to the proposed investment. The paper does not provide a firm solution to the problem