Question

“Sustainability focuses on meeting the needs of the present without compromising the ability of future generations to meet their needs. The concept of sustainability is composed of three pillars: economic, environmental, and social—also known informally as profits, planet, and people” (Source: Investopedia) In essay format discuss the impact of the second pillar (environmental) of sustainability on capital investment decisions.

Answer 1

The second pillar of sustainability is environmental and pertains to the planet. This pillar has a significant and profound impact on capital investment decisions. Sustainability risks are factored into new investment decisions and equal importance are given to qualitative data when compared to quantitative data. In the present times of global warming and increasing pollution levels organizations are looking to integrate sustainability into their mission, goals, objectives, and operations. Accounting for sustainability has become an important aspect in the field of accounting and finance. As such the traditional investment appraisals and capital budgeting techniques are being tweaked for this purpose.

The environmental factors are scoped in new investment appraisals through tools like cost benefit analysis, full cost accounting and multi-criteria decision making. These tools take into account both types of sustainability related investments i.e. direct and indirect. Direct sustainability investments that are related to the planet are those that entails investing in sustainability assets like green buildings, wind farms etc. Indirect sustainability investments will lead to indirect sustainability impact.

The impact on capital investment decisions will be profound in the sense that investment appraisals will have to be done more holistically factoring in the different environmental factors that are being impacted by the project. Costs of carbon emissions or direct/indirect impact of carbon emissions will have to be incorporated in the financial analysis model. New investments will also factor in eco-efficiency both in a qualitative as well as quantitative manner. There will be active measurement and management of green-house gas emissions, energy, water, and waste generation.