Integrating Sustainability in Capital Budgeting Decisions

Abstract

This chapter discusses how to integrate sustainability and environmental impacts into capital budgeting decision-making by including: life-cycle-assessment (LCA), life-cycle costing (LCC), eco-efficiency (EE) and full-cost accounting (FCA) appraisal techniques. This comprehensive investment analysis – from “cradle to grave”- provides a template by which hidden environmental costs and benefits can be identified, analyzed and priced thus resulting in a better prediction of cash flows. The model also integrates environmental risks into the risk-rate component of the cost of capital by developing a sustainability risk-rate and sustainability-cost NPV that captures the sustainability exposure of each capital project alternative.