Sustainability lecture

Question 1

Other aspects that finance must consider and examples:

Answer 1

Increasing social value - paying living wages

Increasing environmental value - reducing carbon emissions

Question 2

Social foundations:

Answer 2

Social priorities grouped into three categories. These social foundations enable people to be:

1) Productive - access to education
2) Well - adequate income, healthcare, food, and water
3) Empowered - equality, peace, justice and networks

Question 3

Corporate finance models:

Answer 3

Shareholder model - the initial model used in the financing, value created only for shareholders (Max V = FV)

Refined shareholder value - the most commonly used model in finance ( Max V = FV + bSV + cEV) b and c below 1

Stakeholder model - used after the Second World War where stakeholders are considered ( Max V = FV + b*SV)

Integrated model - integrated value considered, current and future stakeholder (Max V = FV + bSV + cEV) where c and b equal 1

Question 4

Why use an integrated model:

Answer 4

Business case - more and more external impacts are internalized, such as emissions taxes.

Ethical case - customers expect companies to consider social and environmental values, however, neglecting those can also result in losing an operating license.

Question 5

Value creation matrix:

Answer 5

Quadrant 1 (overexploitation) - S+E value-destroying, FV creating.

Quadrant 2 (Win-win) - s+e and fv value-creating.

Quadrant 3 (Collapse) - s+e and fv value destroying

Quadrant 4 (Charity) - s+e value-creating, fv value destroying.

Currently, most companies are in Quadrant 1.

Question 6

Measuring social and environmental value:

Answer 6

1) Determine the most important issues regarding social and environmental impacts
2) Quantify the impact in units that fit the impact
3) Assign monetary values

Monetary values are calculated using shadow prices, that do not represent market values. Monetary value = unit * shadow price. The shadow price shows the scarcity of resources if we conform to planetary boundaries. They are calculated based on rights and well-being.

Question 7

Integrated value calculations:

Answer 7

IV = FV+SV+EV

We discount all values before adding up.

Question 8

Corporate finance policies:

Answer 8

Calculating the value of a company makes a huge difference if we take EV and SV into account. For example, the tax shield becomes neutral if we take SV into account, as paying taxes is beneficial to society.

Negative SV and EV increase the cost of capital, as negative values increase liabilities.