An Outcome-Based Approach to Net Present Value Models and Discount Rates
Re-evaluating Investment Risk and Return: An Outcome-Based Approach to Net Present Value Models and Discount Rates
Christian Juel, Alex Nicholls, and Anna Woźniak
Developed independently by Christian Juel, Alex Nicholls, and Anna Woźniak, and supported by the Skoll Centre, this publication reflects the authors’ own views and conclusions. It is offered to inform and encourage ongoing dialogue. This work is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License. The authors welcome opportunities to collaborate with high-calibre asset managers and practitioners interested in empirically testing and refining the Outcomes-Based NPV (ONPV) framework in applied investment contexts— particularly those with multigenerational time horizons and a commitment to adaptive, impact-aligned capital that operates within planetary boundaries. Please contact Alex.Nicholls@sbs.ox.ac.uk to discuss.
Table of Contents
Introduction ........................................................................................................................................ 1
Context ................................................................................................................................................ 2
Net Present Value Model (NPV) ....................................................................................................... 3
Static Discount Rates ......................................................................................................................... 5
Monological Discounting ................................................................................................................... 9
Intertemporal Myopia ..................................................................................................................... 10
Multivocality ..................................................................................................................................... 12
Dynamic Discount Rates .................................................................................................................. 14
Pluralistic Discounting ..................................................................................................................... 20
Intergenerational Equity ................................................................................................................. 23
Outcomes-Based Net Present Value Model (ONPV) .................................................................... 27
Conclusion: Uncertain Calculative Practices and the Adjacent Possible ................................... 32
Appendix 1: Pricing Non-Financial Outcomes .............................................................................. 36
Introduction
This paper summarises our wider research project that critiques the conventional Net Present Value model (NPV) and discounting methodologies. Our analysis suggests that the NPV systematically undervalues longer-term risks, externalities, and intergenerational impacts, leading to inefficient capital allocation and the mispricing of investments with significant social and environmental benefits. Specifically, we identify three limitations of the NPV model: • Static (exponential) discount rates , which fail to account for economic uncertainty, evolving preferences over time and longer-term compounding value creation. • Monological capital discounting , which focuses solely on the decision-making utility of financial data and discounts, accordingly, ignoring other capital contributions. • Intertemporal myopia , which has a present bias prioritising current gains over future welfare, even where climate/social damages are concentrated in future cohorts/poorer nations. 1 To address these limitations, we propose three solutions: • Dynamic (hyperbolic) discount rates which account for increasing uncertainty, changes in preferences over time, and longer-term (at times, compounding) value creation. • Pluralistic capital discounting , which recognises the distinct depreciation, replenishment, and unique properties of different capital contributions and discounts accordingly. • Intergenerational equity , which balances short-term and longer-term value creation as a form of multivocality that recognises the interests of future generations as well as those of the immediate present. Taken together these enhancements form an Outcomes-Based Net Present Value model (ONPV) - integrating an Outcomes-Based Discount Rate ( Or ) - that provides a more accurate calculation of resilient value creation over time, aligning investments with longer-term economic stability, environmental sustainability, and enhanced social well-being. In this sense, the ONPV offers an enhanced analytic framework for calculating longer-term value, positioned as a conceptual heuristic rather than a normative guide. We suggest that the ONPV approach to enhance NPV calculations would be of operational value to a wide range of investors including: • Pension funds , who manage longer-term liabilities. • Insurance firms , who are already facing uninsurable assets due to climate change 2 . • Actuaries, who calculate longer-term risk parameters for a range of organizations, such as insurance firms. • Asset managers, with fiduciary duties to balance positive returns with downside protection. • Sustainable and impact investors , which focus on achieving financial returns combined with measurable social and environmental impact outcomes. • Foundation endowment asset managers, which provide longer-term stewardship of assets to support future generations through strategic financial planning. • Family office asset managers, which have a multigenerational investment horizon and are increasingly allocating capital to impactful investments.
1 Conventional NPVs typically operate with a 3–5-year investment time horizon that fails to account for longer-term value creation or destruction. 2 Smith, I., Mooney, A. and Williams, A. (2024). The uninsurable world: what climate change is costing homeowners. [online] www.ft.com. Available at: https://www.ft.com/content/ed3a1bb9-e329-4e18-89de-9db90eaadc0b.
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• Development Finance Institutions , which provide finance to the private sector for investments that promote development in countries with various restrictions on access to market finance. • Outcome-based funder s, which focus on monetizing future social and environmental outcomes, often in impact bond contracts. • Governments and policymakers , which address systemic social risks through longer-term planning and investment. • Sovereign wealth funds and government-owned investment vehicles that take excess national revenues and grow them for longer-term country stability, savings, and strategic advantage.
Context
It is increasingly recognised that significant global challenges threaten economic and political stability globally 3 and that conventional valuation models may be ill-equipped to deploy the investment that may help ameliorate such challenges. 4 Indeed, they may even exacerbate them. 5 According to Kotz et al (2024) 6 , by 2050, climate change is projected to inflict $38 trillion in annual damages, which is the equivalent to a 19% contraction in global GDP relative to a baseline without climate impacts. This is roughly six-times the cost of mitigation. The damage range is between 11% and 29% of global GDP, accounting for uncertainties in physical climate and empirical data. These projections assume current emissions pathways, making the damages essentially ‘committed’, i.e., they cannot be avoided even if immediate mitigation efforts are implemented. To put this into context, global GDP declined approximately c.3% during the 2020 pandemic 7 . At this level of magnitude, irrespective of geographical location, sector or approach to risk, the longer-term effects of climate change will be catastrophic. In the context of unavoidable climate impacts, the UN Sustainable Development Goals (SDGs) were launched in 2012 to provide a pathway for channelling capital into addressing the world's most urgent social and environmental challenges. 8 The SDGs offer a proactive approach to mitigate future risks in. Despite a widespread adoption of the model by institutional investors, the flow of capital remains insufficient to achieve targets. A review at the midpoint of the 2030 timeline revealed that the annual investment gap across all SDG sectors has widened from $2.5 trillion in 2015 to more than $4.2 trillion per year in 2025. 9
Despite the total estimated value of the ‘sustainable’ finance market reaching $6.7 trillion in 2024 10
3 For example, https://www.ecb.europa.eu/press/financial-stability- publications/fsr/html/ecb.fsr202505~0cde5244f6.en.html#:~:text=While%20it%20is%20hard%20to,growth%2C%20inf lation%20and%20asset%20prices. 4 For example, https://www.oaktreecapital.com/insights/memo/the-calculus-of-value, https://www.westminsteram.com/wp-content/uploads/2025/01/Article-58-Westminster-Asset-Management-the- limitations-of-valuation.pdf, https://www.professionalpensions.com/opinion/4412316/cost-climate-risk- mispricing#:~:text=Long%2Dterm%20impact%3A%20Over%20time,%2C%20agriculture%2C%20and%20real%20est ate. 5 See, for example: https://www.pwc.com/gx/en/services/audit-assurance/corporate-reporting/esg-reporting/esg-impact- company-valuation.html; Udohaya, N. (2025). Rethinking Financialisaton. In: Impact Investing and Financial Inclusion. Sustainable Development Goals Series. Palgrave Macmillan. For a positive perspective ss: https://mybrand.schroders.com/m/3e994d36a0864d84/original/Impact-and-Financial-Performance-PDF-Final.pdf. 6 Kotz, M., Levermann, A. & Wenz, L (2024). ‘The economic commitment of climate change’. Nature 628, 551–557. 7 Our World in Data (2024): https://ourworldindata.org/grapher/global-gdp-over-the-long-run?time=1990. 8 https://sdgs.un.org/goals. 9 UNDP (2025): https://www.undp.org/news/undp-leverages-every-dollar-promote-investments-nearly-60-sustainable- development-shows-new-report. 10 https://www.globenewswire.com/news-release/2024/10/04/2958387/28124/en/Sustainable-Finance-Market- Projected-to-Reach-6-71-Trillion-in-2024-Exponential-Growth-and-Innovation-Pave-the-Way-for-Future-
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- with sustainable (green) bond issuance growing five-fold over the previous five years 11 - to address this shortfall will still require mainstream capital markets to engage with the SDGs at a scale beyond the current levels. A key priority is to increase exposure to developing economies by expanding the investable universe beyond green bonds to include the health, education, and social development sectors. In this context, we suggest that there is a market failure in the efficient allocation of capital, consequent on incomplete investment analyses that systematically undervalue material investment risks and opportunities in the longer-term. 12 Specifically, this paper offers a critical analysis of the Net Present Value model.
Net Present Value Model (NPV)
In the presence of efficient financial markets, Net Present Value (NPV) is a core concept for the investment decision-making process in which future costs/benefits (often manifested as cash flows) are discounted to their present value. Fisher’s seminal works, The Rate of Interest (1907) 13 and The Theory of Interest (1930) 14 formalized foundational principles, including the time value of money (TVM) that laid the foundations for subsequent economic debates about future value, which is discussed in this paper. The justification for discounting future cash flows at a given discount rate ( r ) reflects two dominant logics related to consumption and investment. Firstly, economists assume rising consumption over time, which leads to diminishing marginal utility 15 and secondly, that investments tend to yield a positive return 16 . This leads to the assumption that $1 today is worth more than $1 in the future and so we discount this future benefit to account for the opportunity cost. Risk, in its various forms is also captured within the term r . The Discounted Cash Flow (DCF) method calculates the present value of cash flows within the investment horizon and beyond, incorporating a Terminal Value (TV) perpetuity 17 for long-term projections (see below). While DCF serves as a valuation technique, the NPV model acts as a decision-making tool, guiding capital allocation by evaluating the present value of discounted cash flows net of the initial investment. The objective of this analysis is to identify investments that yield the maximum NPV whilst comparing alternative investment opportunities, to optimise asset/resource allocation, support long-term investment decisions, consider all revenues/costs, account for the time value of money, consider risk and cost of capital, determine break-even discount rates and to run sensitivity and/or scenario analysis over the forecasted period. The NPV formula is represented as follows: Developments-Global-Longer-term-Forecast-to- 2033.html#:~:text=Sustainable%20Finance%20Market%20Projected%20to%20Reach%20%246.71%20Trillion%20in %202024,Long%2Dterm%20Forecast%20to%202033 11 https://sdgpulse.unctad.org/investment-flows/#Ref_3UN5E29U. 12 These are typically treated as ‘externalities’ that are not a material to NPVs calculations with a short-term time horizon. 13 See: Veblen, T., 1909. Fisher's rate of interest. Political Science Quarterly , 24 (2), pp.296-303. 14 Fisher, I., 1913. The impatience theory of interest. The American Economic Review , 3 (3), pp.610-618. 15 The economic principle that states as a person consumes more units of a good or service, the additional satisfaction or utility they derive from each successive unit decreases. 16 Costanza, R., Kubiszewski, I., Stoeckl, N. & Kompas, T., 2021. Pluralistic discounting recognizing different capital
contributions: an example estimating the net present value of global ecosystem services, p. 3. 17 Ganti, A. (2023). Terminal Value (TV) Definition. [online] Investopedia. Available at: https://www.investopedia.com/terms/t/terminalvalue.asp.
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Where: •
NPV: Net Present Value.
• t : Time period, where t 0 is the initial investment. • n : the number of periods. • C t : the costs / benefits or cash flow in period t (this can be positive or negative). • r : the discount rate • C 0 : the initial investment, or cost at t 0 .
When calculating NPV, a TV calculation is used to quantify the costs/benefits or cash flows beyond the forecasted period. The perpetuity formula is a common approach and is defined as follows:
Where: •
TV = Terminal value at the end of the forecast period • C n = Costs/benefits (e.g., free cash flow) in the last forecasted period • g = perpetual growth rate of free cash flows (assumed to be constant) • r = the discount rate • n = the last year of the projected period. o This is based on the Gordon Growth Model 18 .
The terminal value then needs to be brought back to present value and is therefore incorporated into the NPV formula as follows:
The first term represents the sum of the discounted costs/benefits (e.g., cash flows) over the forecasted period, the second term represents the present value of the terminal value, and the third term represents the initial investment. The efficacy of the NPV model depends on accurate assumptions, particularly for the terminal growth rate component ( g ) and the discount rate ( r ). Given that all cash flows are discounted using r , which captures the cost of capital, opportunity cost and risk, in its various forms, the correct choice of r is critical. The same can be said for the choice of g within the TV calculation, given its relative weight to the overall value. The growth rate within TV typically depends on long-term economic conditions and Gross Domestic Product (GDP) is often used. This paper discusses certain limitations of static discount rates ( r ), however, many of the arguments put forward are also interrelated to the choice of constant growth rates (g).
Although the Internal Rate of Return (IRR) remains a common metric, this paper focuses on NPV because it provides a clearer and more decisive basis for capital allocation. IRR suffers from two
18 In financial valuation techniques, such as the NPV, or DCF analysis, the Gordon Growth Model is commonly used to estimate the terminal value (TV) of a company, which represents the value of all future cash flows beyond a certain projection period.
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well-documented limitations. First, if a project’s cash flows switch between positive and negative more than once, the IRR calculation can yield multiple mathematical solutions, providing no single rate on which to base a decision. Second, even when unique, IRR ranks investments by relative percentage return rather than absolute value creation, which can make smaller projects appear preferable to larger ones that generate far greater net benefits. NPV avoids these issues by offering a single, unambiguous measure of value added. The NPV formula has become an integral component in modern finance and is embedded in the investment decision-making process. It provides a model for evaluating positive value creation (positive NPV) or value destruction (negative NPV), focusing predominantly on financial aspects of investments (i.e., cashflows) within a defined timeframe. However, non-financial outcomes, including externality risks are rarely considered or quantified and the manifestation of these externalities can lead to macro-economic shocks or the attritional destruction of the initial value creation. Given this, we suggest that conventional NPV calculations have often failed to accurately evaluate investments by not correctly capturing or pricing material positive and negative long-term outcomes, whilst disproportionately weighting the present over the future. In certain instances, long-term value destruction may cannibalise shorter-term value creation, however the existing NPV model often fails to capture this. In this paper we endeavour to unpack some of the limitations around NPV and r and outline an alternative approach that may offer practitioners a more holistic view. A material variable here is the exclusion and quantification of non-financial outcomes, both social and environmental. At the point of NPV’s inception, quantification of these variables was inconceivable. However, as we have become increasingly sophisticated in terms of finance, economics and science, quantifying these variables is now possible (see Appendix 1).
To support our argument, our analysis sets out three significant limitations of the NPV model:
• • •
Static discount rates.
Monological discounting. Intertemporal myopia.
Next, each limitation is discussed in turn.
Static Discount Rates
Our first limitation focuses on static discount rates.
The discount rate in financial analysis can take various forms, including the Weighted Average Cost of Capital (WACC) 19 , which incorporates the cost of equity using the Capital Asset Pricing Model (CAPM) 20 , the cost of debt, and the risk-free rate. It can also refer to the Required Rate of Return (RRR), which represents the minimum return an investor expects to justify the risk of an 19 The Weighted Average Cost of Capital represents a company's average cost of financing from both equity and debt sources, weighted by their respective proportions in the capital structure. For more, see: Hargrave, M. (2024). Weighted Average Cost of Capital (WACC): Definition and Formula. [online] Investopedia. Available at: https://www.investopedia.com/terms/w/wacc.asp. 20 The Capital Asset Pricing Model is a fundamental formula in finance used to estimate the cost of equity by quantifying the relationship between risk and expected return. For more, see: Kenton, W. (2024). Capital Asset Pricing Model (CAPM) and Assumptions Explained. [online] Investopedia. Available at: https://www.investopedia.com/terms/c/capm.asp.
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investment. Additionally, companies often use a hurdle rate, the minimum acceptable return for an investment or project, typically based on WACC plus a risk premium. Another key measure is the Internal Rate of Return (IRR), which represents the discount rate at which the net present value (NPV) of a project’s cash flows equals zero, making it useful for evaluating and comparing investment opportunities. Discount rates within financial analysis are often kept constant 21 . This allows the investor to have a fixed assumption around the cost of capital, risk and required rate of return over a given investment period, whilst analysing opportunity costs and maintaining a consistent approach when comparing multiple investment opportunities. Static discount rates are referred to as exponential discounting , as the present value of future rewards decreases exponentially overtime and therefore, the weight of future value declines over time, gradually trending to 0. This framework assumes time consistency: for example, an individual’s preference between receiving $100 today versus $110 in one year is treated as equivalent to their choice between $100 in ten years and $110 in eleven years. Such models are normative in nature, prescribing how rational investors should discount future cash flows under the assumptions of modern finance theory. While mathematically elegant and widely adopted as the industry standard, the model may oversimplify and fails to capture behavioural characteristics, such as present bias or changing preferences over time, especially as risk appetites shift with circumstances, such as volatility. 22 The same concept applies to the propensity to invest in areas such as climate change mitigation, where shifting perceptions of risk are amplified by increasingly severe repercussions. This raises a critical question concerning whether such models should adapt when underlying assumptions and variables change due to shifts in risk appetite or economic volatility. Moreover, certain behavioural biases can also be observed with the choice of the discount rate. Conventional models assume unbounded rationality (also known as perfect rationality), which views decision-making optimization as a fully rational process of finding an optimal choice given the information available. This contrasts with the reality of ‘bounded rationality’ 23 , which recognises the discrepancy between the assumed optimisation of homo economicus and the vagaries of actual human behaviour. Perfectly rational decisions are often infeasible in practice because of the intractability of decision problems and the finite computational resources available to decision- makers. From this perspective, a discount rate may be interpreted as a bounded rationality approach to investment decisions: decision makers rest on subjectively determined aspiration levels. Consequently, humans often do not undertake a full cost-benefit analysis to determine the optimal decision, but rather, choose an option that fulfils their adequacy criteria rather than a rationally optimal one. Berg (2003, 2014) 24 proposed the use of behavioural economics as a normative tool in terms of critiquing NPV models suggesting that the model was influenced by normative logics of 21 See more at: Hayes, A. (2023). Discount Rate Defined: How It’s Used by the Fed and in Cash-Flow Analysis. [online] Investopedia. Available at: https://www.investopedia.com/terms/d/discountrate.asp. 22 See Shiller, R.J., 1990. Market volatility and investor behaviour. The American Economic Review , 80 (2), pp.58-62; Shiller, R.J., 2003. From efficient markets theory to behavioural finance. Journal of economic perspectives , 17 (1), pp.83-104. 23 ' Bounded rationality is the idea that rationality is limited when individuals make decisions, and under these limitations, rational individuals will select a decision that is satisfactory rather than optimal: Sent, E.M., 2018. Rationality and bounded rationality: you can’t have one without the other. The European Journal of the History of Economic Thought , 25 (6), pp.1370-1386. See also Simon, H.A., 1990. Bounded rationality. In Utility and probability (pp. 15-18). Palgrave Macmillan, London, Jones, B.D., 1999. Bounded rationality. Annual review of political science , 2 (1), pp.297-321. 24 Berg, N., 2003. Normative behavioural economics. The Journal of Socioeconomics , 32 (4), pp.411-427, Berg 2014, "The consistency and ecological rationality approaches to normative bounded rationality." Journal of Economic Methodology 21.4: 375-395.
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maximizing returns in economics. This ties in with the inherent subjectivity of materiality judgements.
Moreover, in the context of the global issues noted above, static discount rates fail to capture long- term value creation or destruction. For example, upfront investment in climate change mitigation and adaptation will, sui generis , deliver long-term value beyond the investment time horizon. This is also applicable to long-term social investments in health and education whereby the multiplier effect generates benefits such as sustained economic growth, higher labour productivity, improved health and well-being, greater social cohesion and reduced inequality. For example, investments in early vaccination can reduce millions of lifetime cases of illness, hospitalizations and premature deaths. Early vaccinations for the 1994–2023 birth cohorts averted $780 billion in direct costs and $2.9 trillion in societal costs by preventing illnesses and deaths. After accounting for $240 billion in direct costs and $268 billion in societal costs of routine childhood immunization, the net savings for routine childhood immunization from the payer and societal perspectives were $540 billion and $2.7 trillion, respectively. The payer and societal benefit-cost ratios for routine childhood immunizations were 3.3 and 10.9, respectively. 25 While these results are drawn from cost-benefit analyses in public health economics rather than conventional NPV models, they illustrate how long- term social value can be systematically undervalued if appraised only through narrow financial discounting frameworks. In these cases, we see the concept of value (economic, social and environmental) compounding over time rather being exponentially discounted. It is also worth noting that long-term investments such as these are often mutually reinforcing, where the compounding annual value creation contributes to a more resilient and efficient global economy. However, conventional models of capital allocation struggle to capture this broader future value, particularly when it derives from long-term social or environmental impact. Furthermore, under static discount rates, value itself is exponentially discounted to zero, failing to capture investment that deliver compoundin g value over time. In addition, discounting future cashflows with a static approach to r and g, treats risk and growth as deterministic, assuming smooth, long-run trajectories for productivity and economic performance. This neglects the uncertainty surrounding timing and magnitude of potential shocks (e.g. Kotz et al, 2024 26 ). If future growth is volatile, which might arise during economic shocks or if costs or benefits arise at different times, then relying on a single average growth assumption becomes problematic. Although the arguments for estimating probabilities when the time scale is measured over multiple years are disputed, a declining discount rate may be more appropriate for valuing the long-term outcomes of climate mitigation and transition projects, early years education and childcare (particularly in developing countries), or early health interventions (such as vaccines). 27 The same can be said for long-term assumptions around economic growth (i.e., the choice of g within TV). A further limitation is uncertainty about the future path of discount rates themselves, which undermines the validity of applying a single constant value across long horizons. Choosing an appropriate discount rate becomes increasingly complex as the investment time horizon extends. 25 Zhou et al. (2024). Health and Economic Benefits of Routine Childhood Immunizations in the Era of the Vaccines for Children Program — United States, 1994–2023. MMWR Morbidity and Mortality Weekly Report, [online] 73(31), pp.682–685.Payer benefit-cost ratio = benefits in direct costs / direct cost of immunization. Societal benefit-cost ratio = benefits in societal costs / societal cost of immunization. 26 Kotz, M., Levermann, A, and Leonie, W. "The economic commitment of climate change." Nature 628, no. 8008 (2024): 551-557. 27 See also, Nolan (2013), What use is ‘social investment’? Journal of European Social Policy , 23 (5), pp.459-468 - who noted that nearly all forms of social/environmental investment simultaneously have both investment and consumption characteristics. For example, education enhances human capital and, thus, has investment attributes with long-term societal benefits but also something which pays off immediately for the individual.
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Traditional approaches to address uncertainty - such as increasing the discount rates, applying risk premiums, adjusting CAPM/WACC models, and incorporating scenario analysis with probability overlays - are typically static, ex-ante adjustments. However, long-term risks, such as the carbon dioxide emitted today persisting for centuries and nuclear waste like plutonium having half-lives spanning tens of thousands of years, highlight the inadequacy of conventional financial markets in guiding investments to mitigate such enduring threats. Financial instruments with maturities beyond 30 years are rare; even the widely traded 30-year U.S. Treasury represents the practical upper bound of most liquid markets, leaving economic models as the primary tool for valuing more distant futures. Yet, models projecting long-term outcomes over such extended periods face exponentially increasing uncertainty, resulting in non-deterministic cash flows that conflict with the deterministic assumptions of traditional NPV models. To address this uncertainty, academic research strongly supports the adoption of a declining discount rate, a more flexible and realistic approach for valuing long-term investments. When the future path of discount rates is uncertain, taking expectations over a range of possible scenarios implies that the certainty-equivalent discount rate declines as the time horizon lengthens. While declining rates are often justified on ethical grounds, such as intergenerational equity, demonstrate that no normative assumption is required: declining effective rates emerge endogenously from uncertainty about future r . Costanza 28 highlights arguments put forward by Weitzman (1998, 2001, 2007) 29 and Newell & Pizer (2003) 30 , stating that discount rates themselves are uncertain and because of this, their average value should decline over time, highlighting that: Future rates decline in our model because of dynamic uncertainty about future events, not static disagreement over the correct rate, nor an underlying belief or preference for deterministic declines in the discount rate . 31
When we include a static r this further underestimates compounding, path-dependent impacts based on this underlying choice.
A further limitation arises from the circularity embedded in WACC and CAPM, where the cost of equity is derived from market valuations that themselves depend on discounting future cash flows at the very rate being estimated. The dependence on WACC and CAPM calculations to arrive at a given discount rate, however, contains an inherent flaw due to its somewhat tautological underpinning argument. The discount rate, used to value future cash flows, depends on the cost of equity, which is influenced by the market value of equity. However, the market value itself is derived from the present value of cash flows discounted by the same rate, creating a feedback loop. With regards to the terminal value component, given that this represents a perpetuity, its contribution to Net Present Value (NPV) can be substantial, depending on the length of the forecasted period, the growth rate ( g ), and discount rate ( r ). TV often dominates NPV calculations, as financial models typically use relatively short forecast horizons (10 years), assume constant long- term growth ( g ) , and value assets on a long-term basis. In such cases, TV can account for over 50% of total NPV, making valuations highly sensitive to small changes in g and r . While extending the forecast horizon reduces the TV’s weight, enhancing valuation accuracy and reducing reliance on 28 Costanza, R., Kubiszewski, I., Stoeckl, N. & Kompas, T., 2021. Pluralistic discounting recognizing different capital contributions: an example estimating the net present value of global ecosystem services, p. 2. 29 Weitzman, M.L., 1998. Recombinant growth. The quarterly journal of economics , 113 (2), pp.331-360, Weitzman, M.L., 2001. Gamma discounting. American Economic Review , 91 (1), pp.260-271, Weitzman, M.L., 2007. A review of the Stern Review on the economics of climate change. Journal of economic literature , 45 (3), pp.703-724. 30 Newell, R.G. and Pizer, W.A., 2003. Regulating stock externalities under uncertainty. Journal of environmental economics and management, 45(2), pp.416-432. 31 Costanza, R., Kubiszewski, I., Stoeckl, N. & Kompas, T., 2021. Pluralistic discounting recognizing different capital contributions: an example estimating the net present value of global ecosystem services, p.2.
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terminal assumptions, 32 in practice financial market practitioners often default to conservative or subjective inputs for g and r , highlighting both the bounded rationality and the scope for bias in such models. The growth rate is usually assumed to be the long-standing GDP growth rate of a given country; however, this too is unrealistic. Economies and industries experience cycles, structural breaks, and technological disruptions, all of which undermine the plausibility of projecting steady growth indefinitely. This reinforces the fragility of terminal-value-driven NPVs with constant assumptions for r and g. Finally, Baumgärtner et al 33 and Marglin 34 proposed that discount rates applied to private or market- based investment decisions tend to be higher than social and environmental discount rates. Private investors rationally demand higher returns, reflecting opportunity costs of capital, liquidity constraints, and risk premiums embedded in measures such as WACC or hurdle rates. However, when these high rates are applied to long-term projects whose benefits materialise only in the distant future, such as climate change mitigation, biodiversity conservation, or early childhood education, the present value of those benefits collapses, resulting in systematic undervaluation. From a societal perspective, where intergenerational equity and sustainability are critical, lower discount rates are more appropriate. Using private market rates in these contexts therefore leads to underinvestment in socially desirable projects and, ultimately, to sub-optimal long-term outcomes.
Monological Discounting
Our second limitation focuses on monological discounting.
Global economies are made up of intricate systems that produce goods and services which, in turn, are the sum product of multiple types of capital. While production processes may be extremely complex, directionally, we are intuitively aware that this is true. Costanza et al. (2021) suggested that ‘discounting the future is essential to inform long-term decisions, but the future of humanity is being put in jeopardy by using the same discount rate for all types of capital.’ 35 If we assume there are only two capitals (built, K ; and natural, N ), only two different consumer goods ( C 1 and C 2 ) that are each produced using K and N in different proportions ( k 1 〉 k 2 ; n 1 < n 2 ), and a Cobb-Douglas production technology 36 . Such production functions can be written as:
k1 N n1 k2 N n2
C 1 = K C 2 = K
If K grows more rapidly than N , then with k 1 > k 2 and n 1 < n 2 , C 1 will grow more rapidly than C 2 . The rates of change in consumption opportunities, and thus in marginal utilities, will thus differ across goods, which justifies the need to use different discount rates 37 .
32 Some models suggest a terminal value of zero for high climate risk investments see Glendon, 2019, More and more assets have a terminal value of zero at https://www.fuw.ch/article/more-and-more-assets-have-a-terminal-value-of-zero. 33 Baumgärtner, S., Klein, A.M., Thiel, D. and Winkler, K., 2015. Ramsey discounting of ecosystem services. Environmental and Resource Economics, 61, pp.273-296. 34 Marglin, S.A., 1963. The social rate of discount and the optimal allocation of resources. Quarterly Journal of Economics, 77(1), pp.95-111. 35 Costanza, R., Kubiszewski, I., Stoeckl, N. & Kompas, T., 2021. Pluralistic discounting recognizing different capital contributions: an example estimating the net present value of global ecosystem services, p. 1. 36 The Cobb-Douglas production technology is a widely used economic model that represents the relationship between inputs (capital and labour) and output in production. 37 Costanza, R., Kubiszewski, I., Stoeckl, N. & Kompas, T., 2021. Pluralistic discounting recognizing different capital contributions: an example estimating the net present value of global ecosystem services, p. 3.
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However, the differences do not end there. For example, natural and social capital have varying levels of impact and duration. The use of natural capital combined with built capital in the form of renewable energy infrastructure can prevent irreversible climate related damages and provided high marginal utility for vulnerable nations. Social capital for example in education, can have a multiplicative effect that continues well beyond the investment time horizon. Early childhood intervention is presumed to endow the recipients with capabilities that will both raise their potential (human capital) and contribute to greater social cohesion (social capital) and wider increases in productivity. The eventual pay-off is lower future social costs as reduced unemployment and social exclusion decrease the likelihood of social unrest, which is costly. In combination, the different strands of public sector social investment raise the stock of productive workers (see Begg, 2017 38 ). This can be mapped to improved quality of life, increased lifetime earnings, GDP growth, and ultimately an economic output, although ethical questions around quantifying human life remain (discussed further below). The differences go on to include changing relative scarcities (Baumgärtner et al., 2015), risk, required investments, depreciation rates and so on. We can understand the differences between the two and acknowledge that they are fundamentally different, but this paper suggests that this monological approach to discounting is less accurate than pluralistic discounting.
Intertemporal Myopia
Our final limitation focuses on intertemporal myopia.
A central argument in this paper is the failure to recognise intergenerational equity, reflected through the choice of the discount rate and the temporal shift of value. The conventional approach means today’s valuation of investments often fails to align with the perspectives of future generations, particularly regarding who bears the costs of the climate crisis and the deficits in achieving the UN SDGs. Clearly, the voices of future generations cannot be heard or represented at a democratic level, however scientific forecasts (e.g. Kotz et al (2024) 39 ) and anecdotal evidence alone point towards a rapidly deteriorating situation. By fixing a constant discount rate, prevailing practice effectively institutionalises present bias, privileging near-term returns while systematically undervaluing benefits that accrue to future generations, a distortion that is particularly acute in climate and social domains, where damages disproportionately fall on poorer, future generations. We describe this limitation as a function of intertemporal myopia. Ethical and philosophical frameworks offer some insights in how to address this limitation. For example, the Rawlsian 40 approach is grounded in the principles of fairness and intergenerational equity. Central to this approach is the ’veil of ignorance’, which requires decision-makers to design policies without knowing their own position in society, ensuring impartiality and fairness. It emphasizes the ‘maximin principle’, advocating for policies that maximize the welfare of the least advantaged, whether within the current generation or across future generations. This stands to reason given the disproportionate exposure of developing nations and the Global South to climate change.
Alternatively, a Utilitarian approach 41 can be used which is a moral and decision-making model based on the principle of maximizing overall utility or happiness. It focuses on achieving the
38 Begg, I., 2017. Social investment and its discount rate. The Uses of Social Investment , 174 . 39 Kotz, Maximilian, Anders Levermann, and Leonie Wenz. "The economic commitment of climate change." Nature 628, no. 8008 (2024): 551-557. 40 Rawls, J., 1971. A Theory of Justice. Cambridge, MA: Harvard University Press. 41 Mill, J.S., 1863. Utilitarianism. London: Parker, Son, and Bourn. Bentham, J., 1789. An Introduction to the Principles of Morals and Legislation. Oxford: Clarendon Press
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greatest good for the greatest number of people. Originating from the works of Bentham and John Stuart Mill, this approach evaluates actions or policies based on their consequences, emphasizing long-term outcomes rather than intentions or intrinsic qualities. In decision-making, the utilitarian perspective involves calculating the net benefits of an action by weighing its positive and negative impacts on all stakeholders. It is widely used in cost-benefit analysis, where decisions aim to maximize aggregate welfare. Historically, economists such as Ramsey 42 argued that it was "ethically indefensible" to discount future utility too heavily, implying that policy makers should prioritize future generations more than individuals prioritize their own future. While this was later contested by the concept of revealed preferences within markets, it is the authors’ opinion that future generations must be borne into consideration more systematically within investment decisions. Similarly, Gollier (2002) 43 suggested that the logic of remedial investments in climate mitigation or transition today reflect the urgent need to frame addressing the climate crisis in terms of the substantial future benefits of such action; as well as the counterfactual of present inaction leading to catastrophic climate-related damage to economies. Moreover, reflecting a public benefit logic, it is common for governments to use ‘social’ discount rates that decline over time, increasingly giving more weight to the lived value of future generations. 44 Reliance on market rates imports the revealed preferences of individuals, which are often time- inconsistent, into social planning, embedding structural inequities and reinforcing ‘tragedy of the commons’ 45 dynamics. Standard economic models rely on revealed preferences, i.e., current choices (such as consumption, investment) fully reflect individual preferences over time. However, decision-makers at any point in time cannot change decisions made in the past, creating an asymmetry in intertemporal control. Market choices made today do not reveal preferences over past consumption, because once a decision has been made, future selves cannot revisit it. This suggests that revealed preferences do not adequately guide long-term policy, as they are based on incomplete information about preferences over past and future 46 . Arrow and Kurz (1970) 47 suggested that the preferences revealed by individual behaviour in markets (revealed preferences) should guide public policy, even in intertemporal (time-based) choices. However, this is challenged by Caplin and Leahy (2004), who state that while this works for static (one-time) decisions, it is flawed in dynamic settings (decisions over time). They stated that “there may be a single unified perspective on the static problem, but not on the dynamic problem.’ 48 The Strotz model (1956) 49 allows for preferences to change over time and account for past consumption, as individuals demonstrate changing utility functions over time. That at t 1 an individual may assign a higher weight to future rewards, however, at t 2 , their utility function changes, favouring immediate gratification over longer term gains. The implications for this are extensive and the examples are many and include dynamic inconsistencies around defining a plan that may seem optimal, only for it to be abandoned at a later stage. We have seen this, for example, with public policy on climate in multiple jurisdictions. In turn, this can lead to myopic behaviour 42 Ramsey, F.P., 1928. A mathematical theory of saving. The economic journal, 38(152), pp.543-559. 43 Gollier 2002 Discounting an Uncertain Future, Journal of Public Economics, 85 149–166 44 See, for example: Freeman and Groom, 2016 and Arrow et al, 2013. 45 See Ostrom, E. (2008). Tragedy of the Commons. The New Palgrave Dictionary of Economics, pp.1–5. 46 See Caplin. A, and Leahy, J., The Social Discount Rate, New York University and National Bureau of Economic Research, 2004 47 Arrow, K.J. and Kurz, M., 1970. Optimal growth with irreversible investment in a Ramsey model. Econometrica: Journal of the Econometric Society , pp.331-344. 48 Caplin. A, and Leahy, J., The Social Discount Rate, New York University and National Bureau of Economic Research, 2004, p. 1260 49 Strotz, R.H., 1956. The role of stereotypes in welfare economics. Metroeconomica , 8 (3), pp.199-202.
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that is exacerbated by structural characteristics of politics, such as short-term election cycles. Caplin and Leahy (2004) build on the Strotz model, stating that the revealed preference in markets is the most impatient Pareto Optimum - an outcome that reflects short-term thinking and prioritizes immediate benefits over future gains. They argue that policy makers should be more patient than private citizens, considering future generations to account for intergenerational equity (discussed further below). In summary, this paper has suggested three significant limitations to current NPV models that are causing market failures, mispricing of certain investment opportunities and the inefficient allocation of long-term capital to address climate change as well as health and social inequities: • Static discount rates and the reliance on exponential discounting fails to account for increasing uncertainty, changes in preferences over time, and long-term (sometimes compounding) value creation that requires dynamic discounting. • Monological capital discounting overlooks the contributions of multiple forms of capital to goods and services, as well as their inherent differences around variables that include growth, deprecation and replenishment. • Intergenerational myopia, which undervalues long-term outcomes and externalities and prioritizes short-term gains over the long-term welfare of future generations. To move our discussion from limitations to solutions, we engaged with financial accounting as an analytical lens. The justification for this approach was to acknowledge the centrality of accounting practices in underpinning the disclosure requirements of investment managers, specifically in terms of materiality. F rom a financial accounting perspective, the limitations set out above can be framed as relating to materiality, defined according to the IFRS as: Information is material if omitting, misstating or obscuring it could reasonably be expected to influence the decisions that the primary uses of general-purpose financial statements make on the basis of those financial statements, which provide financial information about a specific entity. 50 The inherent subjectivity of materiality judgements is a core element of this paper, as we argue that NPV calculations in conventional investment analysis risk inaccuracy as they may fail to account for all material information necessary for setting an appropriate discount rate. This subjectivity also allows for alternative perspectives and attendant data to be recognised as decision-relevant depending on the investment context under analysis. Specifically, we set out our solutions in terms of multivocality which acts as an interpretive framing to enhance the range of decision-useful, material data to inform more effective capital allocation. We discuss the multivocality framing next.
Multivocality
Traditional materiality judgments in finance are typically made by qualified professionals, much like how doctors diagnose medical conditions or judges interpret laws. While this expertise is valuable, in certain cases, it may be insufficient for assessing long-term investments in complex and dynamic areas such as climate change mitigation or global health initiatives. In these contexts, reliance on purely financial indicators may lead to mispricing, and flawed risk assessments requiring the monetization of non-financial data. 51
Therefore, we argue that effective materiality judgments are context-sensitive, dynamic, and inclusive, adjusting for whose voices are heard and whose are excluded. This is particularly relevant
50 https://www.accounting.com/resources/gaap/ 51 Appendix 1 sets out methods to calculate the monetary value of non-financial data.
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for long-term investments, where small miscalculations can cascade into significant valuation errors, distorted capital flows, flawed projections, and unintended social consequences. Such data gaps can even destabilize financial markets, making them less resilient to systemic shocks and undermining fiduciary responsibilities to forecast future value accurately. Since all materiality judgements are inherently subjective, we argue that – particularly in the context of increasingly complex and dynamic markets - effective investment valuation models benefit from recognising multiple stakeholder perspectives beyond investors. In this context, and drawing on cultural anthropology, 52 we use the term multivocality to refer to the integration of diverse stakeholder perspectives and data sources to improve the understanding of an investment’s potential risks and returns. We suggest that multivocality provides a novel interpretive - rather than technical - approach through which questions of materiality (what counts as value) and risk (how uncertainty is understood, over what horizon, and for whom) are better understood. Therefore, a multivocality approach expands the decision-useful dataset beyond conventional financial metrics, incorporating broader material considerations that refine risk assessments and decision-making and ensuring that data that may be excluded as ‘externalities’ is included when material. In addition, a multivocality approach addresses the reality that future value creation is embedded within a broader social and environmental context, where financial capital depends on other forms of capital and that these systemic inter-dependencies are best understood by incorporating a wider range of perspectives and voices. We argue that by taking a multivocality approach, market practitioners may strengthen the material evidence base available to them, particularly in long-term investments where uncertainty increases over time. Moreover, a multivocality approach may also reduce valuation uncertainty by enhancing risk-return analysis with more holistic, multidimensional data. This is especially valuable in long-term investments, where conventional models often fail to capture all non-financial value creation. By broadening material considerations, asset managers may improve financial forecasts, mitigate long- term risk, and better assess the long-term social and environmental impacts of their investments.
In summary we suggest that a multivocality approach:
• Enables a broader range of factors to be considered material beyond the purely financial. • Incorporates a broader range of stakeholder perspectives on what constitutes material, decision-relevant, data • Extends financial materiality for long-term investment considering future generations perspectives as well as those of the present. • Provides a more accurate and comprehensive assessment of risk, especially for long-term investments where risks often become clearer over time.
52 See Rodman, M.C., 1992. Empowering place: Multilocality and multivocality. American anthropologist, 94(3), pp.640-656; Atalay, S., 2008. Multivocality and indigenous archaeologies. In Evaluating multiple narratives: beyond nationalist, colonialist, imperialist archaeologies (pp. 29-44); Hodder, Ian. "Multivocality and social archaeology." In Evaluating multiple narratives: Beyond nationalist, colonialist, imperialist archaeologies, pp. 196-200; Casasnovas, G., Hehenberger, L.K. and Papageorgiou, K., 2020. Multivocality and calculability in field emergence: The case of impact investing in Spain. In Academy of Management Proceedings (Vol. 2020, No. 1, p. 18985); Cisneros-Puebla, C.A., 2022. Multivocality as Practice of Critical Inquiry for Social Justice. Qualitative Report, 27(8); Wylie, A., 2008. The integrity of narratives: deliberative practice, pluralism, and multivocality. Evaluating multiple narratives: Beyond nationalist, colonialist, imperialist archaeologies, pp.201-212.
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