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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