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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