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Which discount rate for sustainability?

Author

Listed:
  • Schoenmaker, Dirk
  • Schramade, Willem

Abstract

There is a long-standing controversy about determining the discount rate at which companies should discount the long-term benefits of sustainability investments (e.g. for climate change mitigation and adaptation). While financial capital is discounted at the standard financial discount rate, this paper argues that companies should discount social and natural capital at the social discount rate. We add a risk parameter to the social discount rate to deal with the macroeconomic risk of rare disasters. Social discount rates are typically lower than financial discount rates. So, if applied, they should lead to higher investments in social and natural capital.

Suggested Citation

  • Schoenmaker, Dirk & Schramade, Willem, 2024. "Which discount rate for sustainability?," CEPR Discussion Papers 19321, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:19321
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    More about this item

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • H43 - Public Economics - - Publicly Provided Goods - - - Project Evaluation; Social Discount Rate
    • Q22 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Fishery

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