2. A Two-Pronged Approach

To account for the non-financial aspects of a project, managers should pursue a two-pronged approach when deciding about capital expenditures:

  • First, assess the NPV of the project based on objective market prices. If properly implemented, this NPV shows the direct financial value of a project. For investors who want to earn a fair return on their capital, this NPV should be non-negative.
     
  • Understand to what extent the project contributes to (or harms!) other non-financial goals. To structure this part of the analysis, it could be helpful to follow the logic of the United Nation's 17 Sustainable Development Goals (SDG).
     
    • Clearly, many of these goals are very difficult to capture quantitatively, as the project's impact is often not immediate, and even when it occurs, it is hard to express in dollars. For example, think of the impact of a fish-farming project on the U.N.'s Sustainable Development Goal number 14, "Life Below Water," or the impact of a large-scale real estate project on goal number 11, "Sustainable Cities and Communities."
       
    • Therefore, this second part of the analysis will often be qualitative. Still, it is crucial to be specific and to explain in detail how and why a project is expected to have a certain impact on a non-financial goal and, equally importantly, how that impact can be measured over time. Otherwise, we risk that bad financial investments are sugarcoated with noncommitting promotional statements about how the project will make the world a better place.
       

With such a two-pronged approach, managers should be better able to find the appropriate balance between financial and nonfinancial goals. It should enable them to make investment decisions in a structured and transparent way. And it should discipline them to refrain from investments that generate short-term financial gains but are otherwise not sustainable.
 

The crucial point is that investments can and should be financially attractive and sustainable at the same time. This is important because, by law, corporations are for profit. Managers therefore have a fiduciary duty towards their shareholders to invest the capital diligently and responsibly. At the same time, investors increasingly require their target firms to provide high quality information about their non-financial performance. This is the conclusion of many recent surveys, one of which is briefly summarized in the following section.