Sustainable Investments as Real Options

Elżbieta Rychłowska-Musiał ()
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Elżbieta Rychłowska-Musiał: Poznań University of Economics and Business

A chapter in Sustainable Finance in the Green Economy, 2022, pp 191-200 from Springer

Abstract: Abstract This chapter provides an overview of the real options features that allow us to think of sustainable investments as of real options. We analyze the main features of real options such as the following: 1. The term of investment – we indicate two types of a time horizon in real options, time to decide (term to maturity) and an operational horizon (project lifetime), and we discuss their importance for sustainable investments. 2. Multiplicity of risk sources – especially important for projects in the area of ESG (environmental, social, and governance). 3. The risk impact direction – one of the brakes on the real options application in real economy because of the fact that in the classical approach, the increase in project risk always means an increase in the option value which discourages managers to rely on this value. We show that for real options, in some cases, an increase in the project risk means a decrease in the real option value. 4. The multistage nature of the project – that can be considered as a compound option. We quote three examples of such options. 5. The possibility of switching or abandoning a project and 6. soft properties of a project are also mentioned. The second part of the paper is devoted to methods that may be particularly useful in valuing sustainable projects. A special recommendation is given to the Datar-Mathews method and the utility indifference pricing approach.

Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:spr:prbchp:978-3-030-81663-6_14

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DOI: 10.1007/978-3-030-81663-6_14

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