The Contradiction of the Time Value of Money and Sustainability

Abstract

The time value of money principle states that money today is worth more than money in the future if no interest is paid as compensation. This principle is not consistent with inter-generational equity or sustainability. Indeed, we show in this paper that the time value of money principle combined with commonly used capital budgeting techniques tend to reject potentially sustainable projects that only break even in the long run and accept unsustainable projects that break even in the short term but entail significant negative externalities in the long term. We further argue that the separation of ownership and management and the dispersion of ownership leads to a lack of commitment among equity holders and aggravates the bias towards short-term and potentially unsustainable projects.

Keywords: time value of money; capital budgeting; inter-generational equity; separation of ownership and management; lack of commitment