Which Discount Rate for Sustainability?

19 Pages Posted: 3 Sep 2024

See all articles by Dirk Schoenmaker

Dirk Schoenmaker

Rotterdam School of Management, Erasmus University; Erasmus Research Institute of Management (ERIM); Centre for Economic Policy Research (CEPR)

Willem Schramade

Nyenrode Business University

Date Written: July 28, 2024

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.

Keywords: Social discount rate, risk management, social capital

JEL Classification: H43, Q22

Suggested Citation

Schoenmaker, Dirk and Schramade, Willem, Which Discount Rate for Sustainability? (July 28, 2024). Available at SSRN: https://ssrn.com/abstract=4908202 or http://dx.doi.org/10.2139/ssrn.4908202

Dirk Schoenmaker (Contact Author)

Rotterdam School of Management, Erasmus University ( email )

P.O. Box 1738
Room T08-21
3000 DR Rotterdam
Netherlands

HOME PAGE: http://www.rsm.nl/people/dirk-schoenmaker/

Erasmus Research Institute of Management (ERIM) ( email )

P.O. Box 1738
3000 DR Rotterdam
Netherlands

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Willem Schramade

Nyenrode Business University ( email )

Straatweg 25
P.O. Box 130
Breukelen, 3620 AC
Netherlands

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