Notes for 3.8.3 Application of Investment Appraisal - IB | RevisionDojo
3.8.3 Application of Investment Appraisal Notes
Investment Appraisal in ESG: Evaluating Sustainable Investments
Traditional investment appraisals focus on financial returns, how much profit an investment will generate.
But ESG investing (Environmental, Social, and Governance) requires companies to also evaluate non-financial risks and long-term sustainability.
Companies can’t just look at profitability, they have to consider climate impact, social responsibility, and governance risks.
Ignoring ESG factors can mean regulatory fines, reputational damage, or stranded assets (e.g., fossil fuel investments becoming obsolete).
Note
Many companies underestimate the long-term financial risks of ignoring ESG factors, leading to massive losses when regulations tighten.
How Investment Appraisal Works in ESG
ESG investments are assessed using:
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Questions
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Question 1
Recap question
Why might a sustainable project with a longer payback period still be considered financially superior over a conventional project with a shorter payback period?
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What do traditional investment appraisals focus on?
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Note
Introduction to Investment Appraisal
Investment appraisal is the process of evaluating the profitability and viability of an investment project.
Traditional methods focus on financial metrics like profit, cash flow, and return on investment.
In the context of ESG (Environmental, Social, and Governance), investment appraisal also considers non-financial factors.
DefinitionInvestment AppraisalThe process of evaluating the potential financial returns and risks of an investment project.
AnalogyThink of investment appraisal like a doctor assessing a patient's health—not just looking at weight (financial returns) but also considering diet, exercise, and mental well-being (ESG factors).
ExampleWhen a company considers building a new factory, traditional investment appraisal would look at construction costs, expected revenue, and payback period.
NoteESG investment appraisal goes beyond traditional methods by considering long-term sustainability and ethical impact.
Common MistakeDon't assume that ESG factors are separate from financial factors—they can directly impact long-term profitability.
