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The use of real options valuation methodology in enhancing the understanding of the impact of climate change on companies

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  • Emily Tyler
  • Richard Chivaka

Abstract

Climate change has in recent years gathered traction on the business, political and social agenda. From the business perspective, research has shown that climate change impacts on company value are uncertain, significant and strategically important. The challenge therefore is for the business community to apply financial valuation models that support the incorporation of the climate change impacts in strategic planning. However, the commonly used discounted cash flow techniques in capital budgeting are seen as failing to address the high levels of uncertainties inherent in climate change impacts. Real options thinking has been touted as having the potential to enhance understanding of these impacts via its direct handling of uncertainty, although not much research has been done to demonstrate this. Using an illustrative case study, this research presents an argument for introducing the real options approach, a new method for valuing options of future strategic action by companies in a setting that exhibits climate change impacts. The objective of this research is to contribute to the literature on strategic tools for addressing climate change and ultimately offer some management insights that can narrow the gap between finance theory and business practice. Copyright © 2009 John Wiley & Sons, Ltd and ERP Environment.

Suggested Citation

  • Emily Tyler & Richard Chivaka, 2011. "The use of real options valuation methodology in enhancing the understanding of the impact of climate change on companies," Business Strategy and the Environment, Wiley Blackwell, vol. 20(1), pages 55-70, January.
    • Handle: RePEc:bla:bstrat:v:20:y:2011:i:1:p:55-70
    DOI: 10.1002/bse.668
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    References listed on IDEAS

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    8. Robert C. Merton, 2005. "Theory of rational option pricing," World Scientific Book Chapters, in: Sudipto Bhattacharya & George M Constantinides (ed.), Theory Of Valuation, chapter 8, pages 229-288, World Scientific Publishing Co. Pte. Ltd..
    9. Karan Capoor & Philippe Ambrosi, "undated". "State and Trends of the Carbon Market 2006," World Bank Publications - Reports 13409, The World Bank Group.
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    Cited by:

    1. Jorge Tarifa-Fernández & Ana María Sánchez-Pérez & Salvador Cruz-Rambaud, 2019. "Internet of Things and Their Coming Perspectives: A Real Options Approach," Sustainability, MDPI, vol. 11(11), pages 1-15, June.
    2. Mirza, Nawazish & Umar, Muhammad & Horobet, Alexandra & Boubaker, Sabri, 2024. "Effects of climate change and technological capex on credit risk cycles in the European Union," Technological Forecasting and Social Change, Elsevier, vol. 204(C).
    3. Petre Caraiani & Carolyn Chisadza & Rangan Gupta, 2024. "Does Climate Affect Investments? Evidence from Firms in the United States," Working Papers 202448, University of Pretoria, Department of Economics.
    4. Konstantinos Evangelinos & Ioannis Nikolaou & Walter Leal Filho, 2015. "The Effects of Climate Change Policy on the Business Community: A Corporate Environmental Accounting Perspective," Corporate Social Responsibility and Environmental Management, John Wiley & Sons, vol. 22(5), pages 257-270, September.
    5. Adriana AnaMaria Davidescu & Eduard Mihai Manta & Margareta-Stela Florescu & Robert-Stefan Constantin & Cristina Manole, 2025. "Evaluating Sectoral Vulnerability to Natural Disasters in the US Stock Market: Sectoral Insights from DCC-GARCH Models with Generalized Hyperbolic Innovations," Sustainability, MDPI, vol. 17(18), pages 1-35, September.

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