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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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    1. Michael Toman, 1998. "Research Frontiers in the Economics of Climate Change," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 11(3), pages 603-621, April.
    2. Kolk, Ans & Pinkse, Jonatan, 2004. "Market Strategies for Climate Change," European Management Journal, Elsevier, vol. 22(3), pages 304-314, June.
    3. repec:wbk:wboper:13412 is not listed on IDEAS
    4. Cox, John C. & Ross, Stephen A., 1976. "The valuation of options for alternative stochastic processes," Journal of Financial Economics, Elsevier, vol. 3(1-2), pages 145-166.
    5. Geoffrey Heal & Bengt Kriström, 2002. "Uncertainty and Climate Change," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 22(1), pages 3-39, June.
    6. 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..
    7. repec:wbk:wboper:13408 is not listed on IDEAS
    8. Karan Capoor & Philippe Ambrosi, "undated". "State and Trends of the Carbon Market 2006 : A Focus on Africa," World Bank Publications - Reports 13413, The World Bank Group.
    9. Sir Nicholas Stern, 2006. "What is the Economics of Climate Change?," World Economics, World Economics, 1 Ivory Square, Plantation Wharf, London, United Kingdom, SW11 3UE, vol. 7(2), pages 1-10, April.
    10. Karan Capoor & Philippe Ambrosi, "undated". "State and Trends of the Carbon Market 2006," World Bank Publications - Reports 13409, The World Bank Group.
    11. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-654, May-June.
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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. 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.

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