Environmental Engineering Reference
In-Depth Information
panies made “environmental investment because
of the negative impacts of probable ecological
accidents”. They also found that a large part of
this investment was in tangible capital assets.
If, for example, we look at the water industry,
agricultural emissions in parts of France have
increased in recent times to become a serious
threat to water quality (Ekins, 2003). However,
traditional appraisal models are inappropriate in
such a uniquely regulated industry (Tebbutt, et
al., 2003).
It is acknowledged that a first step in developing
a proactive environmental management program
has been to identify the myriad of subtle ways
environmental issues impact company cost and
revenue streams (White, 1996). The limitations
existing with various investment appraisal ap-
proaches when it comes to environmental issues,
including the need to incorporate strategic consid-
erations into corporate decision-making, planning
and control processes, has long been recognised
by environmental accounting researchers (Burritt,
2004; Burritt and Saka, 2006). The mainstream
academic literature on investment appraisal ap-
pears to focus on traditional financial evaluation
techniques and tools with little recognition of
environmental issues as a factor in the decision
process of organisations (Ross and Wood, 2008).
There is empirical evidence to show that en-
vironmental benefits accrue over a much longer
time-horizon than typical investments in organi-
sational projects (Regnier and Tovey, 2007), mak-
ing their inclusion into investment appraisal and
justification even more difficult. In addition to long
time planning horizons, there are issues with the
various costs and benefits that are associated with
green decisions and factors. The United States'
Environmental Protection Agency's (USEPA)
well known cost categorisations (USEPA, 1995)
include conventional, hidden, contingent, rela-
tionship/image, and societal costs, which range,
respectively, from easier to measure to most dif-
ficult to measure categories. Thus, there will also
to less tangible and non-traditional cost categories.
It is difficult to integrate these characteristics
of environmental costs into traditional capital
investment appraisal tools. Thus, there is a need
for tools that can effectively help organisations
make decisions concerning capital projects that
include environmentally sustainability dimen-
sions. Organisations need to make a business case
for such projects, irrespective of whether they are
initiated through regulatory or competitive pres-
sures. One solution is the adoption of the financial
appraisal profile approach.
Introducing an Environmental
Aspect to the Financial
Appraisal Profile Model
The FAP model (Lefley and Ryan 2005, Lefley
and Sarkis 2007, Lefley 2008a, Lefley and Sar-
kis 2009) was designed as a three-dimensional
(financial, project specific risk, and strategic)
model for the appraisal of capital investments. In
this case study, we add a fourth dimension, focus-
ing specifically on environmental sustainability
issues. Introducing this fourth environmentally
oriented dimension will enhance the evaluation,
and therefore make for better decision-making of
those projects that have significant environmental
implications. Such environmental factors being,
in the main, ignored by conventional financial
appraisal models because of the difficulty, some
would argue impossibility, in valuing them in
financial terms. We then present a case study that
offers some insights into the application of the
FAP model. Finally, we summarise the chapter,
identifying various issues that may arise with the
technique with managerial implications clearly
defined.
Evaluating Capital Projects
Numerous methods/models have been recom-
mended for the evaluation of capital projects.
However, the strategic evaluation and justifica-
