Sunday, April 20, 2008

Using Pascal's Wager in Supporting Corporate Environmentalism

Is it a corporation's role to invest in the environmental projects and try to reduce the impact on the environment? While there is still confusion around the data on the causation of Global warming how can a manager decide to invest shareholder capital in Green projects?

There is line of argument that justifies the need for sustainability projects that is analogous to Pascal's wager. Pascal's wager defined for faith in god, stated using decision theory, looks like


God exists (G) God does not exist (~G)
Living as if God exists (B) +∞ (heaven) −N (none)
Living as if God does not exist (~B) ?? not specified
perhaps N (limbo/purgatory/spiritual death)
or −∞ (hell)
+N (none)

So the dominant strategy is to pick Living as if God exists.

In the environmental context, companies are advised to act now, because it is a dominant strategy to pick "Living as if Global warming is an effect of industrial activities".

However, unlike the religious argument, this assumes that all these environmental friendly initiatives are NPV positive projects. That is investing in them, even if it turned out "God does not exist", has a positive NPV at the discount rate the corporation uses for its investments. That sure is a big if, not supported in the data. In fact there is more data to suggest otherwise.

The bottom line is shareholders trust the corporation and its executives to invest in projects that have a higher return on investment than the investors can find for themselves.

I believe in reducing consumption and waste. These are necessary for operational excellence. But should the strategy be aligned along Green themes?

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