Environmental Economics and Investment Assessment II pages:3-11
DAFFIE provides a methodology to estimate the economic feasibility of environmental investments.
Typically, (mandatory) environmental investments are unprofitable as such so that classical investment analysis provides insufficient insights to assess their economic feasibility.
Therefore, we evaluate whether an industry or company has the carrying capacity for extra costs associated with the introduction of environmental measures.
In the DAFFIE evaluation method, an investment is economically feasible when an industry or company is able to maintain or strengthen its competitiveness which is defined as the ability to maintain sufficient liquidity and solvency and to earn a return from activities that exceeds the cost of capital in the long run.
This implies the use of financial ratio analysis.
DAFFIE starts from the annual accounts of an (average) company.
The impact of the investment options is simulated into projected accounts.
Eight key financial ratios are calculated for the projected statement with the investment options included and excluded.
Finally, the evolution of the key ratios is benchmarked against a reference group (e.g.total industry in Flanders) to come to a conclusion on the feasibility of the investment options.
This methodology highlights the potential impact of unprofitable environmental investments on the financial position of a company or industry.
The results are used to support environmental policy makers or to objectify discussions between companies which are confronted with additional investments due to environmental legislation, and governments which issue emission permits.
The paper describes the DAFFIE methodology in more detail and illustrates its use with practical cases.