Financial Impacts of Climate Change: Invest or Not?

by: Celia Bravard, Rena Lahn, Gautam Kaul

Publication Date: October 31, 2023
Length: 32 pages
Product ID#: 8-842-679

Core Disciplines: Accounting/Finance, Social Impact, Sustainability

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Teaching Note

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This case involves quantifying emissions, their impact, and applying the social cost of carbon to complete a comparative financial valuation for a fictional startup, VerticalFarm Co. (VFC).

VerticalFarm Co. sites, develops, and owns/operates vertical farms in retrofitted buildings such as warehouses or high rises. These vertical farms grow fresh produce (e.g., lettuce, spinach, microgreens and herbs), using lighting, water nutrient delivery systems, and temperature control. VFC’s leadership is passionate about providing fresh, nutritious food in traditionally food-insecure urban areas and creating employment opportunities in the local community. They aim to expand their operations to a building in Chicago for which they seek venture capital (VC) investment.

The fictional protagonist is a senior investment analyst at a large VC firm. She is asked by her boss to evaluate how the social cost of carbon would affect the firm’s current valuation of VCF—and her analysis and recommendation is due in just a few days, per the request of the firm’s board of directors. Students are asked to act as the protagonist and incorporate the social cost of carbon into the proforma projections and then compare them to the original due diligence analysis. Finally, they will make a recommendation either “for” or “against” investing in VFC.

The case provides an overview of climate change; why emissions are a challenge (from both global stability and monetary impact quantification perspectives); an overview of controlled environment agriculture; and the framework for an analysis and the quantification of the social cost of carbon. Data on alternative estimates of the carbon price for the United States are provided.

Teaching Objectives

After reading and discussing the material, students should:

  • Describe and discuss pros and cons of controlled environment agriculture, map out the value chain and identify core operational differences from conventional agriculture.
  • Explain the basics of climate change including radiative forcing, greenhouse gases, and impacts by sectors and industries.
  • Perform basic greenhouse gas accounting using published data, government databases (e.g., USEEIO and eGRID), and accessible mathematical skills.
  • Apply the social cost of carbon to a financial model and conduct modeling-based analysis of emissions and their impact on all components of Free Cash Flow.
  • Develop a point of view and debate recommendation for investment managers, including the importance of sensitivity analysis.