Investment constraints

The investment constraints represent the use of a company’s funds to invest in certain projects. A company can make investment decisions in financial assets (purchasing shares in other companies) and in capital assets (such as in property, plant and equipment).

For investment in shares, the socially responsible investment (SRI) concept is in line with the ethics of care perspective. As an ethical investment concept, the SRI guides investors to select securities by considering the social, environmental and institutional ethics aspects in financial decision making and allocate financial resources based on the societal impacts of the funded entities. This is consistent with the ethics of care principle, giving attention to stakeholders’ interests, including the community and the environment.

For investments in capital assets, since the feminist ethics of care perspective was used in this study, it was necessary to select the investment or capital budgeting criteria for

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company’s decision making as this represents the sustainability strategy a company adopts in line with the ethics of care. Current trends in the sustainability agenda show that the measuring and communicating of the returns of an organisation’s sustainability strategy can be performed using the social rate of return (SROI—Social Return on Investment) (Ernst & Young 2013). Hence, SROI is used to determine the amount of investments rather than the usual ones, such as the internal rate of return (IRR), return on assets (ROA) or return on investment (ROI).

The SROI represents the social benefits and costs of a company’s operations in dollar terms, relative to the investment or financial costs required (Lingane and Olsen 2004). This approach was developed by the Roberts Enterprise Development Fund (REDF) and was tested by the New Economics Foundation (NEF 2004) (Rotheroe and Richards 2007). The technique is based on the cost-benefit analysis and is used to measure the value of social benefits created by an organisation, relative to the cost of achieving the benefits. In the proposed model, the accounting definitional constraints are as follows:

3. Payments to government

𝐏𝐚𝐲𝐦𝐞𝐧𝐭𝐬 𝐭𝐨 𝐠𝐨𝐯𝐞𝐫𝐧𝐦𝐞𝐧𝐭_𝐭 = 𝐆𝐫𝐨𝐬𝐬 𝐭𝐚𝐱𝐞𝐬_𝐭 + 𝐎𝐭𝐡𝐞𝐫 𝐏𝐚𝐲𝐦𝐞𝐧𝐭𝐬_𝐭

𝐏𝐆𝐭 = (𝐭𝐚𝐱 𝐫𝐚𝐭𝐞 𝐱 𝐏𝐫𝐨𝐟𝐢𝐭 𝐛𝐞𝐟𝐨𝐫𝐞 𝐭𝐚𝐱_𝐭) + 𝐎𝐭𝐡𝐞𝐫 𝐏𝐚𝐲𝐦𝐞𝐧𝐭𝐬_𝐭

𝐏𝐆𝐭=𝐭𝐚𝐱 𝐫𝐚𝐭𝐞 %(𝐄𝐁𝐈𝐓 𝐭− 𝐢𝐭𝐋𝐓𝐃𝐭) + 𝐎𝐭𝐡𝐞𝐫 𝐏𝐚𝐲𝐦𝐞𝐧𝐭𝐬𝐭

where:

i is the interest rate applicable to the long-term debt (or interest-bearing liabilities), EBIT is the Earnings before Interest and Taxes,

LTD is the Long-Term Debt.

4. After-tax profit definition

𝐀𝐟𝐭𝐞𝐫 − 𝐭𝐚𝐱 𝐏𝐫𝐨𝐟𝐢𝐭𝐭= (1-tax rate) (𝐄𝐁𝐈𝐓𝐭 –∑𝟓𝐭=𝟏𝐢 𝐱 𝐋𝐨𝐧𝐠 𝐓𝐞𝐫𝐦 𝐃𝐞𝐛𝐭_𝐭)

The steps used in calculating SROI were provided by Lingane and Olsen (2004) and were used for a fictional example company that employs formerly homeless people and provides health care to its employees, resulting in a reduction of visits to emergency rooms per year. The company produces a polyurethane (PUR) foam recycling technology that enables PUR foam makers to purchase fewer chemicals per year, resulting in fewer emissions in the production of those chemicals, among other benefits.

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For the purposes of a simplified example, it is assumed that there are no negative social cash flows. The steps used were as follows:

1. Quantify non-financial impact of operations per unit.

For example, 10% reduction in emergency room visits = 150 fewer visits per year; 6% reduction in CO2 emissions per year = reduction of 12,000 tons CO2.

2. Translate the impact into dollar terms per unit to achieve “social cash flows.” Cost per visit is $250. Cost savings from 150 fewer visits per year = $37,500/year; Cost per ton CO2 is $1.25 based on regional emissions trading markets. Cost savings

from reduction of 12,000 tons CO2 per year = $15,000.

3. Sum all social cash flows for the horizon or periods.

In this example, the annual social cash flow is $37,500 + $15,000 = $52,500. A five- year period is usually used for projections to proceed to step 4.

4. Discount the social cash flows to present value using an appropriate discount rate (20% in this example).

Year 1 Year 2 …

Present value of social cash flows

Years 1-5

52,500/(1+0.20) + 52,500/(1+0.20)2 _{+ = $157,007}

5. Calculate the SROI by dividing the sum of present value by the initial investment. For instance, if the investment is $100,000 then the SROI is 1.57 (157%).

The net present value is tracked or forecast using a range of discount rates over a given time period to determine the SROI. Rather than attempting to quantify and capture all the benefits, the SROI analysis just estimates the cost savings or revenue contributions from successful program(s) run by a company. The tracking and quantifying of the positive and negative social and environmental impacts or externalities require transparent and comprehensive accounting systems to enable the measurement of social value a company has created. Whenever possible, this requirement should be conducted by extracting the available data in financial statements. Otherwise, reasonable estimates should be used, especially if the impacts cannot be accurately monetised. It should be noted, however, that as with ROI, SROI cannot be used in a vacuum; it only provides a benchmark figure to be considered in decision making (Lingane and Olsen 2004). This

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implies that in final investment decision making, a company can use and compare the ROI, SROI and other measurement tools as the capital budgeting criteria. The use of SROI in the proposed model does not limit the use of other measures in decision making.

The investment constraints for the proposed model are as follows: 1. Investments in financial assets

It is assumed that investments in financial assets should be at least the same as in the previous year and allocated to companies with sound social and environmental track records that pay attention to certain issues such as human rights, labour standards, equal opportunities, environmental protection, consumer safety, community concerns and stakeholder relations.

𝐈𝐧𝐯𝐞𝐬𝐭𝐦𝐞𝐧𝐭 𝐢𝐧 𝐟𝐢𝐧𝐚𝐧𝐜𝐢𝐚𝐥 𝐚𝐬𝐬𝐞𝐭𝐬𝐭 ≥ 𝐈𝐧𝐯𝐞𝐬𝐭𝐦𝐞𝐧𝐭 𝐢𝐧 𝐟𝐢𝐧𝐚𝐧𝐜𝐢𝐚𝐥 𝐚𝐬𝐬𝐞𝐭𝐬𝐭−𝟏

2. Investments in capital assets

The investments in capital assets are targeted to grow at a certain rate of investment in those assets since the previous year.

𝐈𝐧𝐯𝐞𝐬𝐭𝐦𝐞𝐧𝐭𝐬 𝐢𝐧 𝐜𝐚𝐩𝐢𝐭𝐚𝐥 𝐚𝐬𝐬𝐞𝐭𝐬_𝐭 - 𝝆𝐈𝐧𝐯𝐞𝐬𝐭𝐦𝐞𝐧𝐭𝐬 𝐢𝐧 𝐜𝐚𝐩𝐢𝐭𝐚𝐥 𝐚𝐬𝐬𝐞𝐭𝐬𝐭−𝟏 ≥ 0

where𝜌 is 1+ SROI projected from previous period. It represents the rate of investment growth.

6.3.3 Company’s policy constraints derived from the corporate governance