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Sustainable finance and the ‘Space Value of Money’

Armen Papazian, a PhD graduate of Cambridge Judge Business School, outlines how a ‘Space Value of Money’ can help meet global sustainability goals.

Dollar bills floating in space.
Dr Armen Papazian

Armen Papazian, a PhD graduate of Cambridge Judge Business School, is a financial economist and founder of cloud-based analytics platform Value Xd. He argues that while sustainable finance is moving to the mainstream and prompting new disclosure requirements and business strategies, core finance theory has been slow to follow suit. He has proposed a new principle that integrates sustainability into our financial value models and equations: the Space Value of Money, the subject of a forthcoming book he is writing.

Armen outlines a few highlights of the Space Value of Money principle:

We need a theoretical and mathematical adjustment to our core finance principles and models. Simply put, the Space Value of Money aims to fill a gap that exists in our understanding and application of the value of money, currently focused on risk and time. We all know that one dollar today is worth more than one dollar tomorrow (time value of money), and the higher the risk the higher the expected return (risk and return). But the aspect of “space” – reflecting the spatial responsibility that all of us share – doesn’t usually enter the equation. We need a finance principle that establishes our spatial responsibility.

The Space Value of Money principle requires that a dollar invested in space has at the very least a dollar’s worth of positive impact on space. The space value of money principle entrenches responsibility into our models, and thus requires that our mathematical expressions of value reflect this fact by addressing impact and return together. This would imply that alongside risk and time, the value of cash flows and assets are also defined by their space impact.

The space impact of an investment, positive or negative, should be an integral part of the value of an investment. This can be achieved by digging deeper into investments, by looking at how money is deployed, and how it affects ESG and other related aspects of the investment or business. The space value metrics proposed quantify the space impact of an investment or business across all the dimensions and layers of space within which it operates or affects.

The logic of the value of money should be based on risk, time, and space parameters. Just like a discount rate identifies the risk levels of an investment and helps define its value, a required space growth rate has practical implications for selection and helps define how an investment is designed and executed – in effect requiring that an investment’s ecological or space footprint is in line with our global sustainability objectives. A transformed logic in the value of money will integrate responsibility and sustainability into our core finance value models.

This leads to a transformed optimisation target across markets and investments that reflects our global ESG goals and targets. With the introduction of the Space Value of Money, our optimisation target is changed. Now we must optimise space impact while we minimise risks and maximise returns. Through the space value metrics, factors affecting space impact optimisation would include and reflect such goals as net zero, clean oceans, gender freedom and balance, fair wages, and transparency, to name a few.