Sustainable Return on Investment (SROI)(SROI)

CORPORATE ECO FORUM

2011 Annual Meeting - Defining Next Practice in Corporate Sustainability

J 7th 2011June 7th, 2011

Stephane Larocque:Stephane Larocque: Associate Vice-President HDR Decision Economics

Contents

1. Introduce Sustainable Return on Investment (SROI)

2 P id E l f R t SROI P j t2. Provide Examples of Recent SROI Projects3. Discuss SROI and Sustainability Reporting4. Explain SROI Methodology5. Examples of SROI Results/Outputsp p6. The Client Perspective7 Interactive Case Study7. Interactive Case Study8. Wrap-Up and Questions

2

Company

ALeadingA&EFirminNorthAmericawithastrongEconomicsConsultingPracticeg

Foundedin1917

7 800 f i l >7,800professionals

>185locationsworldwide

Completedprojectsin50statesand60countries

Architecture Energy Federal Private LandArchitecture,Energy,Federal,PrivateLandDevelopment,ResourceManagement,Transportation,

andWater

3

SROI

ElementsoftheSROIprocesshavebeenusedtoevaluatethemonetaryvalueofsustainabilityprogramsand

projectsvaluedatover$10B

Making Sustainable Decisions

Traditional models such as Lif C l C t A l iLife-Cycle Cost Analysis (LCCA) often fall short: Only consider cash impactsy p Do not account for uncertainty Lack transparency

5

What is SROI?It b t ti i C t B fit A l i d Fi i lIts best practice in Cost-Benefit Analysis and Financial Analysis over a projects entire life-cycle, augmented by:

Accounting for uncertainty using state of the art risk analysis techniquesAccounting for uncertainty using state-of-the-art risk analysis techniquesEngaging stakeholders directly to generate consensus and transparency

6

SROI adds to traditional financial analysis theSROI = Calculating The Triple Bottom Line

Projects Cash Impacts

Internal Non-Cash Impacts

External Costs & Impacts

SROI adds to traditional financial analysis the monetized value of non-cash benefits and externalities

Capital Operations & Maintenance Productivity MobilityHealth & Safety

Impacts

Greenhouse Gases

Criteria Air Contaminant

Water, Waste, &

Noise

Financial Financial Return

Financial Financial & Internal& Internal& Internal

SROISROI

7

Decision MetricsFrom Both a Financial & SROI Perspective

Net Present Benefit to Cost Value(NPV)

Ratio(BCR)

Discounted Payback Period

(DPP)

Internal Rate of Return

Return On Investment

(IRR) (ROI)

8

Examples of Recent SROI ProjectsCli P jClient Project

DepartmentofDefence SROIontheFortBelvoirCommunityHospital,USAGHumphreysinKoreaandFortBlissinTexas,etc.

BNSF,CSX&UPRailroads Provedthepublicbenefitofdozensofnewinfrastructureprojectsresultingin$200MingrantsfromTCIFandanother$500MfromTIGERandTIGERII

BostonRedevelopmentAuthority

ThecityofBostonusedSROItoanalyzeitsportfolioofARRAfundingprojects

Chicago Area Waterway UsingSROItohelpdeterminethemostsustainableformofChicagoAreaWaterwaySystem

g pphysicalbarrierbetweenthegreatLakesandMississippiriversystem

DenverMetroWastewater UsingSROItomakedesign&constructiondecisionsonReclamationDistrict Denversproposednewwastewatertreatmentfacility

JohnsHopkinsUniversity ProvidedSROIanalysisofJHUsCampusSustainabilityInitiativeprojectinordertosecureLEEDcertification

DepartmentofEnergy SROIanalysisofenergyandwaterreductioninitiativesatArgonneNationalLaboratoryEnergySciencesBuildinginChicago9

MonetizingSustainabilityReports:IncreasingNeed

CustomersCustomers

Shareholders/Investors

RegulatoryRegulatory

CompetitionCompetition

10

TheChangingLandscape

Source:2008KPMGSurveyofSustainabilityReporting

11

TheBottomLineandSustainabilityReporting

Firstenvironmentalprofitandlossaccount:GHGsandwater Preparationforfuturelegislativechangeinreporting Goalisdecisionmakingintegrationintobusinessmodel Environmentalaccountingsectioninannualreport Segmented by activitySegmentedbyactivity

ReportsenvironmentaloperatingandcapitalcostsS t d b b i it Segmentedbybusinessunits

LinksenvironmentalperformancetocompensationR t l h i d GHG f t i t ReportssupplychainprogramsandGHGfootprint

Discloseswaterrelatedriskinformationin10K

12

TheBottomLineandSustainabilityReporting

Shifttoasustainablebusinessmodel Sustainabilityisaroutetoprofitability Ceres2010winner Integratingannualreportandsustainabilitydisclosure Sustainabilityisaroutetoprofitability Ceres2010runnerup

Utilize3rd partyauditorsV if k t i bilit f d t Verifykeysustainabilityperformancedata

Bestpracticeforsustainabilitycostsavingsdisclosurep y g ProvidesROIofsustainabilityinitiatives

13

Quantify&MonetizeSustainability

GHGs CACs

Water NuclearEnergy

14

SROI Methodology A Four Step Processp

SROI reveals the hidden value in projects SROI reveals the hidden value in projects.David Lewis, PhDHDR National Director, Economics & Finance

15

SROI Methodology Step 1Structure and Logic DiagramsStructure and Logic Diagrams

16

SROI Methodology Step 2Quantify Input Data Assumptions

DataSources

Over 8,000 Architects, Engineers, Scientists & Economists Meta-analysis of third party research & data Financial & insurance markets

Quantify Input Data

Q y p p

Sources Contingent valuation i.e. willingness to pay surveys Bayesian analysis/expert opinion

Distributions

17

SROI Methodology Step 2Quantify Input Data Assumptions

Quantify Example: Cost of CO2 per Incremental Ton ($2011)

Median Lower Limit Upper Limit

Q y p p

yInput Data Distributions

pp$20.87 $7.51 $86.50

18

SROI Methodology Step 2Quantify Input Data Assumptions

Quantify Input Data

Example: Range of Values for CO2 Median Value: We used the Interagency Working

Q y p p

Distributions Median Value: We used the Interagency Working Group on the Social Cost of Carbons recommended value for Federal projects

= $20.87 USD/ton$

Low Value: We used $7.51 USD/ton as calculated by William Nordhaus in his book A Question of Balance: W i hi th O ti Gl b l W i P li iWeighing the Options on Global Warming Policies, 2008

High Value: We used $86.50 USD/ton as calculatedHigh Value: We used $86.50 USD/ton as calculated by Nicholas Stern in his book The Economics of Climate Change: The Stern Review, 2006

19

SROI Methodology Step 3Risk Analysis Process (RAP) Session

Sample Participants

y ( )

Client: Project team Technical specialists Financial experts

HDR: Facilitator Economists Technical specialists

Outside Experts: Costing Experts Energy Modelers Architects & Engineers

P bli A i & Offi i l Public Agencies & Officials

20

SROI Methodology Step 4Run the Model and Produce Results

GHG Emissions Green Power =SavingsSavingsCredit + =Health & Safety

Noise Reduction Health & Reduced Energy C t

Total Benefits

Non-Cash BenefitsCash BenefitsSafetyCosts

21

Examples of SROI ResultsFort Belvoir Hospital Virginia US ArmyFort Belvoir Hospital, Virginia US Army

SROI Current Design Alternative NotesAnnual Value of Benefits $1 284 097 $1 388 514 The total value of the benefits in one yearAnnual Value of Benefits $1,284,097 $1,388,514 The total value of the benefits in one year

Energy Reduction $474,470 $516,241 Cash benefit Water Reduction $80,039 $80,039 Cash benefit

Greenhouse Gases Savings $163,461 $177,654 Non-cash benefit Air Pollutants Savings $558,039 $606,492 Non-cash benefit

Savings From ReducedSavings From Reduced Water Use $8,088 $8,088

Non-cash benefit

Net Present Value $15,773,620 $13,798,340 PV Benefits / PV All Costs Return on Investment 39.3% 18.0% Average Rate of Return on Capital Investment Discounted Payback Period 4.6 7.7 Time in years + discounted cash flow Internal Rate of Return (%) 31 0% 18 1% Discount rate making NPV = 0Internal Rate of Return (%) 31.0% 18.1% Discount rate making NPV 0 Benefit to Cost Ratio 4.7 2.8 PV Benefits / PV Costs

FROI Current Design Alternative NotesAnnual Value of Benefits $554,870 $596,193 The total value of the benefits in first year Net Present Value $4 353 935 $1 391 047 PV Benefits / PV All Costs

22

Net Present Value $4,353,935 $1,391,047 PV Benefits / PV All Costs Return on Investment 15.9% 5.5% Average Rate of Return on Capital Investment

Discounted Payback Period 12.9 25.0Time in years to + positive discounted cash flow

Internal Rate of Return (%) 14.2% 6.8% Discount rate making NPV = 0 Benefit to Cost Ratio 2.0 1.2 PV Benefits / PV Costs

Examples of SROI ResultsTehachapi Trade Corridor California BNSF RailroadTehachapi Trade Corridor, California BNSF Railroad

23

Examples of SROI ResultsFuture Community Hospital El PasoFuture Community Hospital, El Paso

ITEM

SUSTAINABLE TECHNOLOGY / DESIGN ELEMENT IMPACT

NET PRESENT VALUE(8.8% NOMINALDISCOUNT RATE)

NET PRESENT VALUE(4.8% NOMINALDISCOUNT RATE)

SROI FROI SROI FROISROI FROI SROI FROI

1 THERMAL STORAGELOAD SHIFTING TO REDUCE ELECTRICITY COST. IT SAVESWATER CONSUMPTION

($2,277,950) ($2,768,156) ($1,423,265) ($2,446,650)

2 CO-GENERATION OPTION #1 (FULL LOADLOAD SHIFTING OF THE FULL ELECTRICITY LOAD FROM THEELECTRIC UTILITY TO NATURAL GAS (FULL LOAD) ($7,519,001) ($29,128,501) $11,115,030 ($34,064,372)

3CO-GENERATION OPTION #2 (PEAKS )

LOAD SHIFTING OF THE PEAK ELECTRICITY LOAD FROM THE(P S ) ($9,960,971) ($14,754,989) ($11,599,363) ($21,409,068)SHAVING) ELECTRIC UTILITY TO NATURAL GAS (PEAK SHAVING) ($ , , ) ($ , , ) ($ , , ) ($ , , )

4 HEAT RECOVERY CHILLERPRODUCES ELECTRICITY AND REDUCES NATURAL GAS ANDWATER CONSUMPTION

$9,451,008 $5,373,148 $20,496,349 $11,402,984

5 ENERGY RECOVERY VENTILATOR REDUCES ELECTRICAL AND NATURAL GAS CONSUMPTION $758,508 ($492,549) $2,627,693 ($66,722)

6 GROUND SOURCE HEAT PUMP REDUCES ELECTRICAL AND NATURAL GAS CONSUMPTION $2,531,891 $532,460 $7,480,615 $3,314,412

REDUCES ELECTRICAL CONSUMPTION HOWEVER INCREASES7 SOLAR HOT WATER

REDUCES ELECTRICAL CONSUMPTION HOWEVER INCREASESWATER CONSUMPTION

($130,196) ($297,640) $158,474 ($215,818)

8 SOLAR PHOTOVOLTAICSPRODUCES ELECTRICITY HOWEVER INCREASES WATERCONSUMPTION

($2,658,852) ($3,240,496) ($2,531,472) ($3,776,996)

9 GEOTHERMAL DIRECT HEATINGREDUCES NATURAL GAS CONSUMPTION HOWEVER INCREASESELECTRICAL CONSUMPTION

($1,375,199) ($1,936,041) ($228,491) ($1,512,578)

HVAC EXHAUST ENERGY RECOVERY.10

HVAC EXHAUST ENERGY RECOVERYWIND TURBINES PRODUCES ELECTRICITY ($1,015,939) ($1,573,125) ($658,058) ($1,857,096)

11 ON-SITE GREYWATER AND WASTEWATERRECLAMATION, TREATMENT, AND RE-USE

REDUCES WATER CONSUMPTION HOWEVER INCREASESELECTRICAL CONSUMPTION

($768,573) ($3,116,302) $1,323,187 ($3,554,027)

12 DISHWASHER WATER RECOVERY AND RE-USE

REDUCES WATER CONSUMPTION HOWEVER INCREASESELECTRICAL CONSUMPTION

($59,432) ($82,115) ($94,223) ($141,415)

13 RECYCLING STATION ON-SITE DIVERTS WASTE FROM LANDFILL HOWEVER INCREASESELECTRICAL CONSUMPTION

$1,199,726 $929,241 $2,916,764 $2,354,488

14 HEPA FILTRATION AT ALL AIR HANDLINGUNITS IN PATIENT-CARE AREAS

REDUCES HOSPITAL ACQUIRED INFECTIONS HOWEVERINCREASES ELECTRICAL CONSUMPTION

$38,151,331 $73,577 $79,618,918 $276,584

15 HYDROGEN PEROXIDE VAPOR CLEANING REDUCES HOSPITAL ACQUIRED INFECTIONS HOWEVERINCREASES ELECTRICAL CONSUMPTION

$121,065,684 $1,966,018 $253,166,523 $4,999,11824

S-Curve Diagram

25

Examples of SROI Results Campus Sustainability Initiative Baltimore John Hopkins University

RISK ANALYSIS OF SUSTAINABLE INITIATIVES - JHUAVERAGE RETURN ON INVESTMENT

SROI FROI

Campus Sustainability Initiative, Baltimore - John Hopkins University

48%50%

51%

57%77%

14%15%

18%27%

53%MEAN: 43%

16%MEAN: 11%

80%

90%

100%

Externalities

42%

44%45%

46%47%

48%

10%

11%12%12%13%14%

43%37% 11%50%

60%

70%

y

o

f

N

o

t

E

x

c

e

e

d

i

n

g

Health & Productivity

Externalities

36%37%

38%39%

40%41%

42%

7%7%8%9%9%10%10%

20%

30%

40%

P

r

o

b

a

b

i

l

i

t

y

19%31%

36%

5%

7%34%6%

0%

10%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90%

Total Return on Investment (%)

26

Scale of Application

FacilityCampusp

CityState & Nationallyy

27

Interactive Case StudyInteractive Case StudyDenver Metro WastewaterDenver Metro Wastewater

Reclamation District (MWRD)

28

Metro Wastewater Reclamation District:The Actual RAP Session in Denver

Partial Participants List

29

Denver Metro Waste Water - Overview

InternalNon-CashBenefits

External Costs & Benefits

Employee Health & Safety

Diversity ReliabilityGreen House Gases

Criteria Air Contaminant

Landfill Waste

Soil Erosion Motorist SafetyOdor & Water

Public Acceptance Permitting Other

30

MWRD: Alternatives Analyzed

Alternative 3: Diversify into Class A Product With Thermal Drying at Both Treatment Plants (Distributed Thermal Drying) FROI

CostsBenefits

Proven Performance Adjustment

Days / Year

1

Increased Revenue from Class A Biosolids

$ / Year

Average Electricity and Natural Gas Prices

$ / MWh or MmBTU

Increased Energy Consumption

MWh or MmBTU / Year

Cost of Freight Transportation

$ / Mile

Reduced Freight Truck Miles

Miles / Year

2 43 5 6

Incremental Capital Costs

$

Capital Replacement Costs

$

Other Incremental O&M Costs

$ / Year

Cost of IncreasedEnergy Consumption

$ / Year

7 8 9

Benefit of Incremental Revenues from Biosolids

$ / Y

Benefit of Reduced Transportation O&M

$ / Y

Cost of Thermal Drying Equipment and O&M

$ / Year

Discount Rate%

$ / Yearq p

$ / Year

10

FROI

32

Alternative 3: Diversify into Class A Product With Thermal Drying at Both Treatment Plants (Distributed Thermal Drying) Internal SROI

33

Alternative 3: Diversify into Class A Product With Thermal Drying at Both Treatment Plants (Distributed Thermal Drying) SROI

GHGs CACs GHGs: Diesel CACs: DieselReduced Diesel Incremental Energy

CostsBenefits

Accident Cost per

Proven Performance Adjustment

Days / Year

Reduced Freight

1

2 43 65 7 8 9

Conversion FactorTons / MWh or MmBTU

Conversion FactorTons / MWh or MmBTU

Increased GHGs from Energy Consumption

Tons / Year

Increased CACs from Energy Consumption

Tons / Year

Reduced GHGs from Diesel Consumption

Tons / Year

Reduced CACs from Diesel Consumption

T / Y

Conversion FactorTons / Diesel Gallons

Conversion FactorTons / Diesel Gallons

ConsumptionGallons

gyConsumption

MWh or MmBTU / Year

Accident Cost per Freight Truck Mile

($/truck mile)

Reduced Freight Truck Miles

Miles / Year

Net GHGs ImpactsTons / Year

Net CACs ImpactsTons / Year

Social Cost of GHGs$ / Ton

Social Cost of CACs$ / Ton

Tons / Year Tons / Year

10 11

Reduction in Land Application% difference

Biosolids Sent to Landfill Base Case

Dt/year

CO2E Emissions Avoided by Displacing Fertilizer

ProductionTons CO2E / Tons of fertilizer

Social cost of CO2$ / Ton

From Alt 3 ISROI From Alt 3 ISROI1312

Benefit of Improved Public & Stakeholder

Acceptance$ / Year

From Alt 3 FROI From Alt 3 FROIFrom Alt 3 ISROI From Alt 3 ISROI From Alt 3 FROI

Benefit of Improved Safety (Truck

Accidents)$ / Year

Benefit of Diversification

(Reduction in GHGs)$ / Year

Benefit of Diversification

(Reduction in Tipping Fees)$ / Year

Cost of CACs Increase

$ / Year

Cost of GHGs Increase

$ / Year

Cost of Thermal Drying Equipment

and O&M$ / Year

Benefit of Reduced Transportation O&M

$ / Year

Benefit of Incremental

Revenues from Biosolids

$ / Year

SROI

Discount Rate%

GHGs- Carbon Dioxide (CO2)- Methane (CH4)- Nitrous Oxide (N2O)

CACs- Sulphur Dioxide (SO2)- Nitrogen Oxides (NOX)- Particulate Matter (PM)- Volatile Organic Compounds (VOCs)

14

34

Biosolids Optimization: Preliminary Results

35

Biosolids Optimization: PV of Benefits & Costs Categories

36

S-Curves: NPV, Alternative 3

The Net Present Value of Alternative 3: Diversify into Class A Product

-$120

-$113

-$119

-$112

-$136

-$129100%

FROI ISROI SROI

With Thermal Drying at Both Treatment Plants (Distributed Thermal Drying)(20 Year Study Period)

-$123

-$123

-$122

-$122

-$121

-$122

-$122

-$121

-$121

-$120

-$140

-$140

-$139

-$138

-$137

70%

80%

90%

-$126

-$125-$125

-$124

-$124

-$125

-$124-$124

-$123

-$123

-$143

-$142-$142

-$141

-$141

50%

60%

o

f

N

o

t

E

x

c

e

e

d

i

n

g

$

-$128

-$128

-$127

-$127

-$126

$

-$127

-$127

-$126

-$126

-$125

$

-$146

-$145

-$145

-$144

-$143

20%

30%

40%

P

r

o

b

a

b

i

l

i

t

y

-$136

-$131

-$130

-$129

-$135

-$130

-$129

-$128

-$155

-$149

-$147

-$147

0%

10%

-$160 -$150 -$140 -$130 -$120 -$110 -$100

Total NPV (Millions)

37

So Why Use SROI?

Its a proven Cost-Benefit Analysis based approach to making planning & budgeting decisions

It fully incorporates non-cash benefits and externalities into the decision making process

It provides a full range of possible outcomes using state-of-the-art risk analysis techniques

It helps generate consensus by being both interactive and transparenttransparent

It is an invaluable tool to help organizations secure funding, t bli t t i t l l tgenerate public support, generate internal approval, etc.

38

Questions?Questions?HDR Practice Group Leader for SROI:HDR Practice Group Leader for SROI:

Stephane LarocqueOr

SROI@hdrinc.com

Doing the right thing is good. Doing the right thing for the right reason and with the right intention is even better. te t o s e e bette

39