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Sustainable Return on Investment

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  • 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

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