Sustainable Return on Investment

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

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Company

ALeadingA&EFirminNorthAmericawithastrongEconomicsConsultingPracticeg

Foundedin1917

7 800 f i l >7,800professionals

>185locationsworldwide

Completedprojectsin50statesand60countries

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

andWater

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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

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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

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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

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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)

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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

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TheChangingLandscape

Source:2008KPMGSurveyofSustainabilityReporting

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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

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TheBottomLineandSustainabilityReporting

Shifttoasustainablebusinessmodel Sustainabilityisaroutetoprofitability Ceres2010winner Integratingannualreportandsustainabilitydisclosure Sustainabilityisaroutetoprofitability Ceres2010runnerup

Utilize3rd partyauditorsV if k t i bilit f d t Verifykeysustainabilityperformancedata

Bestpracticeforsustainabilitycostsavingsdisclosurep y g ProvidesROIofsustainabilityinitiatives

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Quantify&MonetizeSustainability

GHGs CACs

Water NuclearEnergy

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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

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SROI Methodology Step 1Structure and Logic DiagramsStructure and Logic Diagrams

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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

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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

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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

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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

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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

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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

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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

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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

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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 (%)

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Scale of Application

FacilityCampusp

CityState & Nationallyy

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Interactive Case StudyInteractive Case StudyDenver Metro WastewaterDenver Metro Wastewater

Reclamation District (MWRD)

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Metro Wastewater Reclamation District:The Actual RAP Session in Denver

Partial Participants List

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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

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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

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

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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

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Biosolids Optimization: Preliminary Results

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Biosolids Optimization: PV of Benefits & Costs Categories

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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)

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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.

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

Stephane LarocqueOr

[email protected]

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

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