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Sustainable Return on Investment

(SROI)
CORPORATE ECO FORUM
2011 Annual Meeting - Defining Next
Practice in Corporate Sustainability
J
June
7th, 2011

Stephane Larocque:
Associate Vice-President HDR Decision Economics

Contents
1. Introduce Sustainable Return on Investment
(SROI)
2 Provide
2.
P
id Examples
E
l off Recent
R
t SROI Projects
P j t
3. Discuss SROI and Sustainability Reporting
4. Explain SROI Methodology
5. Examples
p
of SROI Results/Outputs
p
6. The Client Perspective
7 Interactive Case Study
7.
8. Wrap-Up and Questions

Company
ALeadingA&EFirminNorthAmericawithastrongEconomics
ConsultingPractice
g
Foundedin1917
>7,800professionals
7 800
f i
l
>185locationsworldwide
Completedprojectsin50statesand60countries

Architecture,Energy,Federal,PrivateLand
Architecture
Energy Federal Private Land
Development,ResourceManagement,Transportation,
andWater
3

SROI

ElementsoftheSROIprocesshavebeenusedtoevaluate
themonetaryvalueofsustainabilityprogramsand
projectsvaluedatover$10B

Making Sustainable Decisions


Traditional models such as
Lif C l Cost
Life-Cycle
C tA
Analysis
l i
(LCCA) often fall short:

Only
y consider cash impacts
p

Do not account for uncertainty

Lack transparency

What is SROI?
Its best
It
b t practice
ti in
i Cost-Benefit
C tB
fit Analysis
A l i and
d Financial
Fi
i l
Analysis over a projects entire life-cycle, augmented by:
Accounting for uncertainty using state
state-of-the-art
of the art risk analysis techniques
Engaging stakeholders directly to generate consensus and transparency

SROI = Calculating The Triple Bottom Line


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

Capital

Operations &
Maintenance

Productivity

Mobility

Financial
Return

Financial
& Internal

SROI

External
Costs &
Impacts

Internal NonCash Impacts

Health &
Safety

Greenhouse
Gases

Criteria Air
Contaminant

Water,
Waste, &
Noise

Decision Metrics

From Both a Financial & SROI Perspective

Net Present
Value
(NPV)

Benefit to Cost
Ratio
(BCR)
Discounted
Payback Period
(DPP)

Internal Rate of
Return
(IRR)

Return On
Investment
(ROI)

Examples of Recent SROI Projects


Cli
Client

P j
Project

DepartmentofDefence

SROIontheFortBelvoirCommunityHospital,USAG
HumphreysinKoreaandFortBlissinTexas,etc.

BNSF,CSX&UPRailroads

Provedthepublicbenefitofdozensofnewinfrastructure
projectsresultingin$200MingrantsfromTCIFand
another$500MfromTIGERandTIGERII

BostonRedevelopment
Authority

ThecityofBostonusedSROItoanalyzeitsportfolioof
ARRAfundingprojects

ChicagoAreaWaterway
Chicago
Area Waterway
System

UsingSROItohelpdeterminethemostsustainableformof
g
p
physicalbarrierbetweenthegreatLakesandMississippi
riversystem

DenverMetroWastewater
ReclamationDistrict

UsingSROItomakedesign&constructiondecisionson
Denversproposednewwastewatertreatmentfacility

JohnsHopkinsUniversity

ProvidedSROIanalysisofJHUsCampusSustainability
InitiativeprojectinordertosecureLEEDcertification

DepartmentofEnergy

SROIanalysisofenergyandwaterreductioninitiativesat
ArgonneNationalLaboratoryEnergySciencesBuildingin
Chicago

MonetizingSustainabilityReports:
IncreasingNeed
Customers
Shareholders/
Investors
Regulatory
Competition

10

TheChangingLandscape

Source:2008KPMGSurveyofSustainabilityReporting

11

TheBottomLineandSustainabilityReporting
Firstenvironmentalprofitandlossaccount:GHGsandwater
Preparationforfuturelegislativechangeinreporting
Goalisdecisionmakingintegrationintobusinessmodel
Environmentalaccountingsectioninannualreport
Segmentedbyactivity
Segmented by activity
Reportsenvironmentaloperatingandcapitalcosts
Segmentedbybusinessunits
S
t db b i
it
Linksenvironmentalperformancetocompensation
ReportssupplychainprogramsandGHGfootprint
R
t
l h i
d GHG f t i t
Discloseswaterrelatedriskinformationin10K

12

TheBottomLineandSustainabilityReporting
Shifttoasustainablebusinessmodel
Sustainabilityisaroutetoprofitability
Ceres2010winner
Integratingannualreportandsustainabilitydisclosure
Sustainabilityisaroutetoprofitability
Ceres2010runnerup
Utilize3rd partyauditors
Verifykeysustainabilityperformancedata
V if k
t i bilit
f
d t
Bestpracticeforsustainabilitycostsavingsdisclosure
p
y
g
ProvidesROIofsustainabilityinitiatives

13

Quantify&MonetizeSustainability

GHGs

Water
14

CACs

NuclearEnergy

SROI Methodology
A Four Stepp Process

SROI reveals the hidden value in projects.


projects
David Lewis, PhD
HDR National Director, Economics & Finance

15

SROI Methodology Step 1


Structure and Logic Diagrams

16

SROI Methodology Step 2


Quantifyy Input
Q
p Data Assumptions
p
Quantify
Input Data
Distributions

17

Data
Sources

Over 8,000 Architects, Engineers, Scientists & Economists


Meta-analysis of third party research & data
Financial & insurance markets
Contingent valuation i.e. willingness to pay surveys
Bayesian analysis/expert opinion

SROI Methodology Step 2


Quantifyy Input
Q
p Data Assumptions
p
Example: Cost of CO2 per Incremental Ton ($2011)
Quantify
y
Input Data
Distributions

18

Median

Lower Limit

Upper
pp Limit

$20.87

$7.51

$86.50

SROI Methodology Step 2


Quantifyy Input
Q
p Data Assumptions
p
Quantify
Input Data
Distributions

Example: Range of Values for CO2

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
Weighing
the O
Options
ti
on Gl
Global
b lW
Warming
i P
Policies,
li i
2008

High 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 3


Risk Analysis
y Process (RAP)
(
) Session
Sample Participants

Client:

Project team

Technical specialists
Financial experts

HDR:

Facilitator

Economists
Technical specialists

Outside Experts:
Costing Experts
Energy Modelers
Architects & Engineers

20

P bli A
Public
Agencies
i & Offi
Officials
i l

SROI Methodology Step 4


Run the Model and Produce Results

Green Power
Credit

Emissions
Savings

GHG
Savings

Health & Safety

Total Benefits
Reduced Energy
C t
Costs

Cash Benefits

21

Noise Reduction

Health &
Safety

Non-Cash Benefits

Examples of SROI Results


Fort Belvoir Hospital,
Hospital Virginia US Army

SROI
Annual Value of Benefits
Energy Reduction
Water Reduction
Greenhouse Gases Savings
Air Pollutants Savings
Savings From Reduced
Water Use
Net Present Value
Return on Investment
Discounted Payback Period
Internal Rate of Return (%)
Benefit to Cost Ratio

Current Design Alternative


$1,284,097
$1
284 097
$1 388 514
$1,388,514
$474,470
$516,241
$80,039
$80,039
$163,461
$177,654
$558,039
$606,492
$8,088
$15,773,620
39.3%
4.6
31 0%
31.0%
4.7

$8,088
$13,798,340
18.0%
7.7
18 1%
18.1%
2.8

FROI
Annual Value of Benefits
Net Present Value
Return on Investment

Current Design
$554,870
$4 353 935
$4,353,935
15.9%

Alternative
$596,193
$1 391 047
$1,391,047
5.5%

Discounted Payback Period 12.9


Internal Rate of Return (%)
14.2%
Benefit to Cost Ratio
2.0

22

25.0
6.8%
1.2

Notes
The total value of the benefits in one year
Cash benefit
Cash benefit
Non-cash benefit
Non-cash benefit
Non-cash benefit
PV Benefits / PV All Costs
Average Rate of Return on Capital Investment
Time in years + discounted cash flow
Discount rate making NPV = 0
PV Benefits / PV Costs
Notes
The total value of the benefits in first year
PV Benefits / PV All Costs
Average Rate of Return on Capital Investment
Time in years to + positive discounted cash
flow
Discount rate making NPV = 0
PV Benefits / PV Costs

Examples of SROI Results


Tehachapi Trade Corridor
Corridor, California BNSF Railroad

23

Examples of SROI Results


Future Community Hospital
Hospital, El Paso
ITE

SUSTAINABLE TECHNOLOGY /
DESIGN ELEMENT

NET PRESENT VALUE


(8.8% NOMINAL
DISCOUNT RATE)

IMPACT

SROI
LOAD SHIFTING TO REDUCE ELECTRICITY COST. I T SAVES

THERMAL STORAGE

CO-GENERATION OPTION #1 (FULL LOAD

C O-GENERATION
SHAVING)

HEAT RECOVERY CHILLER

ENERGY RECOVERY VENTILATOR

REDUCES ELECTRICAL AND NATURAL GAS CONSUMPTION

GROUND SOURCE HEAT PUMP

REDUCES ELECTRICAL AND NATURAL GAS CONSUMPTION

SOLAR HOT W ATER

SOLAR PHOTOVOLTAICS

GEOTHERMAL DIRECT HEATING

.10

HVAC EXHAUST
WIND TURBINES

11

ON-S ITE GREYWATER AND W ASTEWATER REDUCES WATER CONSUMPTION


RECLAMATION, TREATMENT, AND RE-USE ELECTRICAL CONSUMPTION

12
13
14

OPTION

#2

LOAD S HIFTING OF THE FULL ELECTRICITY LOAD FROM THE


($7,519,001)
(FULL LOAD)
(PEAK LOAD S HIFTING OF THE PEAK ELECTRICITY LOAD FROM THE
($9,960,971)
($
,
,
)
ELECTRIC UTILITY TO NATURAL GAS (P EAK S HAVING)
PRODUCES ELECTRICITY AND REDUCES NATURAL GAS AND
$9,451,008

WATER CONSUMPTION

PRODUCES

ELECTRICITY

HOWEVER

INCREASES

WATER

CONSUMPTION

REDUCES NATURAL GAS CONSUMPTION HOWEVER INCREASES


ELECTRICAL CONSUMPTION

RECOVERY

PRODUCES ELECTRICITY
HOWEVER

INCREASES

INCREASES

HEPA F ILTRATION AT ALL AIR H ANDLING REDUCES HOSPITAL


ACQUIRED
INFECTIONS
UNITS IN P ATIENT-C ARE AREAS
INCREASES ELECTRICAL CONSUMPTION
REDUCES HOSPITAL
ACQUIRED
INFECTIONS
HYDROGEN PEROXIDE V APOR CLEANING

HOWEVER

INCREASES

ELECTRICAL CONSUMPTION

INCREASES ELECTRICAL CONSUMPTION

HOWEVER

($2,768,156)

SROI
($1,423,265)

($29,128,501) $11,115,030

FROI
($2,446,650)
($34,064,372)

($14,754,989)
($
,
,
) ($
($11,599,363)
,
,
) ($
($21,409,068)
,
,
)
$5,373,148

$20,496,349

$11,402,984

$758,508

($492,549)

$2,627,693

($66,722)

$2,531,891

$532,460

$7,480,615

$3,314,412

($130,196)

($297,640)

$158,474

($215,818)

($2,658,852)

($3,240,496)

($2,531,472)

($3,776,996)

($1,375,199)

($1,936,041)

($228,491)

($1,512,578)

($1,015,939)

($1,573,125)

($658,058)

($1,857,096)

($768,573)

($3,116,302)

$1,323,187

($3,554,027)

($59,432)

($82,115)

($94,223)

($141,415)

$1,199,726

$929,241

$2,916,764

$2,354,488

$38,151,331

$73,577

$79,618,918

$276,584

WATER CONSUMPTION

REDUCES ELECTRICAL CONSUMPTION HOWEVER INCREASES

ENERGY

($2,277,950)

ELECTRIC UTILITY TO NATURAL GAS

DISHWASHER W ATER RECOVERY AND RE- REDUCES WATER CONSUMPTION HOWEVER


USE
ELECTRICAL CONSUMPTION
DIVERTS WASTE FROM LANDFILL HOWEVER
RECYCLING STATION ON-SITE

24

15

WATER CONSUMPTION

FROI

NET PRESENT VALUE


(4.8% NOMINAL
DISCOUNT RATE)

$121,065,684 $1,966,018

$253,166,523 $4,999,118

S-Curve Diagram

25

Examples of SROI Results


Campus Sustainability Initiative,
Initiative Baltimore - John Hopkins University
RISK ANALYSIS OF SUSTAINABLE INITIATIVES - JHU
AVERAGE RETURN ON INVESTMENT

SROI

77%

27%

100%

MEAN: 11%

MEAN: 43%

18%

57%

16%

90%

15%
14%
14%
13%
12%
12%
11%

80%
Probabilityy of Not Exceeding

FROI

70%
60%

53%
Externalities

Health &
Productivity

11%

50%

37%

30%
20%

6%

10%

43%
42%
41%
40%
39%
38%
37%
36%

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

40%

51%
50%
48%
47%
46%
45%
44%

34%
31%

5%

19%

0%
0%

10%

20%

30%

40%

50%

Total Return on Investment (%)

26

60%

70%

80%

90%

Scale of Application

Facility
Campus
p

City

27

State & Nationallyy

Interactive Case Study


Denver 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


External
Costs &
Benefits

Internal
Non-Cash
Benefits

30

Employee
Health &
Safety

Diversity

Reliability

Green
House
Gases

Criteria Air
Contaminant

Landfill
Waste

Public
Acceptance

Permitting

Other

Soil Erosion

Motorist
Safety

Odor &
Water

MWRD: Alternatives Analyzed

Alternative 3: Diversify into Class A Product With Thermal Drying


at Both Treatment Plants (Distributed Thermal Drying) FROI
Benefits

Costs
1

Proven Performance
Adjustment
Days / Year

Cost of Freight
Transportation

Reduced Freight
Truck Miles

Increased Revenue
from Class A Biosolids

Increased Energy
Consumption

Average Electricity and


Natural Gas Prices

$ / Mile

Miles / Year

$ / Year

MWh or MmBTU / Year

$ / MWh or MmBTU

Benefit of Reduced
Transportation O&M

Benefit of Incremental
Revenues from Biosolids

$ / Year
Y

$ / Year
Y

Incremental Capital
Costs

Cost of Increased
Energy Consumption

Other Incremental
O&M Costs

Capital Replacement
Costs

$ / Year

$ / Year

Cost of Thermal Drying


q p
and O&M
Equipment
$ / Year

10
Discount Rate
%

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
1

Benefits

Proven Performance
Adjustment

Costs

Days / Year

Accident Cost per


Freight Truck Mile

Reduced Freight
Truck Miles

($/truck mile)

Miles / Year

4
GHGs: Diesel
Conversion Factor

CACs: Diesel
Conversion Factor

Reduced Diesel
Consumption
Gallons

Tons / Diesel Gallons

GHGs
Conversion Factor

Incremental Energy
gy
Consumption

CACs
Conversion Factor

Tons / MWh or MmBTU

MWh or MmBTU / Year

Tons / MWh or MmBTU

Tons / Diesel Gallons

Reduced GHGs from


Diesel Consumption

Reduced CACs from


Diesel Consumption

Tons / Year

T
Tons
/ Year
Y

Increased GHGs from


Energy Consumption

Increased CACs from


Energy Consumption

Tons / Year

Tons / Year

11

10

From Alt 3 ISROI

% difference

Dt/year

From Alt 3 ISROI

$ / Year

$ / Year

Social Cost of CACs

$ / Ton

$ / Ton

12

Reduction in Land
Application

Benefit of
Diversification
(Reduction in GHGs)

Social Cost of GHGs

Tons / Year

From Alt 3 ISROI


Biosolids Sent to Landfill
Base Case

Benefit of Improved
Safety (Truck
Accidents)

Net GHGs Impacts

Benefit of
Diversification
(Reduction in Tipping
Fees)
$ / Year

CO2E Emissions Avoided by


Displacing Fertilizer
Production

Net CACs Impacts


Tons / Year

13
Social cost of CO2
$ / Ton

Tons CO2E / Tons of fertilizer

From Alt 3 ISROI

Benefit of Improved
Public & Stakeholder
Acceptance
$ / Year

From Alt 3 FROI


Benefit of
Incremental
Revenues from
Biosolids

From Alt 3 FROI

Benefit of Reduced
Transportation O&M
$ / Year

From Alt 3 FROI

Cost of Thermal
Drying Equipment
and O&M

Cost of GHGs
Increase

Cost of CACs
Increase

$ / Year

$ / Year

$ / Year

$ / Year

14
Discount Rate
%

GHGs

SROI

34

- Carbon Dioxide (CO2)


- Methane (CH4)
- Nitrous Oxide (N2O)

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

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

ISROI

100%

SROI

-$129

-$113

-$136

90%

-$120

Probability of Not Exceeding

-$141

-$143

-$126

-$145

-$126

-$128

-$146

-$127

-$128

-$127

$
-$129

-$147

$
-$128
-$129

-$130

-$149

-$150

-$125
-$126

-$127

$
-$147

-$155

-$125

-$127

-$145

-$160

-$124

-$126

-$144

0%

-$130

-$131
-$136

-$140

-$135

-$130
Total NPV (Millions)

37

-$124

-$125

-$143

10%

-$123

-$125

-$142

20%

-$123

-$124

-$142

30%

-$122

-$124

-$141

40%

-$122

-$123

-$140

50%

-$121

-$123

-$140

60%

-$121

-$122

-$139

70%

-$120

-$122

-$138

80%

-$119

-$121

-$137

-$112

-$120

-$110

-$100

So Why Use SROI?

38

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-ofthe-art risk analysis techniques
It helps generate consensus by being both interactive and
transparent
It is an invaluable tool to help organizations secure funding,
generate
t public
bli support,
t generate
t internal
i t
l approval,
l etc.
t

Questions?
HDR Practice Group Leader for SROI:

Stephane Larocque
Or
SROI@hdrinc.com

Doing the right thing is good. Doing the right


thing for the right reason and with the right
te t o is
se
even
e bette
better.
intention
39

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