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Measuring ROI+ and Building More Effective Business Cases Summary of Lessons Learned to Date

This summary was prepared in connection with a special CEF member meeting held November 8-9, 2017 at the Kimberly-Clark Roswell, GA campus. The not-for-attribution meeting aimed to generate practical “how to” recommendations in ways that build on real-world experience of members as well as important related methodological work to date, including:

1. Potential Value/Benefits to Business. Outlines the various ways that sustainability projects/investments could potentially create (or protect) value for a business.

2. Making the Business Case for Sustainability: Lessons Learned and Recommendations. Synthesizes top-line recommendations from a number of different guides and experts.

3. Tools and Resources. Summarizes available tools, methodologies, and other resources for measuring and quantifying a wide range of costs and benefits associated with sustainability-related initiatives.

4. Works Cited and Further Reading. Additional resources, guides, reports, and research. Full notes from the November meeting, including slide decks presented by the Monetization Working Group and Tensie Whelan, Director, Center for Sustainable Business, Stern School of Business, can be accessed in the CEF Member Center: www.cefmembercenter.com

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1. Potential Value/Benefits to Business1

Risk Management

Driver Description Avoid costs of future regulations

Future regulatory developments could limit product or production choices.

Avoid potential legal liabilities

Head off future regulatory requirements, shareholder lawsuits, civil and criminal fines and penalties, property damage costs, cleanup costs from an accident, or ecosystem restoration costs.

Avoid damage to corporate reputation and brand

Avoid spills, accidents, product recalls, or other performance issues that could induce the ire of NGOs, regulators, or consumers.

Avoid supply chain disruptions and shocks

Secure resilient, long-term, and sustainable access to safe, high-quality inputs like raw materials, energy, and labor.

Reduce operational burden and interference

Improved sustainability reputation can pay off in the form of lighter regulatory scrutiny, less pressure from environmental groups and other NGOs, and less risk of boycotts or bad publicity that could damage sales.

Protect social license to operate

Failing to attend to environmental and social concerns of the local communities in which a company operates or the broader society can, in extreme cases, make it impossible to continue operation.

1 Adapted from: [8] and [6]

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Costs

Driver Description Cut operating expenses Reduce energy, water, and waste-related costs in buildings and facilities, data

centers, and fleets.

Cut product and process costs

Increase resource productivity, reduce materials and energy intensity, extend the life of products or equipment, and enable recyclability.

Reduce supply chain and distribution costs

Lower or eliminate expenses upstream and downstream.

Reduce or avoid regulatory and compliance costs

Reduce or eliminate pollution, toxics, or other issues that could otherwise lead to regulatory paperwork, fees, and cleanup obligations.

Lower cost of capital Achieve a lower risk rating in capital markets, leading to improved access to finance at a lower rate.

Reduced payments to government

Reduced tax payments through superior sustainability performance, avoided taxes (e.g. carbon tax), or access to green tax benefits and incentives.

Growth

Driver Description Product development Create a new product or service line either targeting unmet societal needs or

finding alternative lower-impact ways to meet existing needs.

Product differentiation Differentiate existing product or service line, causing an increase in sales.

Access to markets for growth

Enable company to maintain or increase access to key markets for growth, including: suppliers and source markets, markets for sales, and M&A targets.

Enhance reputation and brand equity

Reputation can affect a company’s stock price and its ability to generate sales, charge premium prices, close deals, attract partners, and retain talent.

Strengthen consumer acceptance, loyalty, and emotional connection

Consumers want to buy brands that they trust. A company’s performance on environmental and social issues can help shape customer perceptions.

Attract and retain top talent

A growing number of employees, particularly high-end knowledge workers, want to be part of a company with values they share. Workplace practices and environmental commitment can translate directly into positive associations in the labor market, easier recruitment of top talent, and increased retention rates.

Boost employee satisfaction and productivity

Research shows that corporate eco-efforts can boost employee productivity by inspiring people around a shared mission and a corporate purpose that goes beyond benefits.

Innovation Develop new technologies and business models for unmet social or environmental needs, sometimes creating new markets.

Shape the market Shape the market to the company’s advantage, creating barriers to entry or extra costs for competitors.

Early mover advantage Taking prompt, coherent action on an emerging issue can achieve a more effective response than by delaying.

Access to key financial resources for investment

Enable the company to maintain or increase financial capital for investment.

Access to partners for growth

Enable company to build trust-based relationships with commercial and non-commercial partners that increase access to opportunities.

Build management qualities to enable long-term success

Develop capabilities in individuals and systems that enable enduring success. For instance, through an innovative culture, or people and systems that are prepared for an uncertain future.

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2. Making the Business Case for Sustainability Lessons Learned and Recommendations2

Below are recommendations for building a strong business case for a variety of objectives, including:

1. Strengthening the case for your company’s overall commitment to sustainability—including setting more ambitious goals

2. Inspiring others across the enterprise to embrace sustainability thinking & action 3. Getting budget/approval for projects and expenditures that advance sustainability

objectives (e.g. product or service changes, R&D, operational improvements, internal programs)

4. Getting approval for capital expenditures that advance sustainability objectives 5. Arguing against capital projects/ decisions that may undercut sustainability objectives

or pose sustainability-related risks

Understand the assumptions that currently drive decision-making • What are the most important underlying assumptions and stories that impact decision-

making in the company—about your business, what drives financial performance for your company, about the business context and trends, and about the future?

• Which assumptions naturally align with what you’re proposing? • Which assumptions may be flawed or incomplete? Which are creating a bias that favor less

sustainable decisions? Does your team see risks that others don’t? Are there opportunities to help others see the potential risks with business-as-usual and not pursuing what you propose? Don’t assume others’ numbers are any better than your own. Dig into the underlying assumptions and ask about the sensitivity of their analysis to these assumptions.

List all ways your proposal could create financial value/ advance business goals • List all the ways your proposal could

add financial value to the business. • Pay particular attention to areas that

decision makers believe are key to driving financial performance for the company.

• Consider intangible benefits and all potential benefits arising across the entire lifecycle of a product, process, or project.

• Be mindful of which benefits could accrue to others in the value chain.

Put a dollar figure on what you can • Be selective. Trying to monetize values

can be challenging, costly, and time-

2 Adapted from: [1], [2], [3], [6], [8]

Supply chains: hidden sources of risk and opportunity

In one recent very large-scale study, 72% of global supplier companies said that climate change presents risks that could significantly impact their operations, revenue, or expenditures. [22]

Look for relevant drivers both vertically within supply chains and horizontally within your market. If there’s the possibility that someone downstream might make you a preferred supplier, that’s significant, and may make it easier to quantify the benefits. If a peer takes an action and gets visibility, why wouldn’t we also want to do that?

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consuming, so prioritize the benefits that are likely to be most compelling, significant, and relevant.

• Draw on monetization tools that exist (see section 3). • Involve the finance team. Not only might they have valuable insight and expertise to

contribute, but they will likely find their own results more persuasive than those of outsiders, especially when those involved are perceived to have a stake in the outcome of the analysis.

• Use a range: Even if you can’t determine the exact contribution of a sustainability project to a financial or other business benefit, you could work with others to estimate a contribution “range” (i.e. lower bound and upper bound) and then that allows you to say that our businesses agreed that sustainability x% or (x% * financial metric).

Gather supporting evidence • Monetization isn’t always the answer. Not every benefit can be translated into a credible

number. Good decisions are often made based on informed judgments in the face of uncertainty. Are there relevant case studies or examples that demonstrate others undertaking similar efforts that are paying off? Any success stories you can point to, or ROI figures you can highlight? A strong business case often rests on precedent.

• Consider non-financial ways to quantify costs and benefits, such as: o Qualitatively weighting sustainability-related criteria along with other factors—

potentially with stakeholder participation o Using performance indicators such as Return on Resources (the ratio of profit,

revenue, or intended result to critical resource inputs) or Product to Non-Product Ratio (the ratio of productive output to non-product output)

• Connect your business case to corporate goals and targets. Find the revenue/cost reduction/talent goals of the company, and then connect sustainability initiatives to those.

• Reference current research around trends that support your general arguments (investors, consumers, millennials, industry trends, etc). For example:

o “Well-run corporate sustainability programs at publicly traded companies increase revenue by as much as 20%, increase market value by as much as 6%, increase employee productivity by up to 13%, reduce the company’s turnover rate by up to 50%, and provide risk protection of up to 7% of company value.” [4]

o "An analysis of payback periods for over 12,000 initiatives in 2014 to 2016 shows that 65% of environmental initiatives pay back in three years or less, and 86% within ten years. Firms are failing to identify tangible, realistic opportunities with credible financial returns." [7]

o 44% percent CEOs believe their customers in five years will “put a premium on the way companies conduct themselves in global society” and seek relationships with companies “that address wider stakeholder needs.” [17]

o 50% see climate change and environmental damage as a threat to their company’s growth prospects. [17]

o 52% of CEOs surveyed said their current actions to create value for wider stakeholders is helping their profitability. [17]

o Of the $88 trillion in assets under management around the world, more than a quarter ($22.89 trillion) are now investing according to environmental, social, and governance principles (ESG). This is according to McKinsey, which noted sustainable investing has become “a large and fast-growing major market segment,” with a portfolio integration growth rate of 17% a year. [18]

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o 75% of executives in investment companies think sustainability performance should be considered in investment decisions, but only 60% of corporate executives think investors care about sustainability performance. [19]

o 71% of investors polled agreed that good social, environmental and governance practices can potentially lead to higher profitability and may be better long-term investments. [20]

o 90% of millennial investors expressed interest in pursuing sustainable investments as part of their 401(k) portfolios. [20]

o 75% of millennials surveyed would take a salary cut to work for a responsible company, compared to the 55% U.S. average. [21]

o 64% of millennials surveyed will not take a job from a company that does not have strong CSR commitments, compared to the 51% U.S. average. [21]

o Increasing/remaining steady over time, respondents have a more positive image (92% vs. 85% in 1993), are more likely to trust (87% vs. 66% in 1998), and are more loyal (88% vs. 90% in 2013) to companies that support social and environmental issues. [22]

o 89% of Americans would switch brands to one that is associated with a good cause, given similar price and quality, compared to 66% in 1993. [22]

o One study estimated that companies experience an average internal rate of return of 27% - 80% on their low carbon investments. [23]

When appropriate, highlight risks of business as usual

• Help others see how much a project’s performance could be impacted by sustainability-related sources of risk.

• McKinsey & Co. research found that the “business value at stake because of sustainability-related challenges could be as high as 25%-70% of earnings before interest, taxes, depreciation and amortization (EBITDA) through restrictions on license to operate, reputational harm, rising operation costs, and supply chain disruptions.”[2]

Make friends, build trust—and ask for help • “Inertia and ‘sunk-costs’ prevent

action even with a business case. A business case by itself is not always enough; you will need to influence key decision makers.” [6]

• Identify the most important decision makers and stakeholders who could help or hinder your case and ask: How do they think? What are they most interested in?

• Bring allies on board early in the process, e.g. treasurer, accounting, procurement. Must build common understanding from the start.

• Learn the language of those you’re trying to influence. Frame discussions in terms they will understand and that align with their agendas, e.g. risk, insurance, continuity, innovation, efficiency, scarcity, compliance.

• Enlist help from credible messengers (internal and external) whom top decision makers respect the most.

Consider a broad range of stakeholders “Through regular dialogue with stakeholders and continual iteration, a company with a sustainability agenda is better positioned to anticipate and react to economic, social, environmental, and regulatory changes as they arise.” [22] “If your customers care about it, then your leaders will care about it.”

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• “Lead with what they know.” It’s important to understand who you’re trying to communicate with, and be able to speak in terms and concepts they will understand and appreciate.

• “Culture eats strategy for breakfast.” What’s the current culture? Does it have an appetite for big, bold goals you may never reach? Build on that. Does it need to have line-of-sight glide paths? Then build on that.

• “You can’t focus exclusively at the top. Work with and try to get buy-in at the middle, and then work your way up.”

Consider a portfolio approach • Consider using a portfolio-based approach instead of advocating for one-off projects.

This could involve bundling high-sustainability projects with high-ROI projects in order to meet internal hurdle rates—and/or combining projects with different risk-return profiles into a portfolio.

• Consider presenting multiple scenarios for how things could play out.

Highlight financial experiments underway at other companies • Among them:

o Setting aside dedicated funds for sustainability-related investments o Imposing an internal carbon fee/tax and allocating a portion of the proceeds to

fund projects that may not meet traditional hurdle rate o Setting an internal price for carbon for all investment projects in order to include

the cost of carbon emissions in the calculations o Using a different hurdle rate for sustainability-related investments, either strategically

for a few projects or across all projects

Look for small wins/successes to build on. Success breeds success. • “Ruthlessly pursue early, iconic successes that demonstrate real financial and environmental

value creation. Make these a platform for influencing thinking and culture across your business, and justifying the need for new valuation capabilities.”

Don’t oversell benefits—and be transparent about any risks • Don’t over-claim the benefits. • Be transparent about any potential risks related to your proposal. Consider describing

multiple possible scenarios. Be thorough in describing both the potential upside and downside, and be prepared to discuss how to mitigate the various risks you’ve identified.

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From A4S Essential Guide to Social and Human Capital Accounting [9]

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From A4S Natural and Social Capital Accounting: An Introduction for Finance Teams [10]

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3. Major Tools and Resources3

Resource or tool Overview More info EPA Environmental Accounting Project Publications

Though over a decade old, these documents continue to provide valuable insights and practical tools with a rare combination of analytical depth and clarity.

Click here

IFAC’s International Guidance Document: Environmental Management Accounting (EMA)

A 2005 guidance document for accountants and financial professionals. Surveys techniques to identify and quantify the full range of internal and external environmental and social costs.

Click here See also: IFAC’s Global Knowledge Gateway on Sustainability; and Project and Investment Appraisal for Sustainable Value Creation

American Institute of Chemical Engineers’ Total Cost Assessment (TCA) Methodology

Method with manual, spreadsheets and software to identify and monetize a range of hard-to-quantify internal and external eco-related costs and benefits.

Click here

SIGMA Sustainability and Environmental Accounting Guides

Guidelines for updating P&L statement and balance sheet to include internal and external environmental costs and benefits. Helpful review of methods for assigning value to external environmental costs.

SIGMA Sustainability Accounting Guide SIGMA Environmental Accounting Guide

HDR, Inc.’s Sustainability ROI (SROI) Model

Impressive methodology to monetize all potential internal and eternal sustainability-related costs and benefits for ROI analysis and project evaluation.

Click here

Bob Willard’s Sustainability Advantage Worksheets

Simple and practical recommendations and worksheets to help you monetize internal costs and benefits that could factor into ROI calculations of proposed sustainability efforts

Click here

True Impact Web-based ROI Calculator and Other Software Tools

Web-based software that helps companies measure and monetize social, financial and environmental impacts (internal and external) of current or prospective programs.

Click here

ORC Worldwide’s Return on Health, Safety, and Environmental Investments (ROHSEI) Method

A method and software to help identify and quantify (not always monetarily) relevant internal costs and benefits for ROI analysis and project evaluation. [Note that ORC Worldwide was acquired by Mercer in 2010]

Click here

BP’s Sustainability Assessment Model

An approach to evaluate external sustainability costs and benefits of individual projects.

Click here

Marc J. Epstein’s Making Sustainability Work Method for Risk Measurement and Valuation

Method and worksheets to factor eco-related risks into ROI calculations.

Click here for book on Amazon

Various brand/reputation indexes

Interbrand Harris Interactive

3 Adapted from [1]

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Annual Reputation Quotient

Weighted-criteria approach Simple method to integrate hard-to-quantify or non-financial criteria into traditional cost-benefit analyses. 1. Identify the criteria that should influence the decision; 2. Assign a numerical weight to each criterion based on its

relative importance; 3. Score each project for its potential to meet each criterion; 4. Multiply the weight times the score to get a value; 5. Add up the values to get a total numerical score for each

competing project.

Life cycle costing Assesses costs related to a product or asset over its entire life cycle. This approach ensures that costs such as installation, electricity or fuel, service and maintenance, compliance, replacement, and disposal get factored into the analysis.

1995 NIST Manual

Material flow cost accounting This methodology helps companies spot opportunities for cost savings relating to resource use, waste, and emissions. It tracks all physical inputs and outputs to determine their effect on costs.

ISO 14051:2011

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4. Works Cited and Further Reading

[1] Show Me the Money: Demonstrating Green Business Value to Skeptics. Available on CEF Member Center online. [2] Sustainability and the CFO: Challenges, Opportunities and Next Practices. Available online: http://www.corporateecoforum.com/wp-content/uploads/2015/04/CFO_and_Sustainability_Apr-2015.pdf [3] 2017 CEF Annual Leadership Retreat: Executive Summary. From the session: Measuring & Proving the Business Value of Sustainability and Getting Financing. [4] 22 Research Studies Proving the ROI of Sustainability. Available online: http://e.sustainablebrands.com/resources-report-22-research-studies-proving-the-roi-of-sustainability.html [5] BSR and Futerra’s Business Case Builder. Available online: http://business-case-builder.com/ [6] Better Decisions, Real Value Toolkit. Available online: https://www.forumforthefuture.org/project/better-decisions-real-value/overview [7] Understanding the financial value of environmental performance in consumer goods. Available from: https://value.cdp.net/pdf/21230_CDP_Consumer_Goods_v6_single.pdf [8] The Green to Gold Business Playbook: How to Implement Sustainability Practices for Bottom-Line Results in Every Business Function, by Daniel Esty and P.J. Simmons. [9] A4S Essential Guide to Social and Human Capital Accounting. Available online: https://www.accountingforsustainability.org/en/knowledge-hub/guides/social-and-human-capital.html [10] A4S Essential Guide Series: Natural and Social Capital Accounting: An Introduction for Finance Teams. Available online: https://www.accountingforsustainability.org/en/knowledge-hub/guides/Natural-social-capital.html [11] A4s Essential Guide Series: Capex (“A practical guide to embedding sustainability into capital investment Capex”). Available online: https://www.accountingforsustainability.org/en/knowledge-hub/guides/capex.html [12] Measuring Shared Value: How to Unlock Value by Linking Social and Business Results. Available online: https://www.sharedvalue.org/sites/default/files/resource-files/Measuring_Shared_Value.pdf [13] Banking on a Low-Carbon Economy: The Economic Impacts of Bank of America’s $125 Billion Environmental Business Initiative. Bank of America. Available online: https://about.bankofamerica.com/assets/pdf/Environment-Economic-Impact-Report-2017.pdf [14] How to Measure Anything: Finding the Value of Intangibles in Business, by Douglas Hubbard. Also see companion website: http://www.howtomeasureanything.com

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[15] Insights: Ideas for Change – Michael Porter – Creating Shared Value: https://www.youtube.com/watch?v=aUdPDVO-toM

[16] Harvard Business Review: Creating Shared Value. Available online: https://hbr.org/2011/01/the-big-idea-creating-shared-value [17] 19th Annual Global CEO Survey. PwC. Available online: https://www.pwc.com/gx/en/ceo-survey/2016/landing-page/pwc-19th-annual-global-ceo-survey.pdf [18] From ‘why’ to ‘why not’: Sustainable investing as the new normal. McKinsey & Co. Available online: https://www.mckinsey.com/industries/private-equity-and-principal-investors/our-insights/from-why-to-why-not-sustainable-investing-as-the-new-normal [19] Corporate Sustainability at a Crossroads. MIT Sloan Management Review and Boston Consulting Group. Available online (requires registration): http://sloanreview.mit.edu/projects/corporate-sustainability-at-a-crossroads/ [20] Sustainable Signals: New Data from the Individual Investor. Morgan Stanley. Available online: https://www.morganstanley.com/ideas/sustainable-socially-responsible-investing-millennials-drive-growth [21] 2016 Cone Communications Millennial Employee Engagement Study. Cone Communications. Available online: http://www.conecomm.com/research-blog/2016-millennial-employee-engagement-study [22] 2017 Cone Communications CSR Study. Cone Communications. Available online (requires registration): http://www.conecomm.com/research-blog/2017-csrstudy#download-the-research [23] Harvard Business Review: The Comprehensive Business Case for Sustainability. Available online: https://hbr.org/2016/10/the-comprehensive-business-case-for-sustainability [24] Harvard Business Review: Sustainability’s Impact on Your Bottom Line. Available online: https://hbr.org/2017/09/how-to-quantify-sustainabilitys-impact-on-your-bottom-line