Understanding the Business Value of Sustainability Initiatives
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Antea Group consultant Francisco Cordero presented at the 2016 ILTA conference on strategic sustainability, including challenges and opportunities, and practical tactics to build your business case and measure your results.
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Understanding the Business Value of Sustainability Initiatives
- 5. Impacts On Competitiveness – How? Advance Enabling Growth Gain Market Share Acquire New Revenue Strengthen Saving Cash Added Financial Flexibility Greater Capital Productivity Increased Employee Retention & Productivity Protect Improved Risk & Reputation ManagementCost Avoidance
- 6. Can The Sustainability Strategy Help Navigate The Storm? • Force for internal collaboration – ‘Integral’ approach? • Find new ways to leverage the organization’s talent & current activities? • Help create a more ‘long‐term’ mindset and establish a pace for enduring success? • Can sustainability help to scale the company’s best ideas & practices? • Can we get a few ‘quick wins’ and communicate the good news to the organization? Oil price shock Declining production Taxes Disappointing results Austerity drive Personnel cuts Renegotiation w/suppliers & contractors Extensive pension liability Global competition
- 9. Shared Value
- 14. Many Ways To Measure Social Impact 10 Ways to Measure Social Value Method Description Cost‐Benefit Analysis/ Cost‐Effectiveness Analysis The most widely used family of tools; counts up costs and benefits (usually using some of the methods described below), and then applies discount rates. Often used for large public programs. Stated Preferences Asks people what they would pay for a service or outcome. Revealed Preferences Examines the choices that people have actually made to infer the relative worth of different options. Social Impact Assessment/Social Return on Investment Assessment Estimates the direct costs of an action, the probability of it working, and the likely change in future outcomes, sometimes with discount rates. Public Value Assessment Judges how much the public values a service. Value‐Added Assessment In education, assesses how much a school adds to the quality of its pupils. Quality‐Adjusted Life Years/Disability‐ Adjusted Life Years Assessment In health care policy and research, accounts for patients’ objective health and patients’ subjective experiences. Life Satisfaction Assessment Judges social projects and programs by how much extra income people would need to achieve an equivalent gain in life satisfaction. Government Accounting Measures In government, accounts for government spending and its effects. Other Field‐Specific Assessments Every field has its own cluster of metrics. Source: Mulgan, Geoff, “Measuring Social Value”, Stanford Social Innovation Review, 2010.
- 15. …But How Do I Measure Business Impact? Advance Growth Gain Market Share Acquire New Revenue • Improved customer trust, loyalty and satisfaction? • More return business/repeat customers? • Innovation leading to competitive advantage? • Enhanced ability to enter new/changing markets? • Improvements in pricing power? • New or expanded sources of revenue? Strengthen Margin Improvement Added Financial Flexibility Greater Capital Productivity Increased Employee Retention & Productivity • Greater operational and supply chain efficiency? • Reduced resource consumption? • Improve business processes? • Enhance product development? • Greater ability to attract/retain employees? • Higher employee productivity? • Reduced cost of capital, lower risk premiums? • New financing options? Protect Improved Risk & Reputation Management • Reduce business, legal and operational risk? • Enhance business continuity and resilience? • Minimize future risks? Cost Avoidance
- 16. Discovering Shared Value Opportunities Find opportunities to create shared value by inspecting situations through the lens of an investor S T R E N G T H E N Are we using resources, like water in the most efficient manner possible? INVEST $2.4 million over 3 years • Reducing consumption of water by 20 million gallons annually, AND • Avoid more than $9.75 million in water‐related costs over the same time period by eliminating money otherwise spent to maintain, treat, move, heat, cool and discharge this resource
- 19. Element 1: Articulate The Problem Clearly and concisely articulate: • What is the problem you are trying to solve (in terms of environmental, social and business impacts)? • What change is needed? • Why does this need to happen now? • What are the implications if things do not change? Simplification is the job of those proposing not those deciding
- 20. Element 2: Frame The Solution Typically there are several ways a problem can be solved or an opportunity can be pursued To effectively communicate the selected approach: • Frame the solution by explaining the key success criteria that must be satisfied • Provide an overall description of the alternatives examined and the pros and cons of each in comparison to the success criteria • Clearly recommend the most appropriate solution and describe why it is the best compared to the alternatives
- 21. Element 3: Value of Alignment Understand Key Stakeholders Interests & Intent For investors and those who’s support is otherwise needed… • Synergistic strategies? • Similar projects or initiatives? • Common goals, objectives, vision or mission? Align – With the interests of stakeholders who will decide upon and support the proposed investment
- 22. Elements 4 & 5: Quantify Value & Assumptions PRESUMING: investment will allow • Significant improvements in ingredient traceability to identify/mitigate presently unknown risks; and • Effective implementation of historically successful programs (e.g., sourcing guidelines, grower training, etc. ‐ reducing negative env. and social impacts) INVEST €3.4 million over 5 years • Improving social and environmental conditions for growers & their lands; AND • Significantly reducing the probability of realizing risks that may cost the company €9.9 million or more over the same period 4. Create Value ‐ Including positive return & shared value for investors, environmental and society 5. Plausible – With reasonable assumptions most can agree upon
- 23. Elements 6 & 7: Articulate Needs & Your Plan 6. Have You Made Your Needs Clear? • Monetary Resources ‐ How much overall? Justification for amount? • Cash Flow ‐ Initial funding and additional cash flow requirements? • Human Resources ‐ Staff, cross‐ functional support, volunteers, etc., that need to be involved? How much time? • Major Decisions – What major decisions will be needed along the way? 7. Have You Made Your Plans Clear? • Planned Efforts – Summarizing what steps/stages will be required for solution implementation? • Schedule – Outlining when work will be started/finished as well as associated spending, staffing and milestones/major decision points? • Initiative Team – Listing key roles, responsibilities and individuals that will lead and manage implementation?
- 25. Measuring
- 26. What Is An ‘Intangible’? There are different definitions of 'intangible assets‘, but in most basic terms, these are assets that are not physical in nature and generally fall into the following categories as classified by International Accounting Standards (IAS): • Artistic‐related intangible assets • Marketing‐related • Technology‐based • Customer‐related • Contract‐based In accounting terms, an asset is defined as a resource that is controlled by the entity in question and which is expected to provide future economic benefits to it FOR INSTANCE Brands fulfill the definition of intangible assets, in that they are controlled by management, provide future economic benefits and are identifiable and therefore can be sold, transferred or licensed as appropriate
- 27. Intangibles In Sustainability Parlance “[intangibles are]…the indirect and unpriced value creators (or destroyers)… [and] include the ability to attract and retain talent; support from the community and the license to operate from society; reduced risk and enhanced resilience; customer loyalty; and all brand equity…a firm’s environmental and social performance can enhance or diminish all these assets.” Source: Resilience in a Hotter World, A. Winston, April 2014 Harvard Business Review Anything can be measured no matter how fuzzy the measurement is, it’s still a measurement if it tells you more than you knew before Douglas W. Hubbard
- 28. • Are you more informed on some of these topics than others? • Is your current state of uncertainty in itself something you can quantify? • Is this then not a form of measurement? • What could you do to refine you answers? Let’s Take A Measurement Test… # Question Lower Bound (95% chance value is higher) Upper Bound (95% chance value is lower) Actual 1 What year did Hernán Cortés land in Mexico? 1519 2 What is the wingspan of a Boeing 747 jet? 59.6 m 3 How many hectares make up the entire area of the Amazon Rainforest? 62 million
- 30. What To Measure? Example: How big is the car? What does this mean – what type or model, weight, height, length, how many people it can conformably hold? What are we really measuring when we say: • Improving brand? • Increasing our social license to operate? • Improved health and well‐being? • More engaged employees? How: Measurement Instruments very precise indirect, extrapolated, inferred or deductive reasoning For many, measurement seems impossible when it is necessary to infer or deduce the ‘unseen’ from something ‘seen’
- 31. Measurement Methods & Myths 1) It’s never been measured before… There is a tendency to believe you are the first to measure, research will most certainly prove you wrong 2) I have little or no data on the subject… Don’t assume only direct answers to your questions are useful, extrapolation is an amazing substitute 3) It is not precise enough… Error is inherent to all measurements, don’t be dismissive, keep the purpose in mind – uncertainty reduction, not elimination 4) I cannot afford to collect the information… Think of your first idea as the ‘hard way’ to measure, and with a little more ingenuity you’ll identify an easier, more economical approach Let’s start with perceived obstacles that often keep ‘intangibles intangible’
- 32. Not Convinced? The Value Of More Information When is it worth gathering more information? • Size of the prize? • How certain do we need to be? • What’s the chance and cost of being wrong? Source: http://timoelliott.com/blog/2014/02/cartoon‐ the‐value‐of‐reliable‐information.html
- 35. Decompose Any Relevant Investment Workplace Enhancements Compliance Product & Packaging Innovation Supply Chain Resiliency Alternative Energy …more
- 36. Decomposition – How Does It Work? For our purposes, 3 to 4 levels of questioning is usually enough, but don’t hesitate to probe ‘deeper’ if needed… Question 1 What Drives Value? Response A Question 2 In How Many Ways? Response B Response 1 Question 3 To What Degree? Response n Response 2 Response i Can We: • Observe? • Measure? • Quantify? • Monetize? Response n Response ii Response n
- 37. Decomposition – Example Question 1 What Drives Value In Sustainability? Enhancements In The Workplace Question 2 In How Many Ways? Gains In Resource Efficiency Engages Our Talent Question 3 To What Degree? Product Innovations Improves Occupational Health & Safety Increases Retention Can We: • Observe? • Measure? • Quantify? • Monetize? Etc. Improves Working Conditions In The Supply Chain Increases Attraction Etc. Increases Productivity Can we now quantify and monetize increases in employee retention, talent attraction and productivity due to our investments in sustainability?
- 38. Let’s Try To Quantify Can an investment in sustainability help engage our talent by increasing employee retention for those aware and/or involved? • Has it ever been measured before? Yes • Is there little data? Actually, there’s quite a bit available • Is it precise enough? It’s certainly more precise than no data • Can I afford to collect the information? Is a couple hours on Google too much
- 39. Past Studies Start To Answer The Question To What Degree? One study indicated that employees who had been engaged in a sustainability initiative(s) were less likely to consider leaving the company, in this case ≈12% less likely 3 years after that experience Source: Corporate Social Initiatives & Employee Retention, C, Bode, et. al., INSEAD, 2014 Retention Effect of Participation in a Corp. Social Initiative (CSI) ≈12% difference
- 40. Now We Are Getting Somewhere… Assuming there’s reasonably comparability and confidence in the research, we can now say investments in certain sustainability initiatives: 1. Should create value for the organization 2. Through workplace enhancements 3. By engaging our talent 4. Which results in increasing employee retention 5. By ≈12% for those aware and/or involved in such efforts for every 100 EMPLOYEES engaged ±12 will be less likely to consider leaving
- 42. Putting It Altogether… Decomposition POTENTIAL RETURNS FOR INVESTING IN SUSTAINABILITY Workplace Enhancements – From Greater Engagement of Talent Reduced Employee Turnover/Replacement & Assoc. Costs Quantification # of different employees engaged by the sustainability initiative per year 500 Duration of initiative (years) 5 % of employees less likely to leave as they are aware and/or involved in the initiative 12% # Of Employees Less Likely To Leave 300 Monetization Cost of employee turnover (% of annual salary) 20% Average salary of engaged employees ($) $50,000 Total Value Created Over 5 Year Period Due To Reduced Employee Turnover/Replacement $3,000,000
- 43. Example: Investment Cash Flow Analysis PROTECT: Relevant Cost Avoidance Benefits Category Year 1 Year 2 Year 3 Year 4 Year 5 5‐Yr Proj Benefit 1 Production Losses Averted Business Continuity $95,000 $190,000 $380,000 $380,000 $380,000 $1,425,000 2 Avoid Reputation Damage Reputational Mgt ‐ 3 Reduced/Eliminate Response costs Risk Mgt ‐ 4 Avoid/Minimize Collateral Damage Cost Risk Mgt ‐ 5 Avoid Escalating/Volatile Resource Cost Business Continuity ‐ Total Cost Avoidance Benefit: $95,000 $190,000 $380,000 $380,000 $380,000 $1,425,000 STRENGTHEN: Relevant Cash Savings Benefits Category Year 1 Year 2 Year 3 Year 4 Year 5 5‐Yr Proj Benefit 1 Less Frictional Cost Assoc w/Expansions Capital Productivity $460,000 $920,000 $920,000 $920,000 $920,000 $4,140,000 2 Reduced Resource Consumption Capital Productivity ‐ 3 Less Pre‐Treatment Needed Capital Productivity ‐ 4 Reduced Future Capital Cost Financial Flexibility ‐ 5 Employee Engagement Benefits Emp. Productivity ‐ Total Cash Savings Benefit: $460,000 $920,000 $920,000 $920,000 $ 920,000 $4,140,000 Investment Cost Summary Category Year 1 Year 2 Year 3 Year 4 Year 5 5‐Yr Proj Cost 1 Watershed Conservation Practices Inc. in Water Fund $0 2 Landowner Compensation Inc. in Water Fund $0 3 Training, Guidelines, Best Practice Sharing Inc. in Water Fund $0 4 Water Fund Participation (2 FTE @ 10%) Water Fund Element $40,000 $40,000 $40,000 $40,000 $40,000 $200,000 5 Water Fund Contributions Conservation $1,000,000 $1,000,000 $1,000,000 $1,000,000 $1,000,000 $5,000,000 Total Cost: $1,040,000 $1,040,000 $1,040,000 $1,040,000 $1,040,000 $5,200,000 Cash Flow Forecast: $(485,000) $70,000 $260,000 $260,000 $260,000 $365,000 Hurdle Rate: Net Present Value > 0: $185,000 PASSED Hurdle Rate: Internal Rate of Return >15%: 18% PASSED Assumptions Notes Discount Rate: 8%; Finance Rate: 8%; Reinvestment Rate: 8% Gradual ramp‐up of benefit realization as indicated Gray shaded areas represent additional possible benefits not estimated at this time