By John Williams and Stephane Larocque
WHAT: Calculating sustainable return on investment (SROI)
Develop cost structure and logic for the project life cycleQuantify input assumptions, assign risk/uncertainty values, and enter both into a preliminary modelFacilitate a risk-analysis session, a one-day workshop that brings stakeholders together to develop consensus on data values and calculationSimulate outcomes and perform probability analysis. This generates metrics including net present value, discounted payback period, benefit-cost ratio, and internal rate of return (see sidebar on page 44).
COST: $30,000 — includes consultant time and ROI/SROI analysis — if the process is deployed during project feasibility and planning stages. Actual costs can increase depending on complexity, number of alternatives examined, and availability of data.
Without a standardized method for identifying, quantifying, and evaluating the environmental, economic, and social benefits of sustainable operations, it's very difficult to answer the taxpayer's key question: “What's in it for us?”
Life-cycle cost analysis calculates the direct cash costs of owning, operating, maintaining, and ultimately disposing of a potential project. While this method determines if operational savings justify investment costs, it doesn't include the financial impact of better community health, reduced waste, and lower greenhouse gas emissions.
The sustainable return on investment (SROI) framework, however, does.
A nonproprietary process presented by HDR Engineering Inc. at the Clinton Global Initiative annual meeting in 2009, the framework incorporates evidence-based cost-benefit analysis with probability and risk analysis to quantify a proposed initiative's triple bottom line.
The process objectively and transparently assigns monetary values to social and environmental factors such as fewer sick days by employees working in green buildings or reduced use of freshwater. It also provides the equivalent of traditional life-cycle cost outputs, such as reduced operations and maintenance costs, which is referred to as “financial return on investment.”
To calculate these values, HDR built models in Microsoft Excel with Palisade Corp.'s @Risk risk-analysis software. The result is a spreadsheet that shows how likely it is that each potential outcome will occur.
Because the process demands stakeholder input, the likelihood of achieving consensus vastly increases. Public works can involve the project team, community members, and regulatory representatives in validating the structure and logic of the analysis as well as the inputs that inform it. When stakeholders agree on the approach, the data, and the assumptions informing it, they tend not to challenge or disagree with the projected outcomes.
Where budgets are limited, output can be used to rank the most sustainable strategies without losing focus on financial considerations.
Applicable to any project, the process isolates the point at which sustainable attributes would be achieved at the expense of other goals; for example, when initiatives to reduce utility bills outweigh savings in the amount of potable water consumed or reduction in vehicle miles traveled. It assigns dollar values to intangibles such as the reduced carbon footprint of open space compared to commercial development. It balances the implications of, for instance, planting trees with watering and maintenance needs.
Denver's Metro Wastewater Reclamation District is using the process to quantify the value of water and energy consumption, greenhouse gas and air-contaminant emissions, using biosolids for fuel, and the impact of odor on residents. Initially, managers are using the process to incorporate sustainability into the design and construction of a new treatment plant.
— Williams (firstname.lastname@example.org) is a senior vice president and national director of sustainable development at HDR, New York City; Larocque (email@example.com) is a principal economist and SROI practice leader with HDR Decision Economics in Ottawa, Canada.
Glossary of decision metrics
Net present value: The total value of a potential investment's benefits minus its costs, with both expressed in real current dollars.
Return on investment: The ratio of an investment's net value to its cost.
Discounted payback period: The amount of time it takes for the value of the investment's benefits to equal the sum of the original investment.
Internal rate of return: The discount rate at which the investment's net present value would be zero, or how you devalue future cash flows.
Benefit-cost ratio: The investment's overall “value for money” presented as the ratio of benefits to costs, with both expressed in present-value monetary terms.