Note: This is part of a series about how companies can integrate sustainability into their core business strategies. Previous articles in the series describe how to assess your company’s sustainability strategy, how to identify material ESG factors and stakeholders and how to develop your company’s business strategy. This article describes how to make the internal business case for investment in sustainability initiatives.
Investments in material sustainability initiatives create business value that is often not calculated or tracked. It is important to assess the internal business case for the investments needed to implement or maintain sustainable business initiatives. Incorporating that investment into capital allocation and decision-making processes can increase the amount and the speed of investment.
The Return on Sustainability Investment (ROSI) framework, created by the NYU Stern Center for Sustainable Business (CSB), has been used by companies in a variety of industries as a decision-making tool to unlock investment in sustainability initiatives. The ROSI framework is built on the premise that embedding sustainability at the core of business strategy unlocks improvements through a number of mediating factors: improved risk management, stakeholder engagement, operational efficiency, talent management, supplier relations, media coverage, customer loyalty, sales and marketing, and innovation. These improvements result in revenue growth, greater profitability and higher corporate valuation, ultimately generating an increase in business value and positive societal impact. Unfortunately, this value is often unaccounted for due to data gaps, lack of the finance team’s involvement in accounting for sustainability value and difficulties in monetizing avoided risk.
A 5-step approach
So how do you help your company account for the transformational enterprise value that can be created by sustainability initiatives?
Our methodology includes a five-step approach:
Let’s say your company has a strategy to reduce its greenhouse gas (GHG) emissions to address climate change. First, identify material sustainability issues, a process detailed in a previous article of our series. Then map the strategies that your company has implemented, or is planning to implement.
Second, determine the practices that are associated with the strategies so that you have a sound basis for determining the benefits that are being created. This is the step where you take the broad strategy to reduce GHG emissions and determine the practices or actions, such as switching to renewable energy or using less energy. Going down an additional level to the “sub practice” is needed here, too. Using our example, how do you plan to switch to renewable energy? Is it through generating your own or through a virtual purchase power agreement (VPPA)?
Third, determine the benefits that result from these practices. Go back to the list of mediating factors. Does switching to renewable energy help with customer loyalty, help you retain increasingly sustainability-minded employees or avoid potential penalties? ROSI is best deployed with input from a multifunctional team that can help identify benefits.
Fourth, examine each benefit to quantify it and determine the time frame for the benefit to be realized. Switching to renewable energy via a VPPA, for example, is much quicker than installing a geothermal well, with differing cost and payback implications. In this stage, involvement from the leadership of your finance team will be very helpful as some of the value that is recognized via ROSI includes avoided costs, which are not typically recognized in traditional accounting.
Finally, calculate the net present value, or the sum of future cash flows over the life of an investment discounted to the present value, using the time frame and discount rate that is relevant for your company and the practices that you have chosen. The timeframe for a geothermal well investment is going to be much longer than VPPA, as an example, and your finance department can tell you what discount rate is appropriate.
Making the business case to continue or expand sustainability initiatives
From 2015 to 2019, Eileen Fisher moved away from air cargo to reduce GHG emissions and transportation costs, and shifted to sea and trucking transportation. This allowed the company to reduce its transportation costs by a ROSI-estimated $1.6 million over that same period. This change also led to additional cost savings in 2020, when COVID-19 caused a 186 percent per-unit surge in air-transport prices. Eileen Fisher also estimated the reduction in emissions because of the transportation change and multiplied that by the social cost of carbon, achieving a cumulative societal benefit of about $150,000 during this time period. This example shows the benefit of taking a broad view as you identify and analyze benefits of sustainability initiatives and investments, looking at tangible and intangible benefits.
Making decisions for the future
ROSI can also be used to analyze the financial impact of potential sustainability investments for the future. For example, the methodology can help you examine the potential benefits of acting earlier on sustainability topics than is mandated by legislation, or to look at the financial risk of inaction on sustainability issues such as addressing water rights or planning for future recycled content needs. For example, Capital Power examined the potential financial impact of exiting the coal market earlier than required by the Canadian government using a 2021-2030 financial analysis. A conventional financial analysis did not show financial benefits of an early exit. By using ROSI to assess and include a broader set of benefits, including employee retention, employee productivity and the cost of capital, the company determined that there was a business case to exit coal as soon as possible.
CSB offers additional guidance in its “Practitioners’ Guide to Embedding Sustainability” as well as a free, online self-paced course, “How to Embed Sustainability Core to Business Strategy and Drive Competitive Advantage.” Our next GreenBiz installment will look at how to develop a culture that supports the implementation of your business and sustainability strategies.
Tensie Whelan is a distinguished professor of practice for business and society and founding director of the NYU Stern Center for Sustainable Business. Chisara Ehiemere is the senior research lead, Return on Sustainability Investment at the NYU Stern Center for Sustainable Business, where she oversees ROSI research and partnerships.