SUSTAINABLE SROI RETURN ON INVESTMENT. SROI Enhanced Decision Making Framework

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1 SUSTAINABLE RETURN ON INVESTMENT Enhanced Decision Making Framework

2 CAN HELP GET THE RIGHT PROJECTS FUNDED/APPROVED There is no lack of worthy projects and real needs; so how do you choose the right investment? Over the past several years, economic analysis has gained prominence in prioritizing projects in both the private sector and at local, state/provincial and federal levels. Of particular interest are the impacts related to infrastructure projects from a social and environmental standpoint while financial guidelines are fairly well-developed, there is often uncertainty and confusion about the total public cost of ownership of infrastructure investments. Sustainable Return on Investment () was developed by HDR specifically to address the need for a triple-bottom line (TBL) decision making framework. involves identifying, quantifying, monetizing and summing in dollars the value of all relevant incremental costs and benefits over the life of the project. methodology not only allows clients to place a financial value on the social and environmental aspects of a project, but more importantly, it helps with prioritizing the overall program by providing an apples to apples comparison of projects in dollar terms. Sustainable Return on Investment Origins Developed by HDR s Decision Economics Group Input from Columbia University s Graduate School of International and Public Affairs Launched into the public domain at the 2009 Clinton Global Initiative annual meeting Elements of the process have been used to evaluate the monetary value of sustainability programs and projects valued at well over $15B THE ABILITY TO ASSIGN MONETARY VALUES TO THE FULL COSTS AND BENEFITS OF SUSTAINABLE INITIATIVES WILL UNLOCK THE DOOR TO ADDITIONAL PUBLIC INVESTMENT. City of Boston Boston, MA; Analysis of Boston s Portfolio of ARRA Projects Thomas Menino Four-term Mayor of the City of Boston Methodology Guides Your Decision Making Process Community Development Corporate Responsibility Emissions Energy Environmental $ Health & Safety Life-Cycle Costs Mobility $ Financial Social! Risks Waste Water Evidence and Data Process TBL Decision Support

3 WHAT IS? The process accounts for a project s triple-bottom line its full range of environmental, social and financial impacts. The process builds on best practices in cost-benefit analysis and financial analysis methodologies, complemented by state-of-the-art risk analysis and stakeholder elicitation techniques. The process identifies the significant impacts of a given investment, and makes every attempt to credibly assign monetary value. Any relevant impacts that cannot be assigned a monetary value also will be identified and ideally quantified by the process. Results are presented in innovative ways that help clients and their stakeholders prioritize projects, better understand trade-offs and evaluate risk. is a framework which identifies projects that will best accomplish your goals of optimizing the total value of your investment, while positioning your project with the best possible business case for funding and both internal and external approval. HDR has recognized that, increasingly, decision makers want information to enable budgetary decisions that reflect value-for-money comparisons of investment proposals among different projects. This includes the need to compare competing projects on a common language basis whereby environmental and social impacts are converted into monetary values to estimate the overall impacts in comparable financial terms. These impacts Denver Metro Wastewater Denver, CO; Framework for Design of New Treatment Plant are typically assessed only qualitatively. By comparing specific infrastructure alternatives using, organizations can show greater rigor and transparency in the decision-making process and create a defensible position for their capital budget allocation choices. Considers All Relevant Costs and Benefits Project Cash Impacts Sample Internal Non-Cash Costs & Benefits Sample External Costs & Benefits Revenue or Operational Savings Capital Plus O&M Productivity Employee Health & Safety Value of Risks Green House Gases Criteria Air Contaminants Water Quality/ Quantity Financial Return Reliability Public Acceptance Technical Complexity Public Health & Safety Odor & Noise Community Impacts Financial & Internal adds to the traditional financial analysis the monetized value of non-cash costs and benefits plus externalities

4 HOW DOES THE PROCESS WORK? Decisions considering sustainability require more inclusive forecasting of future costs and benefits. Elements such as water quality or criteria air contaminants currently have no tradable value and are not captured by financial return on investment analyses. Assigning monetary value to such elements sometimes involves a high-level of uncertainty. relies on peer-reviewed literature, stakeholder input and expert opinions to determine the financial, social and environmental value of investments. The process is fully transparent and all inputs utilized in HDR s economic modeling are provided to decision makers. Monetary values, which are collected and stored in HDR s Inventory of Social Values, are determined across a probabilistic spectrum to account for this uncertainty. For example, the divergent perspectives on the value of a ton of CO 2 can be shown as a distribution of potential values, as illustrated in the chart on the right. In this case, the median value is one that is supported by the U.S. Federal Government. By accounting for risks, greater assurance is realized in the process of identifying the best and highest value projects. Probability Distribution - Value of a Ton of CO 2 Probability of Occurrence % 90.0% 5.0% $0 $10 $20 $30 $40 $50 $60 $70 $80 $90 $100 $110 Cost/Ton Pert Distribution Minimum $13.23 Maximum $ Mean $44.73 Std Dev $16.65 HDR s process involves four distinct steps: STEP 1 Develop the Structure and Logic Diagrams Map out all relevant economic, social and environmental variables of an initiative, starting from the basic division of costs and benefits. STEP 2 Assign Monetary Values and Risk Ranges Measure the impacts of the project by assigning monetary values and probability distributions, where possible, to each variable. STEP 3 Develop Consensus Among Stakeholders Bring stakeholders together to evaluate and validate the structure of the model and the assigned values and probabilities of each variable. STEP 4 Simulate and Quantify the Outcome Once consensus regarding the inputs is achieved, compute the net present value, discounted payback period, rate of return and the probability range of outcomes to support informed decisions on the initiative. Fort Belvoir Community Hospital Fort Belvoir, VA; Analysis of New Hospital Complex 2011 Ari Burling City and County of Honolulu Honolulu, HI; Analysis of H-POWER WTE Expansion

5 Johns Hopkins University Baltimore, MD; Analysis of Campus Sustainability Program, LEED for Existing Buildings SAMPLING OF RECENT PROJECTS has been applied on projects of all scales for design refinement, choosing among project alternatives and ranking projects in a capital plan. The following chart provides recent examples where HDR has applied its methodology across market sectors, such as urban planning, energy, water and transportation. REVEALS THE HIDDEN VALUE IN PROJECTS. David Lewis, Ph.D. Former Principal Economist at the U.S. Congressional Budget Office Tahoe Transportation District Lake Tahoe, NV; US 50 Transportation Improvements Alan Karchmer Client Austin Capital Metro Austin, TX Boston Redevelopment Authority Boston, MA City and County of Honolulu Honolulu, HI City of Calgary Calgary, AB City of Edmonton Edmonton, AB City of Holland Holland, MI Denver Metro Wastewater District Denver, CO EPCOR, Inc. Edmonton, AB Houston-Galveston Area Council Galveston, TX Johns Hopkins University Baltimore, MD National Renewal Energy Laboratory Denver, CO Pratt & Whitney East Hartford, CT Tahoe Transportation District Lake Tahoe, NV U.S. Army Corps of Engineers Fort Bliss, TX Volusia County Daytona, FL Project Analyzed multi-modal transit investments to determine the locally preferred alternative considering the triple-bottom line Used to analyze the city s portfolio of ARRA funding projects Used analysis to rank various waste stream alternatives, including the H-POWER WTE facility Identified the net benefits of requiring all city buildings to be LEED Gold as compared to LEED Silver Used to evaluate a wide range of emission reduction alternatives, including district energy and photovoltaics Analyzed various potential fuel types for a new power plant in the downtown core Developed a framework to help the district make sustainable decisions on a new wastewater treatment plant Evaluated water reuse investments for small- to large-scale alternatives Using HUD grant funding, analyzed various sustainability initiatives for the City of Galveston Performed analysis on JHU s Campus Sustainability Initiative project to help achieve LEED certification In conjunction with USAID, educated government officials in Gabon on how to conduct analyses Looked at the net triple-bottom line benefits of a water conservation effort Analyzed a potential loop road project to create a more pedestrian friendly corridor Used to help the military make sustainable design decisions on a new $1.45B military hospital Ranked a variety of sustainable investments, including electric vehicle charging stations and green waste collection

6 WHAT YOU GET: OUTPUTS Organizations are looking for specific evidence of benefits, costs and risks presented in a transparent business case. The vision of HDR is to provide organizations with a widely recognized and standardized process to model and prioritize projects with a view to both direct financial impacts and the implications for both the environment and society as a whole. HDR s process provides decision makers with two sets of risk-adjusted outputs: financial return on investment (FROI) and. With these metrics, decision makers will be able to identify a series of projects that not only pay for themselves, but achieve the highest value. Output examples include: 1. and FROI Comparison Commonly used decision metrics are generated for two perspectives: FROI metrics include only the traditional, cash-only financial impacts to the project; metrics correspond to the triple-bottom line by adding the monetized value of social and environmental impacts to the FROI. Air Pollutants Savings $374,844 40% Economic Value of Water Saved $8,088 1% Greenhouse Gases Savings $97,924 11% Water Bill Savings $80,039 9% Energy Bill Savings $369,591 39% Output Metric Value Notes Annual value of benefits $930,485 Total value of benefits in one year Energy bill savings 369,591 Cash benefit Water bill savings 80,039 Cash benefit Greenhouse gases savings 97,924 Non-cash benefit Air pollutants savings 374,844 Non-cash benefit Savings from reduced water use 8,088 Non-cash benefit Net present value $10,194 PV benefits - PV all costs Return on investment 27% Average rate of return on capital investment Discounted payback period 6 Time in years to positive discounted cash flow Internal rate of return (%) 23% Discount rate making NPV = 0 Benefit to cost ratio 3.3 PV benefits/pv all costs FROI Output Metric Value Notes Annual value of benefits $449,537 Total value of benefits in first year Net present value $2,660 PV benefits - PV all costs Return on investment 12% Average rate of return on capital investment Discounted payback period 12 Time in years to positive discounted cash flow Internal rate of return (%) 11% Discount rate making NPV = 0 Benefit to cost ratio 1.6 PV benefits/pv all costs 2. Non-Monetary Metrics Data, such as tons of CO 2 emissions avoided, gallons of fresh water saved and injuries avoided, is useful for setting goals and reporting results. Probability of Not Exceeding 100% 90% 80% 70% 60% 50% 40% 30% 20% Environmental Annually Tons of CO 2 emissions avoided 3,943.6 Tons of CH 4 emissions avoided 0.1 Tons of N 2 O emissions avoided 0.1 Tons of SO 2 emissions avoided 14.3 Tons of NO X emissions avoided 4.4 Tons of PM emissions avoided 1.0 Tons of VOC emissions avoided 0.1 Gallons of fresh water saved 1,640,602.0 Tons of waste avoided 23.0 Social Annually Number of injuries avoided 1.0 Hours of productivity saved 16,783.0 Economic Annually Equivalent cars taken off the road Equivalent barrels of oil saved 11, Sustainability S Curve The S curve illustrates the difference in value between FROI and providing a risk-adjusted snapshot of returns and showing the likelihood of occurrence for project outcomes. Using the process gives decision-makers the ability to prioritize worthy but competing projects for funding based on the maximum financial and societal returns. In the following example, a project s outcome metrics are synthesized into an intuitive risk analysis model based on ROI. A. Compare the FROI and. In this example, the mean is more than double the traditional ROI. B. Evaluate non-cash benefits, such as improvements in employee health and productivity, and benefits to the larger community. C. Assess the statistical likelihood that the return will fall within an 80 percent confidence interval. In this example, ranges from 15 percent to 34 percent. A. 12% 20% 27% B. 10% C. 0% 0% 10% 20% 30% 40% 50% Return on Investment (Percentage) Basic FROI Cash Plus Non-Cash Benefits Realized by an Organization

7 HDR is a trusted partner with a track record of success in sustainable architecture, engineering and consulting. We are committed to offering our clients the best possible financial, social and environmental value by delivering integrated sustainable solutions. Our Sustainable Solutions Program includes an internal Corporate Sustainability Initiative, a Climate Change Initiative and services in the following areas of expertise: buildings, mobility, water, energy, waste, community, site development and Sustainable Return on Investment (). For more information about, visit or your questions Houston-Galveston Area Council Galveston, TX; Various Sustainability Initiatives for the City City of Edmonton Edmonton, AB; Analysis of Emission Reduction Alternatives for the City We practice increased use of sustainable materials and reduction of material use HDR, Inc., all rights reserved