Monetizing Sustainability: Addressing the Why and How with Case Studies

Monetizing Sustainability28 January 2016 | Chicago

SustainabilityLeadershipForum

Monetizing Sustainability 0

“37%of CEOs said a lack of clear link to business value was a critical factor

deterring faster action on sustainability”

-

The UN Global Compact-Accenture CEO Study on Sustainability 2013, September 2013

“It is not unreasonable for business leaders to want a positive return on their

sustainability expenditures…for me, the convenient analogy is advertising…”

Sustainability a CFO Can Love, Harvard Business Review, April 2014

2 Minutes On MonetizationSUSTAINABLE LEADERSHIP FORUM

4Monetizing SustainabilityLink to Video: http://us.anteagroup.com/en-us/services/sustainability-consulting/accounting-sustainability-aa4s

Our Purpose

Accelerate progress by removing obstacles to better, more sustainable

business decision-making

Our Plan

Focus on making key elements of sustainability more tangible, helping

to build a better case for investment

Our Program

Create a curriculum/tools that improve the monetization and business

case development skills of those proposing and deciding on investments

in sustainability

About The Monetization Working GroupSUSTAINABLE LEADERSHIP FORUM

5Monetizing Sustainability

Better Business Case; Better DecisionsSUSTAINABLE LEADERSHIP FORUM

Need less advocating and more reasons to believe sustainability investments are the best choice for our businessBusiness Strategy Leader & MWG Member

“

”

Articulate Problem

Frame the Solution

Assess Alignment

1

3

Quantify Value

2

4

6

ValidateAssumptions

Articulate Needs

Provide Clear Plan

Measure & Report Success

5

7

8

6

2


Where Is The Value?SUSTAINABLE LEADERSHIP FORUM

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


Making Intangibles More TangibleSUSTAINABLE LEADERSHIP FORUM

8

DEFINITION OF

MONETIZATION

The process of converting

or expressing a result in

terms of money or

currency

DEFINITION OF

DECOMPOSITION

Breaking an uncertain

variable into constituent

parts to identify directly

observable things that

are easier to measure

DEFINITION OF

QUANTIFICATION

To find, determine,

express or calculate (i.e.,

‘measure’) the quantity

or amount of something

Monetizing Sustainability

DecompositionSUSTAINABLE LEADERSHIP FORUM

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Question 1

What Drives Value In Sustainability?

Water Stewardship Question 2

In How Many Ways?

WorkplaceEnhancements

Reducing Potential For Business Disruption

Question 3

To What Degree?

Product InnovationsReducing chance/duration of supply discontinuities

Less Downtime

Etc. Providing new opportunities to gain efficiency

No Stranded Assets

Etc. No Facility Shutdown

Can we now quantify and monetize business valuedue to our investments in sustainability - water stewardship?


Decomposition – Finding The ValueSUSTAINABLE LEADERSHIP FORUM

In How Many Ways?

An Investment in Water Stewardship Creates Value by:

1. Reducing the risk of business disruption

a. Downtime

b. Stranded Assets

c. Facility Shutdown

2. Providing new opportunities for efficiency

a. Reduce resource consumption


In How Many Ways?

To What Degree?

Decomposition – Finding The Value (cont.)

SUSTAINABLE LEADERSHIP FORUM

An Investment in Water Stewardship Creates Value by:


a. Downtime Avoid Cost by reducing the chance/duration of facility downtime

b. Stranded Assets Avoid Cost by averting conditions where past investments/assets become stranded

c. Facility Shutdown Avoid Cost by averting shutdown and facility closure

2. Providing new opportunities for efficiency

a. Reduce resourceconsumption

Saving Cash by reducing resource consumption and all associated costs (treatment, moving, etc.)


Protect Strengthen Advance

Water Stewardship DecompositionSUSTAINABLE LEADERSHIP FORUM

12

With support from the Monetization Working Group’s subject matter experts we identified 6

categories of business benefits associated w/investments in water stewardship:


2. Reducing chance/duration of supply discontinuities

3. Providing new opportunities to gain efficiency

4. Reducing the potential for higher costs in the future

5. Reduces the risk of business/sales loss

6. Opportunity differentiate and grow revenue/business

And 15 specific opportunities to: avoid cost; improve margins and enable revenue growth


Decompose Any Relevant InvestmentSUSTAINABLE LEADERSHIP FORUM


Workplace Enhancements Compliance Product & Packaging Innovation

Supply Chain Resiliency Alternative Energy …more


14

DEFINITION OF

MONETIZATION



terms of money or

currency

DEFINITION OF

DECOMPOSITION






DEFINITION OF

QUANTIFICATION

To find, determine,





• Look for previous experience (tap

into the institutional knowledge

base)

• Seek out subject matter experts

(internal and external)

• Published studies

• Direct measurement,

observation, estimation, or

extrapolation are all possibilities

Quantification & MeasurementSUSTAINABLE LEADERSHIP FORUM


For Investments in Water StewardshipCreate Watershed Improvements Which Reduce Chance/Cost of Operational Curtailment or Downtime

Quantification Confidence

Source

Company Data

Competitor Data

Other Research

Assumed

# of Days Curtailed/5 yr. Period

5 75% Yes Yes

# of RelevantFacilities

15 60% Yes

Reduces Chance of Curtailment By (Conservative Estimate)

25% 35% Yes Yes

Days of Production Not Lost

19 (5 days curtailed/period x 15 facilities x 25% reduction in chance of curtailment)

Credibility: QuantifyingSUSTAINABLE LEADERSHIP FORUM



17

DEFINITION OF

MONETIZATION



terms of money or

currency

DEFINITION OF

DECOMPOSITION






DEFINITION OF

QUANTIFICATION

To find, determine,





Monetizing: Putting It All TogetherSUSTAINABLE LEADERSHIP FORUM

18

Less Business Continuity Risk From Watershed Improvements

Reduced Chance/Cost of Operational Curtailment

Number of Days Curtailed/Plant During 5 year period: 5

# of Relevant BEVCO Plants: 15

Reduces Chance of Curtailment By (ConservativeEstimate): 25%

Days of Production Not Lost: 19

Avg EBITA Per Day/Plant: $103,000


Potential Value Of Reduced Curtailment (USD): $1,900,000


Monetizing: Putting It All Together (cont.)

SUSTAINABLE LEADERSHIP FORUM

19

Reduced Potential For Higher Future Costs - Reputational Enhancement - From Proof Of Water Stewardship

Less Frictional Costs Assoc w/Expansion Approvals

Get To 'Production' Faster (more return on capital)

Shortens Cycle by (Days): 30

Relevance (#of Facilities) Across Operations Over 5 yr Period: 10

Days of Production Gained: 300

EBITDA/Day (For All Production) $103,000

Typical % of Production Represented By Expansion: 15%

EBITDA/Day For Incremental % of Production Gained: $15,450


Potential Value of Less Frictional Cost In Approvals (USD): $4,600,000


Supplemental Materials

EXAMPLE

BEVCO CORPORATION

Growth In The Andean Market

A Case For Investing In Water Stewardship

Executive Summary

The Andean market represents an important growth opportunity for the

BEVCO company.

• The organization operates 30 beverage/bottling plants within six

important watersheds throughout the region

• In four of the six watersheds agricultural development and poor land

management practices represent an ongoing and ever expanding threat

to water supplies

• Regional impacts such as forest loss, soil erosion, nutrients loading and

siltation are already overwhelming water infrastructure systems, causing

curtailments, concerning local governments and threatening future

development

• Without change and improvements in these watersheds, increasing

negative effects on company’s operations and its long range growth plans

are imminent

ChallengeSUPPLEMENTAL MATERIALS: EXAMPLE CASE


Proposed ApproachSUPPLEMENTAL MATERIALS: EXAMPLE CASE

Criteria For A Successful Solution

• Mitigates/minimizes water risks and ensures the company

maintains water-related benefits

• Addresses 4 watersheds already impacted and reduces risks

in 2 others not yet impaired

• Technically and financially feasible

Recommend Joining Existing Andean Water Fund As:

• $5 MM (US) investment over 5 years yields substantial

business benefits (exceeding normal hurdle rates)

• Involves collaboration w/several business partners and

stakeholders to deliver substantial environmental benefits in

all 6 watersheds where the company operates

• Aligns w/organization’s current strategic goals related to

investing in the region’s economic and overall potential

ALTERNATIVES CONSIDERED

• Switch To Groundwater Source

At High Risk Locations: Explored

this option, but technically

impractical at most locations

• Relocate Operations: Possible to

relocate production, but not

financially feasible (mainly due

to addition product distribution

costs)

• Company-Sponsored Source

Water Protection: Considered

applying proposed solution

concepts on our own – could

work quicker, but likely too little

impact for anticipated cost


Why Does This Make Sense For BEVCO?SUPPLEMENTAL MATERIALS: EXAMPLE CASE

Rationale

Return on Investment

(ROI) hurdle rates

typically define a ‘quality

investment’ at BEVCO

In evaluating only two (2)

potential sources of value

(likely are several more)

returns exceeded these

hurdle rates (Appendix X)

As noted, also aligns with

company’s other strategic

pillars (i.e., collaboration

w/key stakeholders and

investment in the region)

FORECASTED VALUE FOR INVESTING IN WATER FUND

1) Business Continuity From Watershed Improvements

Reduced Chance/Cost of Operational Curtailment

Number of Days Curtailed/Plant During 5 year period: 5

# of Relevant BEVCO Plants: 15

Reduces Chance of Curtailment By (Conservative Estimate): 25%


Avg EBITA Per Day/Plant: $103,000


Potential Value Of Reduced Curtailment (USD): $1,900,000

2) Reputational Enhancement - From Proof Of Water Stewardship

Less Frictional Costs Assoc w/Expansion Approvals

Get To 'Production' Faster (more return on capital)

Shortens Cycle by (Days): 30

Relevance (#of Facilities) Across Operations Over 5 yr Period: 10


EBITDA/Day (For All Production) $103,000

Typical % of Production Represented By Expansion: 15%

EBITDA/Day For Incremental % of Production Gained: $15,450


Potential Value of Less Frictional Cost In Approvals (USD): $4,600,000


Business & NGO Partners (Already Supporting The Fund)

• Current agricultural ingredient supplier relying on Fund to help improve groundwater recharge in one

watershed, with BEVCO’s commitment to fund this would likely be expanded to other watersheds

• NGO partner on other sustainability initiatives has a lead role in modeling sediment loads, nutrient

pollution and their results show that with expanded investment the Fund could achieve double digit

reductions in nitrogen pollution and sediment loads in the four challenged watersheds where BEVCO

operates

Water Utilities/Providers

• The reductions above would save ≈ $0.5MM (US) per year in treatment cost in each basin and reduce

need for substantial capital outlays for additional infrastructure, reducing government interest in

limiting growth

Local Communities

• In addition to restorative environmental benefits anticipated, local farmers and landowners that abide

by restrictions designed to protect the watershed will be compensated, further advancing economies

in the region

Benefits For BEVCO’s Key StakeholdersSUPPLEMENTAL MATERIALS: EXAMPLE CASE


Important Assumptions & RisksSUPPLEMENTAL MATERIALS: EXAMPLE CASE

Key Assumptions Associated Risks Relevant Mitigation Strategies

Environmental benefits forecasted will be realized

Failure to reduce/reverse negative env. impacts may affect participants reputation as water stewards, placing forecasted business benefits at risk

BEVCO’s internal experts engaged/ involved with Fund technical oversight; also requiring annual ‘health of the watershed’ status/ trend reports

Key stakeholders, especially water suppliers will recognize and take into account BEVCOs interest in water stewardship

Authorities may curtail company production or delay expansion plans regardless of BEVCOs Water Fund participation or stewardship efforts

Preliminary meetings indicated support from water suppliers in all watersheds given mutual interests in improving env. conditions; also annual validation meetings planned

Other investors will satisfy their commitments to the Water Fund on schedule for the duration of efforts

Due to unforeseen economic or other conditions, one or more investors default on their commitments to the Fund

Investor Agreement includes ‘backstop default provisions’ from multilateral financial institution supporting the Fund

BEVCO committed to pursuing market growth opportunities in the region for the duration of the Water Fund commitment (5 years)

Lack of interest in the region reduces value of benefit realization

Confirmed market commitment at Q2 Executive Leadership meeting; continue monitoring via routine engagement with BEVCO leadership


Investment DetailsSUPPLEMENTAL MATERIALS: EXAMPLE CASE

$5 MM Investment

• Amount correlates to corporate’s ‘cost of effective water stewardship’ model

incorporating BEVCOs 5-yr forecasted water consumption (less ‘in-kind’ labor

provided to support Fund oversight/participation)

• To be paid annually (for 5 years) in equal installments by 1 March, following

publication/presentation of the ‘health of the watershed’ status/trend report

• Legal has confirmed funds can be sourced from company Foundation

Use of Funds

• To be directed by Fund technical steering committee (BEVCO has 2 members

from EHS staff – BEVCO VP already approved) via annual workplan

• Use of funds likely similar to ongoing activities that include, but are not limited

to: reforestation; protected area management; conservation and restoration of

riparian areas; silvopastoral systems; agricultural best practices education; etc.


Deployment Plan & RoadmapSUPPLEMENTAL MATERIALS: EXAMPLE CASE

Schedule

MajorActivities

Year 1 Year 2

BeyondQ1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

KeyMilestones

ResourcedWater Fund

($1MM)

Technical steering

committeemeeting

Technical steering

committeemeeting

Annual workplan

issued

ResourcedWater Fund

($1MM)

Technical steering

committeemeeting

Technical steering

committeemeeting

Annual workplan

issued

Anticipate similar activities and cadence

Communication Plans

Health of the

Watershed reports

published

Progressreported in

BEVCO annual report

Foundation BOD Update

Health of the

Watershed reports

published

Progressreported in

BEVCO annual report

Foundation BOD Update


PerformanceMonitoring

Annual validation meetings w/Water Suppliers

Assess Fund progress –

risk mitigation/

benefit realization

Annual validation meetings w/Water Suppliers

Assess Fund progress –

risk mitigation/

benefit realization



RecapSUPPLEMENTAL MATERIALS: EXAMPLE CASE

• Without change and improvements in the watersheds where the

company operates, increasing negative effects on manufacturing

and long range growth plans should be expected

• While a number of alternatives were considered, it is

recommend BEVCO join the Andean Water Fund, requiring a $5

MM (US) investment over 5 years

• This investment is anticipated to yield substantial business

benefits (exceeding normal hurdle rates) and is aligned with

other company strategic efforts

• Several of our key partners already participate in the Fund, and

expect similar benefits as do other important stakeholders

• Assumptions, risks and plans have been analyzed, compiled and

communicated signaling organizational readiness for this effort

• First indication of commitment to the Water Fund due in 30 days

Accountable Team

Julia RamirezBEVCO VP of EHS & Sustainability, executive

sponsor with overall accountability for

investment performance

Ricardo Reyes BEVCO Env. Director, initiative manager and

lead technical representative with Water

Fund

Juan CondatoBEVCO Env. Manager – Water, supports Mr.

Smith

Susan CarlosFoundation Economist, will serve as finance

support and management


Contents

• Solution Alternative Analyses

• Recommend Solution: Technical Viability Assessment

• Investment Cash Flow Projections

• Andean Water Fund Historic Performance

AppendicesSUPPLEMENTAL MATERIALS: EXAMPLE CASE


Appendix X: Investment Cash Flow AnalysisSUPPLEMENTAL MATERIALS: EXAMPLE CASE

PROTECT: Relevant Cost Avoidance Benefits Category Year 1 Year 2 Year 3 Year 4 Year 55-Yr ProjBenefit

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 55-Yr ProjBenefit

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

Back


Let’s Try To QuantifySUPPLEMENTAL MATERIALS: EMPLOYEE ENGAGEMENT DECOMPOSITION, QUANTIFICATION, MONETIZATION EXAMPLE

32

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


Past Studies Start To Answer The QuestionSUPPLEMENTAL MATERIALS: EMPLOYEE ENGAGEMENT DECOMPOSITION, QUANTIFICATION, MONETIZATION EXAMPLE

33

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


Now We Are Getting Somewhere…SUPPLEMENTAL MATERIALS: EMPLOYEE ENGAGEMENT DECOMPOSITION, QUANTIFICATION, MONETIZATION EXAMPLE

34

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 EMPLOYEESengaged

±12 will be less likely to consider

leaving


Quantification To MonetizationSUPPLEMENTAL MATERIALS: EMPLOYEE ENGAGEMENT DECOMPOSITION, QUANTIFICATION, MONETIZATION EXAMPLE

35

Once again, some basic

research should yield a

way to translate the

quantified impact into a

monetized impact – in

this case we’ll choose

≈20% as the average

cost of replacing an

employee

Note: Some estimate this value as high as 200%,

but most use a number between 10%-30%Source: There Are Significant Business Costs to Replacing Employees, H. Boushey, et. al., Center for American Progress, 2012


Putting It Altogether…SUPPLEMENTAL MATERIALS: EMPLOYEE ENGAGEMENT DECOMPOSITION, QUANTIFICATION, MONETIZATION EXAMPLE

36

De

com

po

siti

on POTENTIAL RETURNS FOR INVESTING IN SUSTAINABILITY

Workplace Enhancements – From Greater Engagement of Talent

Reduced Employee Turnover/Replacement & Assoc. Costs

Qu

anti

fica

tio

n

# 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 (15% annual turnover without program)

2%

# Of Employees Less Likely To Leave 50

Mo

ne

tiza

tio

n 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

$500,000


Sources of Business Benefits/ValueSUSTAINABLE LEADERSHIP FORUM

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?

StrengthenMargin

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?

ProtectImproved Risk & Reputation

Management

• Reduce business, legal and operational risk?

• Enhance business continuity and resilience?

• Minimize future risks?

Cost Avoidance


About Antea GroupSUSTAINABLE LEADERSHIP FORUM

Antea Group is an international environmentalconsulting and engineering firm specializing in full-service solutions in the fields of environment, infrastructure, urban planning and water, with annual revenues exceeding $2B.

With our Inogen Associates we have more than 3,500 employees in over 100 offices around the world, we serve clients ranging from global energy companies and manufacturers to national governments and local municipalities.


B E T T E R B U S I N E S S , B E T T E R WO R L D℠

North American Operations Center5910 Rice Creek Parkway, Suite 100St. Paul, MN 55126, USA800 477 7411 or +1 651 639 9443

European Operations CenterRivium Westlaan 722909 LD Capelle aan den IjssePostbus 85903009 AN Rotterdam, The Netherlands+31 (0) 10 235 17 45

Latin America Operations CenterCalle 35, No. 7-25 Piso 12Bogotá, D.C., Colombia+57 1 327 6300

For additional information contact:

John Platko ([email protected])

Michael Maggio ([email protected])

www.anteagroup.com

Monetizing Sustainability: Addressing the Why and How with Case Studies

Environment

Transcript of Monetizing Sustainability: Addressing the Why and How with Case Studies