By Scott Lewis
Sustainability provides a rich investment opportunity for any organization – business, NGO or public agency. However, conventional approaches to comparing investment options may under-represent the value of sustainability efforts, and therefore lead to underinvestment, missed value creation opportunity and increased risk. By expanding outdated notions and definitions of the “returns” from investment options, CFOs, business leaders and managers of public or non-profit organizations can make more prudent and strategic decisions regarding sustainability opportunities.
The standard measure for the risk-adjusted opportunity of an investment is a simple equation: the benefit or “gain” of the investment divided by the initial cost – referred to as “return on investment.” Put $100 into a project, get $140 back, divide the gain ($40) by the initial investment, and voila – a 40 percent ROI.
While expected ROI is widely used by investors, our focus here is on investment decisions made by CFOs and business managers inside organizations about where to allocate their internal resources to achieve their goals.
From Conventional ROI to SROI
To illustrate the problem with the standard ROI analysis, consider the following example: You’re deciding whether to invest in an energy upgrade project that includes switching out inefficient incandescent lights with more energy efficient T-5 fluorescent lamps, replacing some overhead lighting with task lighting at workstations, and adding natural ventilation and daylighting to the space to save air conditioning and lighting costs. Suppose the initial or “first cost” of the upgrade is $100,000, and you get $15,000 annual energy savings: a 15 percent ROI. If that payback seems low or there is a competing use for those funds that would have an 18 percent ROI, the energy upgrade wouldn’t be worth the investment. But is that really the whole picture?
Image via Renewable Energy News
The problem with the standard ROI analysis is that it overlooks some of the potential benefits of the sustainability investment, and therefore undervalues the possible outcome. The first question in doing a Sustainability ROI analysis is, “Did we really look at all the financial costs and benefits of the project?” The first place to look for additional financial benefits is in the area of Life Cycle Cost Analysis, or LCCA. Did your analysis take into account the fact that the new T5 lights last for 5 years, yet the incandescent lamps they were replacing only last for a year? Did it measure the dollars spent paying maintenance staff to climb a ladder and replace each incandescent bulb each year? Did the analysis uncover the fact that the T5’s produce considerably less heat than the incandescents? In a building where you run air conditioning for 68 percent of the year, the cooler T5’s save you money again.
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