3. overview of the fv software & process

User Guide: Financial Valuation Tool for Sustainability Investments • June 2011 | 9

The objective of the Tool is to quantify the value that is created for the company’s operation through sustainability investments and the value that is protected through better risk mitigation.

To achieve this objective, a company works through a tested process that enables it to con-vene managers across operational units and enter agreed upon data into the FV software to yield the NPV output. This User Guide emphasizes how to use the software, but there are critical steps in the process that will also be highlighted to help implement the FV approach. Where appropriate templates and sample documents are referred to and working copies are available on the FV Tool website: www.fvtool.com

Screenshots of the software data entry sheets are provided in the next chapter.

In general, the FV Tool process includes the following key steps:

Financial Valuation Tool: Sequenced Activity Checklist• Draft/validate risk & opportunity map (per risk register & stakeholder per-

ception data); • Select high-level portfolio of sustainability programs for analysis• Articulate Scenarios A (ie, status quo) and B (ie, additional investment) and

get cross-functional buy-in• Assess key assumptions, data/evidence base for investments • Draft risk consequence table: type, frequency, costs• Enter FV model basics: project phases, cash flows, discount rate • Conduct cost-benefit analysis per investment • Determine ‘risk mitigation significant’ & ‘quality/effectiveness’ ratings for

each investment • Run model & analyze preliminary output • Validate & refine assumptions/inputs with management task force• Rerun model, interpret results & consider implications for investment portfolio• Train additional staff to conduct key exercises, manipulate model and in-

terpret output

3.1 Company’s Asset Risk & Opportunity MapFor a blank template to enter your own risks and opportunities, go to the resources section of www.fvtool.com

3. Overview of the FV Software & Process

10 | User Guide: Financial Valuation Tool for Sustainability Investments • June 2011

3.2 SoftwareThe model consists of three major steps. In the first step, the user has to enter data (see section 3.1). In the second step, the model is allowed to run when the user presses the calculate button. Finally, in the third step, the software generates output through various reports. Each step is further explained below.

3.2.1 Enter Data: Project Definition TabThe General Information, Project Cash Flows and Project Phases tabs allow users to define project characteristics and establish the general settings that will be used throughout the model.

Value Protection TabThe Risk Categories and Project Risks tabs allow users to select the types of risks and consequences that are likely to occur in the project conditions, irrespective of the sustain-ability investments planned (i.e. theoretical inherent or neutral risks of a project). Those risks are defined in terms of their frequency, duration, related costs and revenue losses.

HIG

H

HIGH

ME

D

MED

LOW

LOW

Ris

ks t

o C

om

pan

y /

Op

erat

ions

Opportunity for Impact

• Biodiversity • Corruption

(Political Stability)

• Resettlement

Air Quality

• Impact on agriculture

• Ethic Group • Unions

• Transportation• Inflation• Housing

Carbon Emissions

Responsible Supply Chain

• Local Supplier Development

• Local Workforce Development

• Health & Safety• Land Acquisition &

Resettlement

• Primary education

• Local Industry development

• Telecom• Electrification

High Priority

Medium Priority

Low Priority


3.3 Creating the Risk Consequence Table (working with Fi-nance, Risk & CSR managers)

Sustainability Programs TabThe Sustainability Investment tab allows users to define the initiatives that will be evalu-ated in Scenarios A and B. This selection is largely determined based on what the company wants to learn through modeling.

3.4 Sustainability Investments: Scenarios A and B

Next each investment is given a rating of Risk Mitigation Significance regarding its inher-ent link to risk management.

Description & Assumptions

Community risk consequence

-Water pipeline sabotage if draught or increased water scarcity (even if perception)

Community road block because not consulted on land use despite central gov’t permits

Risk

Production Disruption

Delays in Construc-tion

Annual Rate of Occurrence (ARO)

2-3 times/year

4-6 times/year

Duration

2-4 days

5-8 days

Related Costs (K$)

$1 m for pipeline repair

$5000 per day in lawyer fees

Recurring Costs

$100k per day due to idle equipment, labour.

$100k per day due to idle equipment, labour.

Lost Revenues

$500k/day in lost gold production (based on $1000 per ounce and production of 500 ounces per day

SCENARIO A:

Provide bulk power

No action

Bulk supply promised, build well only

No action

No action

Expand existing school only.

Extension of current hospital, upgrade equipment and technology

SME training program

SECTOR

Power Supply

District Heating

Water Supply

Wastewater Management

Solid Waste Management

Primary school

Hospitals

Local business development

SCENARIO B:

Provide bulk power plus distribution network

Extend heating network system in town, support service delivery arrangements.

Invest in distribution network and service delivery mechanism

Expand sewage network for houses, support service delivery reform

Support solid waste management system development

Build new school

Build new regional hospital

Develop light industrial estate


3.5 Sustainability Investment Risk Mitigation SignificanceRisk Mitigation Significance is a relative importance of an initiative to contribute to the sus-tainability portfolios overall risk mitigation potential. Risk mitigation significance of a specific initiative contributes to the value protection calculations in the FV model, affecting both the size of the value pie and how it is attributed to individual investments.

Risk Mitigation Significance is rated by a small management focus group considering fol-lowing 3 factors:

• The initiative’s relative weight in the total risk profile (related to an asset/project’s overall risk register);

• The initiative’s importance to external stakeholders;• The potential of the initiative to create a positive impact.

The Quality of Sustainability Investments tab allows users to evaluate the estimated quality/effectiveness of company responses in Scenario A versus Scenario B. A guideline for quality is provided in an appendix. The interactive Quality Assessment Tool is avail-able to download at: http://www.fvtool.com/page.php?id=13

3.6 Sustainability Investment Quality Rating: SampleThe quality and effectiveness of community investments are important factors to mitigate identified social risks and to make a positive impact on local development. The quality of a sustainability investment determines whether risks and opportunities are maximized or minimized. The Sustainability Program Quality Framework (Quality Framework) helps com-panies assess the quality and effectiveness of portfolio of sustainability investments. The framework includes:

1) Self-Assessment Tool

2) Quality Benchmark Matrix

The final result of the Self-Assessment Tool is a numerical score ranging from 1 (ineffective) to 4 (excellent). The score is either entered into the FV Tool or can serve as a stand-alone rating of sustainability investment. The Benchmark Matrix helps the user interpret the score received on the Self-Assessment. It also serves as a guide for good and best practices and offers ideas to a company on how to improve its sustainability investments.

7 To download the Quality Assessment Tool, go to: www.fvtool.org

Sustainability Initiatives selected for evaluation

Workforce DevelopmentLocal Procurement Land AcquisitionWater Infrastructure Health and Safety

Rating of risk mitigations potential of initiative0=none to 10=max

87865


Enter score for each sustainability initiative received on the Self-Assessment Tool

Value Creation TabThe Costs and Benefits tab allows users to enter cost and benefit data related to each sus-tainability investment for two scenarios (A and B). The Model is structured like a traditional business case; it estimates the difference between the value impacts of two user-defined scenarios:

• Scenario A, which is the “base case“ set by the user, this may be investments re-quired by local legislation or by corporate (e.g. considered basic compliance); and

• Scenario B, which is the proposed sustainability investment portfolio (e.g. more sig-nificant in quantity and/or quality program). Note: these are common scenarios but each case can be anything as defined by users.

Both scenarios are specified in the Costs and Benefits tabs for each sustainability investment.

3.7 Calculate Once all the tabs have been populated, the Calculate button prompts the software to gener-ate the results.

The final tabs are reporting tabs that have been locked to prevent manual editing. The tabs illustrate the results of direct value creation and indirect value protection:

Cash Flow tab• Cash Flow Scenario A is a report representing cash flows for each investment en-

tered under Scenario A in the Benefits & Costs tabs.

• Cash Flow Scenario B is a report representing cash flows for each investment en-tered under Scenario B in the Benefits & Costs tabs.

• Value Created (B-A) illustrates the difference between Scenario A and B, and thus the value created by Scenario B.

NPV tabNPV Neutral Scenario is a report representing the Net Present Value of the project after accounting for the financial impact of the event’s risks and without applying sustainability investments.

Quality of Sustainability Investment1 = ineffective, 4 = excellent

Workforce DevelopmentLocal Procurement Land AcquisitionWater Infrastructure Health and Safety

ScA

22.22.51.82

ScB

3.13.42.52.12.5


• NPV Scenario A is a report representing Net Present Value of sustainability invest-ments in Scenario A, including:

• The value of total risk and the project NPV with the total risk potential before ap-plying the quality of sustainability investments (and their risk mitigation potential); and

• The value of risk mitigation after applying the quality of sustainability invest-ments in Scenario A.

• NPV Scenario B is a report representing Net Present Value of sustainability invest-ments in Scenario B including:

• The value of total risk and the project NPV with the total risk potential before apply-ing the quality of sustainability investments (and their risk mitigation potential); and

• The value of risk mitigation after applying the quality of sustainability investments in Scenario B.

The model uses Monte Carlo simulations, which are typically useful for modeling phenom-ena with significant uncertainty in inputs, such as the calculation of risk in business.

Histogram Distribution tabThis tab represents one probability (relative likelihood) of Sustainability Value Added falling between two levels (probability density function - PDF) and one cumulative probability of Sus-tainability Value Added being at the same level or lower (cumulative density function - CDF).

Dashboard tabThis tab represents the Total Sustainability Value Added as well as the value added of each sustainability investment, and their relative share on value protection.


Cost Benefit Summary tab• Costs and Benefits per Project Phase represents a compilation of costs defined in

the Costs and Benefits tabs, broken down per project phase for Scenarios A and B.

• Costs and Benefits per Project Year represents a compilation of costs defined in the Costs and Benefits tabs, broken down per year for Scenarios A and B.

3. overview of the fv software & process

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