Introduction to Sustainable Return on Investment (SROI)

New Partners for Smart Growth – Seattle Feb 5th, 2010

John Williams – Senior VP, HDR Inc. Stephane Larocque – Principal Economist, HDR Inc.

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Contents

1.  Set the Stage – Intro by John Williams 2.  Introduce Sustainable Return on Investment

(SROI)

3.  Explain SROI Methodology 4.  Examples of SROI Results/Outputs 5.  Discuss Scale of Application 6.  Provide Examples of Recent SROI Projects

7.  Wrap-Up and Questions

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Aid to States  Medicaid  Retirement Programs  Unemployment Benefits  Infrastructure

Aid to Local Governments  Infrastructure  Green Projects  EECBG Funding  Support for Climate & Sustainability Initiatives

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Transforming the Economy Through Green Investment

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Lessons from Banking & Insurance: Make a Transparent Case

Funding Criteria Transparency & Reporting Expectations for a Sustainable

Return on Investment (SROI) Prioritization

 Shovel Ready  Green Projects  Green Jobs

Striving for “Green” in a “Grey” Period

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Grey Periods Can Work For or Against You

•  USCM Ready to Go with $1.6 Trillion in Projects

•  More Projects than Funding

•  Expect Prioritization

•  Competitive Proposals

•  Emerging Criteria

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Crafting a Green Business Case Articulating the Sustainability Case for Your Projects

• What are the Net Costs & Benefits of Your Proposal?

• What is the Likelihood that Outcomes will be Achieved?

• Would Sustainability Benefits be Realized Without New Investment?

• How will It Affect Green Jobs?

• How will It Contribute to Higher Efficiency in Energy Consumption, Production, & Distribution?

• What Effect will It have on Clean, Renewable Sources of Energy?

• How will It Influence Energy Supply Disruptions?

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Making Sustainable Decisions Organizations of all types must make tough choices & justify their expenditures when it comes to being “Green”

Traditional models such as life-cycle cost analysis (LCCA) fall short:

 Only consider cash impacts  Lack transparency  Do not account for uncertainty

Decisions Based on Triple Bottom Line

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What is The SROI Process?

• It’s a comprehensive Cost-Benefit Analysis study over a project’s entire life-cycle • Augmented by:

•  Accounting for uncertainty using state-of-the-art risk analysis techniques •  Engaging stakeholders directly in the process and generating transparency and

consensus •  The SROI process can also incorporate Economic Impact Assessment to

calculate jobs created, tax impacts, etc.

• Facilitates decision making by answering questions such as:

 What is the full true value of each alternative?  Which alternatives are viable or have the best payoff?  What’s the probability of achieving a positive payoff?

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SROI Flow Diagram

Operating Cost

Increases ($)

Capital Costs ($) Associated Maintenance

Costs ($)

Disposal Costs ($)

Costs

Cash •  Reduced Electricity Costs •  Reduced Heating/Cooling Costs •  Reduced Water Costs •  Reduced Sewage Costs •  Reduced Waste Disposal Costs •  Other Reduced Operational

Costs

Non-Cash •  Reduced Green House Gas

Emissions •  Reduced Air Contaminant

Emissions •  Fresh Water Conserved •  Improved Health •  Improved Productivity •  Improved Resiliency •  Improved Safety

Example of Benefits

Discounting (%)

Total Benefits ($)

Total Costs ($)

Reveals a project’s Full Value

Output Metrics

($)

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Sustainable Return on Investment  SROI adds to traditional financial analysis the monetized value of non-cash

benefits and externalities

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Decision Metrics From Both a Financial & SROI Perspective

Net Present Value (NPV): The net value of an investment, calculated as benefits less costs, with both expressed in present-value monetary terms (PV of Benefits – PV Costs)

Return on Investment (ROI): The arithmetic average rate of return per year on capital invested

Discounted Payback Period (DPP): The period of time required for the discounted return on an investment to recover the sum of the original investment

Internal Rate of Return (IRR): The discount rate at which the net present value of a project would be zero

Benefit to Cost Ratio (BCR): The overall “value for money” of a project, expressed as the ratio of the benefits of a project relative to its costs, with both expressed in present-value monetary terms (PV Benefits / PV Costs)

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SROI Methodology

“SROI reveals the hidden value in projects.” David Lewis, PhD

HDR National Director, Economics & Finance

A Four Step Process

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SROI Methodology – Step 1

Change in Environmental Costs from Displacing Heavy Truck Travel

Structure and Logic Diagrams

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SROI Methodology – Step 2

Data Sources

•  Architects & Engineers •  Meta-analysis of third party research & data •  Financial & insurance markets •  Contingent valuation i.e. willingness to pay surveys •  Bayesian analysis/expert opinion

Sample Inputs Quantify Data Assumptions

Quantify Input Data Assumptions

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SROI Methodology – Step 2 Quantify Input Data Assumptions

Sample Inputs Quantify Data Assumptions

Example: Cost of CO2 per Ton ($)

Median Lower Limit Upper Limit $19.86 $8.08 $73.79

Cost/ton

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SROI Methodology – Step 2 Quantify Input Data Assumptions

Sample Inputs Quantify Data Assumptions

Example: Range of Values for CO2 •  Median Value: We use the current market price as

quoted on the European Climate Exchange based on the Cap and Trade system they have in place in Europe.

 As 17 Apr 2009 = $18.94 USD/ton

•  Low Value: We are using $8.08 USD/ton as calculated by William Nordhaus in his book A Question of Balance: Weighing the Options on Global Warming Policies, 2008

•  High Value: We are using $73.79 USD/ton as calculated by Nicholas Stern in his book The Economics of Climate Change: The Stern Review, 2006

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SROI Methodology – Step 3 Risk Analysis Session

Sample Participants

  Client:   Project team   Technical specialists   Financial experts

  HDR:   Facilitator   Economists   Technical specialists

  Outside Experts   Public Agencies & Officials   Business Groups

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SROI Methodology – Step 4 Run the Model and Produce Results

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Examples of SROI Results Fort Belvoir Community Hospital, US Army

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Examples of SROI Results Tehachapi Trade Corridor, California – BNSF Railroad

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Examples of SROI Results Tehachapi Trade Corridor, California – BNSF Railroad

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Examples of SROI Results Tornado Diagram

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Examples of SROI Results John Hopkins University, Baltimore Maryland

Projects on Project Project Profitability Project Capital Cumulative Project Radar Screen Name Description SROI: IRR Rank Required ($M) Capital ($M) Grouping

Foxtrot Solar Caps 25% 1 58 $ 58 $ Delta Landfill Gas Collection 21% 2 321 $ 379 $ Victor WTE 1 20% 3 72 $ 451 $ Mike Long Haul Rail Option 19% 4 95 $ 546 $ Juliet MRF refurbishment 17% 5 150 $ 696 $

Capital Budget Line Sierra Anaerobic digestion of organics 17% 6 265 $ 961 $ Max Annual Capital $1B Quebec Autoclave 15% 7 250 $ 1,211 $

Lima Waste Park 14% 8 170 $ 1,381 $ Alpha Road haul Option 14% 9 60 $ 1,441 $ Whiskey WTE 2 13% 10 143 $ 1,584 $ November Additional MRF 1 12% 11 86 $ 1,670 $

NPV Break-Even Line

Uniform Standardized Garbage Bins 12% 12 77 $ 1,747 $

Hurdle Rate 7% IRR

Zulu Additional MRF 2 11% 13 99 $ 1,846 $ Golf Landfill 1 10% 14 112 $ 1,958 $ Tango Natural Gas Trucks 9% 15 41 $ 1,999 $ Charlie Solar Panels on HQ 8% 16 250 $ 2,249 $ India Wind Turbines on capped L/F 7% 17 14 $ 2,263 $ Bravo Hybrid Trucks 6% 18 87 $ 2,350 $ X-ray Landfill 2 5% 19 300 $ 2,650 $ Oscar Plasma Gasification 5% 20 12 $ 2,662 $ Hotel Wind Turbine for HQ 2% 21 357 $ 3,019 $ Romeo 3 R’s Education Program 1% 22 37 $ 3,056 $

Projects that should be

implemented

Good projects that lack funding

Projects that aren't worth

pursuing

Prioritizing Projects

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Scale of Application

Facility Campus

City State & Nationally

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Examples of Recent SROI Projects

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Client Project Army SROI business case for the Fort Belvoir Community

Hospital, currently working on USAG Humphreys, Korea

BNSF & UP Railroads Proved the public benefit of three new infrastructure projects resulting in $200M in grants from TCIF

Boston Redevelopment Authority

Performing SROI analysis on the city of Boston’s portfolio of ARRA funding projects

Denver Metro Wastewater Reclamation District

Using SROI to make design & construction decisions on Denver’s proposed new wastewater treatment facility

Johns Hopkins University Provided SROI analysis of JHU’s Campus Sustainability Initiative project in order to secure LEED certification

Marine Corps SROI is being used in Iwakuni, Japan to assist with evaluating sustainable solutions at the base

National Park Service Working with the Park Service to use SROI to help make sustainable transportation planning decisions

  It’s a proven Cost-Benefit Analysis based approach to making planning & budgeting decisions

  It fully incorporates non-cash benefits and externalities into the decision making process

  It provides a full range of possible outcomes using state-of-the-art risk analysis techniques

  It helps generate consensus by being both interactive and transparent

  It is an invaluable tool to help projects secure internal approval, public support, funding, etc.

So Why Use SROI?

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“Doing the right thing is good. Doing the right thing for the right reason and with the right intention is even better.”

Questions? SROI@hdrinc.com

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