Sustainable Return on Investment (SROI)

The Associated General Contractors of America

March 21st, 2011

Stephane Larocque: Associate Vice-President Economics and Finance, HDR Inc.

Contents
1. Introduce Sustainable Return on Investment (SROI) 2. Provide Examples of Recent SROI Projects 3. Explain SROI Methodology p gy 4. Examples of SROI Results/Outputs 5. Wrap-Up and Questions 5 W U dQ ti

Making Sustainable Decisions

Traditional models such as Life-Cycle Cost Analysis Lif C l C t A l i (LCCA) often fall short:
Only consider cash impacts y p Do not account for uncertainty Lack transparency

What is SROI?
Its b t It best practice in Cost-Benefit Analysis and Financial ti i C t B fit A l i d Fi i l Analysis over a projects entire life-cycle, augmented by:
Accounting for uncertainty using state of the art risk analysis techniques state-of-the-art Engaging stakeholders directly to generate consensus and transparency

SROI = Calculating The Triple Bottom Line

SROI adds to traditional financial analysis the monetized value of non-cash benefits and externalities
Projects Cash Impacts Internal Non-Cash Impacts External Costs & Impacts

Capital

Operations & Maintenance

Productivity

Mobility

Health & Safety

Greenhouse Gases

Criteria Air Contaminant

Water, Waste, & Noise

Financial Return

Financial & Internal

SROI

SROI Flow Diagram

Example of Benefits Cash
Reduced Electricity Costs Reduced Heating/Cooling Costs Reduced Water Costs Reduced Sewage Costs Reduced Waste Disposal Costs Other Reduced Operational Costs

Costs Non-Cash
Capital Costs ($)
Associated Maintenance Costs ($)

Reduced Green House Gas Emissions Reduced Air Contaminant Emissions Fresh Water Conserved Improved Health Improved Productivity Improved Resiliency Improved Safety

Operating Cost Increases ($)

Disposal Costs ($) $

Total Benefits ($)

Discounting (%)

Total Costs ($)

Output Metrics ($)

Reveals a projects Full Value

Decision Metrics

From Both a Financial & SROI Perspective

Net Present Value (NPV) Discounted Payback Period (DPP)

Benefit to Cost Ratio (BCR)

Internal Rate of Return (IRR)

Return On Investment (ROI)

Examples of Recent SROI Projects

Client
US Department of Defence BNSF & UP Railroads Boston Redevelopment Authority City of Ottawa Denver Metro Wastewater Reclamation District Johns Hopkins University US National Park Service

Project
SROI analysis for the Fort Belvoir Community Hospital, USAG Humphreys in Korea and Fort Bliss in Texas p y Proved the public benefit of three new infrastructure projects resulting in $200M in grants from TCIF The city of Boston used SROI to analyze its portfolio of ARRA funding projects Developing a framework to rank city streets for rehabilitation based on the triple-bottom line Using SROI to make design & construction decisions on Denvers proposed new wastewater treatment facility Provided SROI analysis of JHU s Campus Sustainability JHUs Initiative project in order to secure LEED certification Working with the Park Service to use SROI to help make sustainable transportation planning decisions

SROI Methodology
A Four Step Process p

SROI reveals the hidden value in projects projects.

David Lewis, PhD HDR National Director, Economics & Finance

SROI Methodology Step 1

Structure and Logic Diagrams

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SROI Methodology Step 2

Q Quantify Input Data Assumptions y p p
Quantify Input Data Distributions Data Sources
Over 8,000 Architects, Engineers, Scientists & Economists Meta-analysis of third party research & data Financial & insurance markets Contingent valuation i.e. willingness to pay surveys Bayesian analysis/expert opinion

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SROI Methodology Step 2

Q Quantify Input Data Assumptions y p p
Example: Cost of CO2 per Incremental Ton ($2011) Quantify y Input Data Distributions
Median
$20.87

Lower Limit
$7.51

Upper Limit pp
$86.50

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SROI Methodology Step 2

Q Quantify Input Data Assumptions y p p
Quantify Input Data Distributions

Example: Range of Values for CO2

Median Value: We used the Interagency Working
Group on the Social Cost of Carbons recommended value for Federal projects = $20.87 USD/ton $

Low Value: We used $7.51 USD/ton as calculated by

William Nordhaus in his book A Question of Balance: Weighing the Options on Gl b l W W i hi th O ti Global Warming P li i i Policies, 2008

High Value: We used $86.50 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 Process (RAP) Session y ( ) Sample Participants

Client:

Project team

Technical specialists Financial experts

HDR:

Facilitator

Economists Technical specialists

Outside Experts:
Costing Experts Energy Modelers Architects & Engineers

Public Agencies & Offi i l P bli A i Officials

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SROI Methodology Step 4

Run the Model and Produce Results

Green Power Credit

Emissions Savings

GHG Savings
Health & Safety

=
Total Benefits

Reduced Energy Costs C t

Noise Reduction

Health & Safety

Cash Benefits

Non-Cash Benefits

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Examples of SROI Results

Fort Belvoir Hospital, Virginia US Army Hospital

SROI Annual Value of Benefits Energy Reduction Water Reduction Greenhouse Gases Savings Air Pollutants Savings Savings From Reduced Water Use Net Present Value Return on Investment Discounted Payback Period Internal Rate of Return (%) Benefit to Cost Ratio FROI Annual Value of Benefits Net Present Value Return on Investment

Current Design Alternative $1,284,097 $1 284 097 $1,388,514 $1 388 514 $474,470 $516,241 $80,039 $80,039 $163,461 $177,654 $558,039 $606,492 $8,088 $15,773,620 39.3% 4.6 31.0% 31 0% 4.7 Current Design $554,870 $4,353,935 $4 353 935 15.9% $8,088 $13,798,340 18.0% 7.7 18.1% 18 1% 2.8 Alternative $596,193 $1,391,047 $1 391 047 5.5% 25.0 6.8% 1.2

Notes The total value of the benefits in one year Cash benefit Cash benefit Non-cash benefit Non-cash benefit Non-cash benefit PV Benefits / PV All Costs Average Rate of Return on Capital Investment Time in years + discounted cash flow Discount rate making NPV = 0 PV Benefits / PV Costs Notes The total value of the benefits in first year PV Benefits / PV All Costs Average Rate of Return on Capital Investment Time in years to + positive discounted cash flow Discount rate making NPV = 0 PV Benefits / PV Costs

Discounted Payback Period 12.9 Internal Rate of Return (%) 14.2% Benefit to Cost Ratio 2.0

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Examples of SROI Results

Tehachapi Trade Corridor California BNSF Railroad Corridor,

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Examples of SROI Results

Future Community Hospital El Paso Hospital,
ITE
M

SUSTAINABLE TECHNOLOGY / DESIGN ELEMENT

IMPACT

NET PRESENT VALUE (8.8% NOMINAL DISCOUNT RATE) SROI FROI

($2,768,156)

NET PRESENT VALUE (4.8% NOMINAL DISCOUNT RATE) SROI

($1,423,265)

FROI
($2,446,650) ($34,064,372)

1 2 3 4 5 6 7 8 9 .10 11 12 13 14 15

THERMAL STORAGE CO-GENERATION OPTION #1 (FULL LOAD C O-GENERATION SHAVING) OPTION #2

LOAD SHIFTING TO REDUCE ELECTRICITY COST. I T SAVES

WATER CONSUMPTION

($2,277,950)

HEAT RECOVERY CHILLER ENERGY RECOVERY VENTILATOR GROUND SOURCE HEAT PUMP SOLAR HOT W ATER SOLAR PHOTOVOLTAICS GEOTHERMAL DIRECT HEATING HVAC EXHAUST WIND TURBINES ENERGY

LOAD S HIFTING OF THE FULL ELECTRICITY LOAD FROM THE ($7,519,001) (FULL LOAD) (PEAK LOAD S HIFTING OF THE PEAK ELECTRICITY LOAD FROM THE ($ , ($9,960,971) , ) ELECTRIC UTILITY TO NATURAL GAS (P EAK S HAVING) PRODUCES ELECTRICITY AND REDUCES NATURAL GAS AND $9,451,008
ELECTRIC UTILITY TO NATURAL GAS WATER CONSUMPTION

($29,128,501) $11,115,030

($ , ($14,754,989) ($11,599,363) ($21,409,068) , ) ($ , , ) ($ , , ) $5,373,148 ($492,549) $532,460 ($297,640) ($3,240,496) ($1,936,041) ($1,573,125) ($3,116,302) ($82,115) $929,241 $73,577 $20,496,349 $2,627,693 $7,480,615 $158,474 ($2,531,472) ($228,491) ($658,058) $1,323,187 ($94,223) $2,916,764 $79,618,918 $11,402,984 ($66,722) $3,314,412 ($215,818) ($3,776,996) ($1,512,578) ($1,857,096) ($3,554,027) ($141,415) $2,354,488 $276,584

REDUCES ELECTRICAL AND NATURAL GAS CONSUMPTION REDUCES ELECTRICAL AND NATURAL GAS CONSUMPTION REDUCES ELECTRICAL CONSUMPTION HOWEVER INCREASES
WATER CONSUMPTION

$758,508 $2,531,891 ($130,196) ($2,658,852) ($1,375,199) ($1,015,939)

PRODUCES
CONSUMPTION

ELECTRICITY

HOWEVER

INCREASES

WATER

REDUCES NATURAL GAS CONSUMPTION HOWEVER INCREASES

ELECTRICAL CONSUMPTION

RECOVERY

PRODUCES ELECTRICITY
HOWEVER INCREASES

ON-S ITE GREYWATER AND W ASTEWATER REDUCES WATER CONSUMPTION RECLAMATION, TREATMENT, AND RE-USE ELECTRICAL CONSUMPTION

($768,573) ($59,432) $1,199,726 $38,151,331

DISHWASHER W ATER RECOVERY AND RE- REDUCES WATER CONSUMPTION HOWEVER USE ELECTRICAL CONSUMPTION DIVERTS WASTE FROM LANDFILL HOWEVER RECYCLING STATION ON-SITE
ELECTRICAL CONSUMPTION

INCREASES

INCREASES

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HEPA F ILTRATION AT ALL AIR H ANDLING REDUCES HOSPITAL ACQUIRED INFECTIONS UNITS IN P ATIENT-C ARE AREAS INCREASES ELECTRICAL CONSUMPTION REDUCES HOSPITAL ACQUIRED INFECTIONS HYDROGEN PEROXIDE V APOR CLEANING
INCREASES ELECTRICAL CONSUMPTION

HOWEVER

HOWEVER

$121,065,684 $1,966,018

$253,166,523 $4,999,118

S-Curve Diagram

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Examples of SROI Results

Campus Sustainability Initiative, Baltimore - John Hopkins University Initiative
RISK ANALYSIS OF SUSTAINABLE INITIATIVES - JHU AVERAGE RETURN ON INVESTMENT

SROI
100% 27%

FROI
77% 57%

MEAN: 11%
90% 80% Probability of Not Exceeding y 70% 60% 50% 40% 30% 20% 10% 0% 0% 10% 15% 14% 14% 13% 12% 12% 11%

18%

MEAN: 43% 51% 50% 48% 47% 46% 45% 44%

16%
Externalities Health & Productivity

53%

11%
10% 10% 9% 9% 8% 7% 7%

37%

43%
42% 41% 40% 39% 38% 37% 36%

6%
5%

34%
31% 19%
20% 30% 40% 50% 60% 70% 80% 90% Total Return on Investment (%)

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Examples of SROI Results

Water Treatment Plant Denver - Metro Wastewater Reclamation District Plant,
The Net Present Value of Alternative 3: Diversify into Class A Product With Thermal Drying at Both Treatment Plants (Distributed Thermal Drying) (20 Year Study Period)
FROI
100%
-$136

ISROI
-$129 -$120 -$121 -$122 -$122 -$123 -$123 -$124 $ -$124 -$125

SROI
-$113 -$119 -$120 -$121 -$121 -$122 -$122 -$123 $ -$123 -$124 -$112

90% 80% 70%

Probab bility of Not Exceedi ing

-$137 -$138 -$139 -$140 -$140 -$141

60% 50% 40% 30% 20% 10% 0% -$160

-$155

$ -$141 -$142

-$142
-$143 -$143 $144 -$144 -$145 -$145 -$146 -$147 -$147 -$149 -$136

-$125
-$126 -$126 $127 -$127 -$127 -$128 -$128 -$129 -$130 -$131 -$135

-$124
-$125 -$125 $126 -$126 -$126 -$127

-$127 -$128 -$129 -$130

-$150

-$140

-$130
Total NPV (Millions)

-$120

-$110

-$100

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Scale of Application

Facility Campus p

City

State & Nationally y

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So Why Use SROI?

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Its 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, generate public support, secure funding, etc. l t bli t f di t

Questions?
HDR Practice Group Leader for SROI:

Stephane Larocque
SROI@hdrinc.com

Doing the right thing is good. Doing the right thing for the right reason and with the right te t o s even better. intention is e e bette
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