Welcome to AIChE Academy on Sustainability Return on Investment or S-ROI.
I’m Lise Laurin of EarthShift Global and I’ve been working with S-ROI for the last fifteen years.
We’ve found it to be a powerful tool in our sustainability toolbox that improves our
ability to make investment decisions.
The S-ROI methodology arose from the Total Cost Assessment methodology developed at the
AIChE in the late 1990s. Starting with the fundamentals of corporate return on
investment accounting, the methodology adds an accounting of uncertainties, such as how
changes in the price of fuel will affect the financial return.
The methodology can also consider costs traditionally considered outside of the company’s
stewardship, such as the effects of pollution or changes in home values.
By considering how different stakeholders might be affected by the decision, companies explore
potential risks and opportunities and how they may affect the financial return.
By far the most comprehensive social assessment method developed to date,
S-ROI not only assesses the social risks and opportunities arising from the investment, it
assesses how those risks and opportunities may affect the company’s bottom line. By considering
the societal and environmental impacts in the same framework as the financial return on
investment, companies can bring all three pillars of sustainability into a single metric.
Companies use S-ROI to identify social risks — kind of a social risk assessment, and to
understand the economic implications of environmental risks. S-ROI helps industry
look at sustainability investments that don't meet the traditional criteria for return on investment,
and for traditional investments with high uncertainty. Since corporate experts value the
risks and uncertainty, the result is in line with corporate values and goals.
Although S-ROI was developed out of a methodology developed by industry, governments
have been using it from the beginning. The methodology not only brings the environmental
impacts into the decision, but it also identifies the winners and losers in the decision.
Since each group of stakeholders can make use of their own value system, decision-makers aren’t
caught by surprise when we don’t all react to the decision in the same way. We can also find ways
to make a decision win-win for all involved.
The last point applies no matter which organization is making the decision.
We nearly always learn something about the risks and opportunities involved in the decision
to allow us to give it a better opportunity of success. Perhaps equally important,
decision makers are able to see the potential range of outcomes, so they are not surprised
when the traditionally calculated ROI doesn’t materialize.
Traditionally S-ROI has been used for major decisions such as these. The advent of a new
S-ROI tool is allowing organizations to assess less costly decisions, such as
which waste-water treatment projects will provide the best S-ROI and should be funded first.
An early adopter of the methodology, Dow Chemical has used S-ROI to assess its
ten-year corporate sustainability goals for the last three cycles.
Typical return on investment calculations start with direct costs, such as capital equipment,
labor, and operational costs and revenues as well as indirect costs such as overhead and
insurance cost. The same values are used in S-ROI, and called Type I and II costs, and are
usually the starting point for the assessment.
But then the S-ROI starts looking at “what-if” scenarios.
Let’s say you were interested in replacing a toxic chemical with a more benign chemical.
With either chemical you may have the same likelihood of a spill, with the cost of cleanup.
With the toxic chemical, there might be fines and penalties involved.
There is a possibility an employee might get hurt resulting in a lawsuit.
These Type III costs are costs that, should the spill occur, will show up on the balance sheet
as type I or II costs. Of course if that employee gets hurt, it may result in poor employee morale.
The community may get upset about the spilled chemical and customers may stop purchasing.
Brand value issues are one of the largest contributors to the S-ROI results.
Type IV costs are very real costs but difficult to identify on the balance sheet.
The last set of costs, Type V costs, are costs to society. These are the costs to mitigate
eutrophication or the cost when someone is disabled. It may be the effect on housing prices.
These costs are typically not paid for by a corporation but may be absorbed by a
government, its residents, or future generations.
How do you do an S-ROI? Like any good assessment you start with your goal and scope.
Follow this with a traditional Return on Investment and an optional life cycle assessment.
LCA is a good tool for identifying environmental externalities, but is not necessary in all cases.
Next, identify the stakeholders in the decision. Who might be affected? If you’re working in
a government or NGO, find a representative stakeholder to bring in to the process.
If you’re working in a company, you may want to find an internal representative to provide
input on their behalf. Get them to buy in to your goal and scope and the methodology.
You’re going to come back to streamline the analysis over and over again. This is one of the
pieces that keeps the process manageable and achievable within a reasonable time period.
Bring in your stakeholders or stakeholder representatives into a workshop
or, if you’re using a social-media enabled tool like 3Pillars, you may want to hold a web meeting.
Corporate studies usually use representatives from within the company, while government and
NGO studies will bring in outside stakeholders. Have the group identify stakeholders.
You’ll be surprised at the stakeholders that the group identifies. For each stakeholder,
identify the risks and opportunities and the costs and benefits associated with them.
Next, crunch the numbers and feedback to your team. Allow the group to revise their input
if needed and rerun the analysis. Then feed the results to the decision makers to include with
their other decision-making tools. Remember that S-ROI is only one of many decision-making tools.
Some people think that it doesn’t make sense to monetize things like human health impacts
of pollution. Yet we do it all the time. Insurance companies have a cost limit for extending
life by a year, for instance. As a society, we agree to pay taxes to clean up “Superfund” sites
and define what “Superfund” means. Of course we don’t all really agree to the same value
and there are many ways to look at the same impact. S-ROI allows us to apply several value
systems and see what the range of outcomes is. That way all stakeholders are represented in
the results and the decision maker can see the best and worst case results,
as well as the most likely outcome.
As part of the S-ROI process, the study team is identifying the probability that an uncertain
event will occur. Unlike flipping a coin, there is usually no mathematical way of determining the
probability that something will happen, so we need to rely on our experiences to guide us.
If we had no experience, we might have no idea what the probability of something occurring is,
so we might say it’s a 50/50 chance. But for many of the events that are predicted in a study,
there is considerable expertise among the stakeholders. We use this expertise to apply
more educated probability ranges. Dialog is an important piece needed to effectively measure
social impacts. When that dialog is constructive, stakeholders begin to understand each other
better and can begin working toward win-win solutions. With S-ROI, we include all the
perspectives. If one person says the probability of a strike is 50%, for example, but another one
says, “No way; our employees won’t strike!” we accept the full range of 0-50% probability.
There is no right answer, so there’s no need to argue over it. This starts to put people on the
same side of the table, working toward something positive for each. We also find that when we
monetize, it cuts to the chase. We’re talking about the stuff that really matters to people.
The whole method is transparent which encourages confidence in the system.
People often ask, “Do we have to have a team involved? Can’t we just use something like social
LCA to get our social impacts?” Aside from the incredible buy-in that you get when you get your
stakeholders involved, dialog prevents unintended consequences. One of the metrics in social LCA
and many other social impact assessments is child labor. Yet when companies made their
purchasing decisions purely based on whether or not child labor was involved, it had devastating
consequences. Instead of those children going to school, they were sent back to their parents
who had nothing to feed them, or they ended up prey to human traffickers. When we talk through
the risks, we can see that by stopping buying from the companies that employ these children,
we do nothing to help them. Instead, we may see opportunities to make our investment win-win;
helping to get the children educated, for example, resulting in a dedicated and educated workforce
for the future. In addition, the S-ROI process brings out social issues that are typically not well
handled by metrics-based assessment. Among many cultures, the ability of a woman to stay at
home with her children is considered a good thing. In these cultures, they care little about
the percentage of women in CEO roles, for example. There is really no right or wrong here,
just a difference in values. S-ROI allows for these differences and supports the stakeholder’s own
value system. Another example is in the area of waste management. New York City wants its
garbage to disappear. At the same time, towns in rural Appalachia are welcoming the city’s
garbage — why? Because the tipping fees are paying for their children’s schooling.
For those people, the health risks and land use associated with landfills are an easy tradeoff
for getting their kids a better education. Again, there is no “wrong” value system here.
Both the New Yorkers and the rural people have the right to their own values, and the result is
a win-win for both. You may be wondering at this point how we address environmental impacts.
As we discussed before, we typically start with a Life Cycle Assessment or LCA. It is easiest to
assess the LCA results using what we call endpoint metrics, such as human health and
resource depletion. LCA human health impacts are typically assessed in Disability Adjusted
Life Years or DALYs. Insurance companies and the World Health Organization also use DALYs
and both have cost values for them. Companies can use the insurance values and governments
will often use the World Health Organization values of three times per capita GDP.
One of the beauties of S-ROI is that you can use a range between these two values and see how
that affects your results. Carbon markets and remediation costs are other ways of assessing
environmental impacts and can be useful at the midpoint level. EarthShift Global has developed a
database of intangible costs (both internal and external) from the published literature.
In the end, however it's the stakeholders who have the final say into the costs used.
To wrap up today’s discussion, S-ROI is a comprehensive sustainability assessment
and it can bring the results of other assessments in to provide broader insight.
LCA, Environmental Risk Assessment, and Ecosystem Service Valuation can all be included
in this single study.
Thank you for your interest in S-ROI Part 1. Join me at your convenience for Part 2.
If you have questions, please do not hesitate to contact me at the email or phone number on this screen.