(127e) Assessing the Total Costs and Benefits of Sustainability Projects

Superior environmental and social performance can lead to real economic benefits to a business, such as more efficient use of natural resources, lower risks, improved stakeholder relations, innovation, and access to new markets. Nevertheless, the value of projects and initiatives driven by sustainability thinking (i.e., systemic consideration of environmental, social, and economic impacts) are often not captured in traditional planning and capital budgeting frameworks. Intangible and societal impacts that can benefit the business in the long-term1 are typically not considered. Therefore, approaches which assess the full value of sustainability projects and initiatives are needed for sustainability thinking to be successfully integrated into business decision-making.

Various monetary and semi-quantitative frameworks are available to assess a fuller set of costs and benefits. Existing approaches, however, are typically too complex for day-to-day decision-making, especially at project-level planning and capital budgeting. Recently, Golder Associates has assisted the development of practical valuation approaches for the Port of Houston Authority and for Caterpillar Inc., which will be reported in this presentation.

Existing approaches

Incorporating environmental and social cost and benefit considerations in business decision-making is commonly done using monetary valuation or semi-quantitative weighting. The Total Cost Assessment (TCA) methodology, developed by an industry consortium at the American Institute of Chemical Engineers (AIChE), provides a useful monetary valuation framework for identifying a fuller set of costs, as well as benefits in terms of cost avoidance.2,3 In addition to the conventional direct and indirect costs, the methodology calls for the valuation of future and contingent liabilities, intangible costs such as impacts on reputation and market access, and societal costs, i.e., costs that are real but not borne by the company. Monetary values of the non-conventional costs are typically determined through workshop deliberations. TCA has been applied in industry, such as in estimating the monetary benefits of the 10-year environmental, health and safety goals at Dow Chemical Company.6,7 Nevertheless, arriving at monetary estimates can easily become a resource intensive process °X sometime even contentious especially in determining intangible costs °X that makes it impractical for day-to-day decision making.

The semi-quantitative approach typically involves normalization and weighting, as outlined in the ISO 14040-series of standards on life-cycle assessment. The total impact from each category (e.g. total energy use or total global warming potential) is first normalized to a reference value. The reference value can be the impact within a geographical boundary (i.e. local, regional, or global), or other benchmark values (e.g. company-wide total, industry average, etc.). Weighting values (usually in percent) may be determined by a panel of stakeholders and applied to the normalized impacts to produce a single-value impact score. A slightly modified version of the ISO 14040-series normalization and weighting methodology is used in generating aggregate indices in the eco-efficiency and socio-eco-efficiency analysis by BASF.8,9 This methodology however requires quantifiable metrics and is not readily applicable to many social and business impacts.

Our Approach

BRIDGES to Sustainability, now a division of Golder Associates Inc. (Golder), has worked on developing approaches to simplify the consideration of sustainability costs and benefits in business decision-making. This includes the development of societal cost databases. Our early work has shown that societal costs are often internalized over time, and thus can be used as proxies for future business costs.1 Databases on societal cost estimates of climate change, urban air pollution, and water eutrophication per unit mass of pollutants have been developed.8,9 The societal cost estimates can then be adjusted for background pollution level and the size of population affected and one can then select the appropriate ranges of costs to apply in decision-making.

Nevertheless, using societal costs as proxies for future business costs does not in itself consider the likelihood and timing of the costs being internalized by a business. Furthermore, few societal cost (and benefit) estimates have been made in the literature beyond some of the more tangible environmental impacts. Therefore, Golder has developed an alternative approach where factors that affect the hard-to-quantify business costs and benefits can be qualitatively estimated as high, medium, or low, with guidance on what each level of estimate means. A weighted scoring system can then be applied for decision-making. This approach has been refined and applied in Golder's recent work with clients, as discussed below.

Applications at the Port of Houston Authority

The Port of Houston Authority (PHA) recently developed with Golder an "environmental sustainability matrix" to assess the costs and benefits of environmental projects beyond traditional accounting to include intangible, societal, and systems impacts. The tool is designed to support project planning and capital budgeting decisions, ensure environmental stewardship, and assist with the integration of sustainability into long-term planning.

Figure 1. Cost-Benefit Assessment Tool for the Port of Houston Authority

Figure 1 shows an example of an application of PHA's cost-benefit assessment tool. The following costs and benefits are considered in the tool:

?P Conventional costs and benefits: This includes direct and indirect costs and revenues, calculated through conventional approaches. ?P Liability costs: Liability is scored based on the financial magnitude of the liability and the likelihood of occurrence, each qualitatively estimated to be high, medium, or low. ?P Non-financial impacts °X weighted by relevance to PHA: Similar to ISO 14040-series methodology for normalization and weighting, estimated environmental impacts of a project (such as mass of emissions reduced) are normalized to a reference value (such as total port emissions) to obtain a dimensionless impact score. Other impacts, such as nuisance and socioeconomic impacts, are difficult to quantify and are therefore qualitatively estimated as high, medium, or low. The impact scores are then weighted by relevance of each impact to PHA (e.g., impacts related to its strategic targets are weighted as high relevance). ?P Non-financial impacts °X weighted by level of concern to stakeholders: This category considers how a project affects various stakeholder groups, including staff, community, port tenants, and the regulators. Impact scores are weighted by level of concern to each stakeholder group and relevance of each stakeholder group to the port's business.

Scores shown in Figure 1 denote improvements from a baseline case that represents business-as-usual. To allow a reasonable degree of consistency in qualitative estimates, guidelines on what constitutes high, medium, or low. The "relevance to the port" and "level of concern to stakeholders" weighting generally do not change from project to project.

The tool allows users to consider costs and benefits that are significant but often ignored and makes the decision-making process and assumptions more explicit. The tool has been applied to evaluate air emission reduction and construction waste management alternatives.

Applications at Caterpillar Inc.

Golder has also assisted Caterpillar Inc. in developing a similar approach for assessing the environmental and social benefits of proposed technology projects to support internal funding decisions. Called the "sustainability filter," it complements Caterpillar's existing tools that calculate conventional costs and benefits and assess business impacts. Figure 2 illustrates the structure of Caterpillar's sustainability filter.

Figure 2. Caterpillar Inc.'s Sustainability Filter

Impacts of a proposed project on environment, health and safety as well as broader societal issues are considered for Caterpillar's products, facilities, and in the "general" category. The "general" category examines more systemic processes and impacts such as integration of life-cycle thinking and the expected socioeconomic impacts of the proposed project. The tool is designed for simplicity and ease of use and is question-driven. Impacts are qualitatively estimated to be high, medium, low, or none with guidance on what each level of estimate means. The expected impacts are then weighted by relevance to the company in coming up with the total score for each category and for the overall assessment. The tool has been applied at Caterpillar to inform internal funding decisions for all corporate research and development projects.

Conclusions

Practical approaches to incorporating sustainability costs and benefits can be developed through a hybrid approach that combine financial estimates with semi-quantitative assessment of environmental, social, and socioeconomic cost and benefit drivers that are more difficult to quantify. Such practical approaches are critical in integrating sustainability thinking into business decision-making.