Measuring Social and Environmental Impact (Sustainable Return)
Recently it has become increasingly difficult to secure investment for your project without a clear idea of what value in terms of sustainability your project brings. In this chapter we shall look at the definition of Sustainable Return on Investment (SROI), review the United Nations’ Sustainable Development Goals, build up a framework and methodology for measuring and reporting the SROI, and look at an alternative methodology.
From working through this chapter, you should increasingly see the interconnectivity between your sustainable project and the United Nation’s (UN’s) 17 Sustainable Development Goals (SDGs). As we have discussed earlier, these goals have been set in order to face the challenges faced by humanity. This chapter will encourage you to integrate your project with these SDGs to maximize the overall impact of your project, which will in turn mean that the project attracts the right stakeholders.
Taking the development of a project from the perspective of SROI, you should look at the maximization of two metrics—Financial Return on Investment and Sustainable Return on Investment. In that context, these two are inextricably linked. Nevertheless, we shall also briefly go over an alternative methodology, the Total Cost Assessment (TCA), which is an approach that arrives at the same result of a comprehensive, “triple bottom line” project valuation.
Finally, I intend for you to, above all, appreciate from this chapter how energy underpins all human activity on the planet and that your efforts as a sustainable energy developer will be crucial to safeguarding the future of humanity on this planet.
The topic of sustainability is gaining in urgency as humanity becomes increasingly aware of the threats it faces. Our environment and natural habitat, thanks to the negative effects of climate change and greenhouse gas emissions, are becoming increasingly fragile and this, in turn, poses far-reaching problems to human beings and society at large. In short, humanity is facing an existential threat and your actions in maximizing the sustainability of your project will contribute to mitigating that threat.
We return to our earlier definition of sustainability; this is the meeting point where economic, social, and environmental benefits all come together as shown in Figure 9.1.
Sustainability, when delivering an energy project, means that the interests of society as a whole are met, not just those of a few stakeholders. There are countless examples from the oil and gas, chemicals, pharmaceutical, and industrial processing industries of environmental and health-related disasters. For you as a sustainable energy developer, it means that you are committed to provide energy without causing environmental damage or causing other negative externalities on society. Calculating the SROI will help you communicate the full value of your project by reporting not just the direct cash benefits but also the indirect and noncash effects that your project will have and present these as a monetary value. This the first step in defining SROI—it seeks to account for a project’s triple bottom line. This means that we can estimate the monetary value of a project by accounting for its environmental, social and economic impacts. Benefits that can be generated from a positive triple bottom line could be a reduction in greenhouse gas emissions, reduced air pollution, amount of water conserved, and so on. All of these would, I hope, be the benefits of the kinds of projects dealt with in this book.
Figure 9.1 The interaction of economic, social, and environmental benefits
You will recall the UN’s published 17 interconnected SDGs to help act as a blueprint to meet the challenge that humanity faces and that SDG 7, which tackles Affordable and Clean Energy, is our focus in this book.
By nature, however, energy touches pretty much every area of human activity; this means that in all likelihood your sustainable project will be interconnected with many of the other SDGs:
1. No Poverty
2. Zero Hunger
3. Good Health and Well-Being
4. Quality Education
5. Gender Equality
6. Clean Water and Sanitation
7. Affordable and Clean Energy
8. Decent Work and Economic Growth
9. Industry, Innovation, and Infrastructure
10. Reduced Inequalities
11. Sustainable Cities and Communities
12. Responsible Consumption and Production
13. Climate Action
14. Life Below Water
15. Life on Land
16. Peace, Justice, and Strong Institutions
17. Partnerships for the Goals
Why is Goal 7 important? All sectors of economic activity are supported by energy—businesses, agriculture, medicine, manufacturing, and high technology all use vast amounts of energy. In Sub-Saharan Africa alone, according to International Energy Agency (IEA) figures for 2018, around 600 million people lack access to electricity. More attention is needed to increase the use of renewable energy, improve energy efficiency and improve the access to safe cooking fuels and technologies for three billion people globally.
Our centuries-old dependence on fossil fuels have produced huge amounts of greenhouse gases, which cause climate change and harm the environment and people’s health. In a world where global consumption of electricity is expected to increase, a sustainable supply of electricity for the future will be needed to prevent poorer countries from being left behind.
At a time when we have seen the world paralyzed by the COVID-19 pandemic, the lack of access to energy may undermine future efforts to fight diseases and pandemics. Goal 7 has the following targets:
7.1 By 2030, ensure universal access to affordable, reliable and modern energy services
7.2 By 2030, increase substantially the share of renewable energy in the global energy mix
7.3 By 2030, double the global rate of improvement in energy efficiency
7.A By 2030, enhance international cooperation to facilitate access to clean energy research and technology, including renewable energy, energy efficiency and advanced and cleaner fossil-fuel technology, and promote investment in energy infrastructure and clean energy technology
7.B By 2030, expand infrastructure and upgrade technology for supplying modern and sustainable energy services for all in developing countries, in particular least developed countries, small island developing States, and land-locked developing countries, in accordance with their respective programmes of support.1
One can make a strong argument for placing Goal 7 as one of the most important, as access to energy boosts economic and social activity that can deliver lasting change. Goal 7 focuses on improving the access to electricity in poorer countries, increasing both energy efficiency and the share of renewable energy in electricity sector.
It will be a strong motivator and helpful for you as an energy developer to be mindful and aware of how your energy project promotes or benefits the other 16 SDGs previously mentioned. It will therefore be of use, when building your SROI framework, to identify how many of the aforementioned SDGs directly or indirectly relate to your project and then measure the project’s overall benefit to each SDG.
Having a project with a high SROI means that you both identify and measure the societal, environmental, and economic benefits of your project to all stakeholders including investors. By measuring and reporting the sustainable return throughout the project lifecycle, you will build up a strong ability to view your project through the lens of these interconnected elements and hence be in a strong position to sell your project to the relevant stakeholders. Indeed, under every possible SDG affected, your project may have stakeholders who will need to be involved in the project at some level.
With this in mind, let us now turn to the methodology for identifying and quantifying your SROI.
The standard seven-principle model for the measurement of sustainable return is as follows:
1. Stakeholders: involving everyone who is changed by your project. Involving them in planning what gets measured and how.
2. Understand what changes: develop a story of change and gather evidence of both positive and negative change.
3. Value the things that matter: rate the importance of different outcomes by valuing the economic, social, and environmental benefits and costs of your project.
4. Only include what is material: report on what is relevant and significant.
5. Do not overclaim: compare your results with what would have happened anyway.
6. Be transparent: clearly explain all assumptions and evidence.
7. Verify the results: make use of others to check your results.
With the above principles in mind, we can now outline the steps for undertaking an SROI:
A. Defining the boundaries (Objective and Scope): A specific geographic area covering your project will need to be chosen over a time span matching that of the life span of the project. At this stage, you should have mapped out all the economic, social, and environmental variables of your project and classed them into either costs or benefits. Once the initial mapping is completed, you assign monetary values to each of the variables (see step E below). If needed, you may have to use probability distributions to determine a realistic monetary value for the variable.
B. Identification and Selection of Key Stakeholders: Identify all relevant actors who are affected by or who influence the project (positively or negatively). You should use whatever means are effective to bring these stakeholders on board with the project.
C. Develop the Business Plan: Representatives of all stakeholders take part in the creation of the business plan. At this point, you should refer to the 17 SDGs and identify which of these will be impacted by your project. You should work with the relevant stakeholders to tell the story of how they were involved in the project and their perception of how their lives were changed or will change.
D. What goes in (identify inputs for each outcome) and what comes out (results). For each intended outcome, there are many different investments and costs linked to the realization of the outcome.
E. Valuation is the process of developing indicators that turn the articulated costs and benefits into a monetary value. By nature, some benefits and costs are easier to value than others are for example, electricity costs, greenhouse emissions and so on. You may need to employ different tools to tackle different indicators such as opportunity cost, value ranking, probability distribution and so on.
F. Calculation of the SROI ratio: By calculating the SROI ratio you are making a comparison between the inputs (investments) on the one hand and the economic, social, and environmental benefits (outcomes) on the other. It goes without saying that solid research data enhances the credibility of the ratio derived.
G. Narratives are seen as the qualitative accounts that complement the quantitative (the SROI ratio). They provide the context around the ratio and provide reflection on what cannot be captured within the ratio.
H. Verification is done through the analyses either by triangulation or by other means. Verifying the narratives as well as the quantitative data from different stakeholder perspectives is important as it builds and maintains on the trust and collective ownership of the project.
From Theory to Practice
The previous steps are all you need to undertake in order to obtain the SROI. Let’s look at simple case: for a typical energy project you will have a set of data inputs that will cover the following:
1. Energy
2. Emissions
3. Site development
4. Community values
5. Corporate responsibility
6. Waste, water, and other utilities
Once you have the inputs, you go through the process described previously to arrive at the Costs and Benefits Outputs. For a typical renewable energy project, these outputs should include the following:
1. Greenhouse gas savings
2. Energy cost savings
3. Air pollution savings
Assigning a monetary value to the above is not always straightforward but can be determined by drawing on evidence, where possible. For example, some greenhouse gases are traded, such as CO2 and so a monetary value on the tons of CO2 saved by your project can be determined. By contrast, energy cost savings are relatively straightforward to calculate, as you should know what is the cost of the electricity you are displacing. Quantifying the savings incurred from reductions in air pollution will require you to collaborate closely with stakeholders such as local environmental or public health agencies. This process of assessment is demonstrated in Figure 9.2.
Figure 9.2 Steps to arrive at Costs and Benefits output of a typical energy project
Table 9.1 Projecting and discounting the monetary value of your project’s costs and benefits outputs
Year 1 |
Year 2 |
Year 3 |
Year 4 |
Year 5 |
|
Benefits Energy costs savings GHG Savings Air pollution savings Water savings Green jobs creation |
$100,000 |
$75,000 |
$50,000 |
$50,000 |
$50,000 |
Discounted values |
$$$ |
$$$ |
$$$ |
$$$ |
$$$ |
Present value |
$$$ |
Once you have assigned monetary values to your benefits then you will have to project and discount them as you would your project’s cash flows as per Table 9.1.
The net present value (NPV) of your SROI would simply be the difference between the present value of all benefits and the present value of all costs.
In cases where you cannot arrive at a monetary value of the benefits, it still pays to present these in a simple format for example, number of green jobs created, tons of NOX emissions saved and so on.
The SROI ratio is simply the value obtained after dividing the discounted value of the benefits by the total investment:
SROI ratio = Present Value/Total investment
You will seek to generate a positive SROI—if the ratio is 3:1 that means that for every dollar invested your project will generate sustainability value worth three dollars. From the above, it should be clear that the success of your calculation of SROI depends heavily on two factors: accurate data and well-coordinated facilitation of the multiple stakeholders in the project.
An alternative means of arriving at the same result is that of Total Cost Assessment (TCA). This methodology was created by chemical manufacturers and published through the Journal of the American Institute of Chemical Engineers. This methodology was intended to take health and environmental costs, which at times can be very unpredictable, into consideration in order to aid decision making around investments.
As in the SROI methodology, you begin by listing all the costs and benefits with the difference being that you categorize these costs and benefits as either internal (borne by the company) or external (borne by society at large). Economists call the latter “externalities” and far too many projects in the past have caused such external costs with no mitigation cost borne by the project sponsor.
In addition to direct and indirect costs and benefits, TCA takes into account contingent liabilities and internal and external intangibles. Bringing all of these together you can build up the list below:
1. Direct costs: These will be one-off costs such as Capex and recurring costs such as Opex and maintenance costs.
2. Indirect costs: Project development costs including reporting and feasibility studies. The rule of thumb here is to place costs that are not directly attributable to the production of the energy that your project sells, into this category.
3. Future and contingent liability costs: Any potential liabilities incurred by accidents or noncompliance. You should quantify any costs that can arise from things going wrong during construction and operations. You will need to rely on third parties and information from similar projects to help in defining these costs.
4. Intangible internal costs: Community relations costs, employee, and staff welfare. These can be difficult to measure from the outset and the true nature of their scale may only be known after a sustained period of operations.
5. Intangible external costs: Negative effects on environment, natural habitat, and public health. Again, these can be hard to measure so you will need to rely on some sort of probabilistic analysis involving historical data.
From this we can see that the TCA methodology, like SROI, looks at all three main aspects of sustainability (environmental, social, and economic) but comes at it from a different aspect of looking exclusively at costs and at minimizing these. The logic of this being that, by minimizing the environmental, economic, and social costs of a project, we are best placed to maximize the project’s benefits to society as a whole. Where TCA falls short of SROI is that SROI considers the potential benefits of all variables as well as the costs. Further details on the TCA methodology can be found in the list of references at the end of this book.
1 https://sdgs.un.org/goals/goal7