Making the Business Case for Sustainability Related Investments Through a Single Financial Metric

Abstract

Most firms have set procedures or thresholds for evaluating capital-intensive projects, such as a minimum level for the payback period or ROI on the project investment. While there is often uncertainty involved in projecting the cost savings or increases in revenue associated with the proposed project, for the most part, reasonable estimates exist for the future unknown parameter values that are needed to make the business case. In today’s business environment, almost every firm is starting to include sustainability-related projects in their regular review cycles. Investments in sustainability-related projects often include some type of cost savings associated with a decrease in the use of a non-renewable commodity such as oil, ore, or water. In these situations, managers often struggle when presenting their business case, in a manner that is understood and consistent with other investment options. One aspect that makes it particularly difficult is fuel, energy, and raw materials are commodities, whose prices fluctuate considerably; thus the resulting yearly savings from the more sustainable technology depend on the underlying assumptions about these prices. In this chapter, we show how the price of options to purchase the commodity at various stages in the future at today’s cost can be used to place a financial value on the savings attributed to sustainability-related investment. This technique provides a single, bottom-line number that managers are more familiar with when evaluating where to allocate a fixed investment budget among competing project proposals.