A new return on sustainable investment methodology enables companies to quantify the financial benefits of their business investments and sustainability initiatives to better demonstrate sustainable growth and long-term value creation
Sustainability is key to both business and societal progress, but many companies struggle to demonstrate the financial benefits of their sustainability initiatives, especially when tackling environmental, social & governance (ESG) concerns.
To address this, the NYU Stern Center for Sustainable Business (CSB) created the Return on Sustainability Investment (ROSI) methodology. This approach connects sustainability efforts with financial outcomes, providing a stronger business case for existing and future sustainability projects, according to Tensie Whelan, Director of NYU Stern Center for Sustainable Business.
From corporate C-Suite leaders, the ROSI framework provides a structured approach to enhancing business performance across social, environmental, and financial dimensions. It achieves this by integrating sustainability principles into the core business strategy, decision-making processes, and accounting practices. (Previously, we have underscored how to embed sustainability into core operations through risk management and financial workflows.)
By quantifying the comprehensive range of costs and benefits, including intangible factors, the ROSI framework enables organizations to drive sustainable growth and create long-term value.
How to calculate the ROI of sustainable business
Quantifying the return on investment in sustainable business initiatives with the ROSI methodology involves five steps, including:
1. Make sure existing sustainability initiatives align with the enterprise’s material issues — You should evaluate whether your organization’s sustainability initiatives correspond with the company’s significant issues. Notably, Whelan said she discovered that many companies have not yet clearly outlined their material sustainability strategies — those that address sustainability issues which have a considerable impact on the company or are significantly influenced by the company’s operations.
In her work with the automotive industry, Whelan and her team identified 16 strategies focused on addressing critical sustainability challenges, including waste management, innovation in products such as electric vehicles, and water conservation. These broad strategies typically span multiple activities that may not initially be recognized as part of these strategies but should be included in future ROSI calculations.
2. Assess practices that are put in place — You should also evaluate the practices that have been implemented. In many organizations, the practices associated with a particular sustainability strategy have developed over time, and it’s often not clear who fully understands these changes. Additionally, it may not be immediately evident which modified practices will be financially beneficial. In such cases, you should try to identify as many altered practices as possible for each strategy, without initially assessing their financial impact. Multidisciplinary teams are essential in recording these developments.
A CSB analysis of the automotive industry identified 240 modified practices. One particular practice, within the waste management strategy, involved recycling paint and solvents in order to lower emissions of volatile organic compounds.
3. Document positive outcomes — This step includes grouping the benefits into four drivers — risk management, innovation, operational efficiency, and employee retention. For instance, enhanced management of waste, energy, and water typically boosts operational efficiency.
4. Measure the financial value of benefits — The next step is to identify how to measure the economic impact of beneficial results. This can often be accomplished by comparing a new approach to an established standard. For example, to evaluate the value of recycling solvents in the automotive industry, a team collected data on the quantity of solvent reclaimed and recycled, the cost per unit of new solvent, the cost per unit for reclaiming and recycling solvents, and the price of water-based alternative solvents. Although this information was readily available, it had not been previously compiled for analysis, Whelan said.
5. Determine the total financial value — It’s important to note that each broad strategy consists of various specific practices. By summing up the financial impact (positive or negative) of each practice within a strategy, it becomes possible to pinpoint which strategies are most lucrative and where to allocate resources effectively. For instance, CSB gathered data from an automotive company regarding the economic effects of lowering harmful emissions through enhanced filtration systems and the implementation of solvent reuse and substitution. Then, to quantify the financial advantages of increased production efficiencies, the CSB team calculated the savings by multiplying the annual reduction in solvent usage by the average price of new solvent, resulting in yearly savings of $72 million.
More rigor, C-Suite and board involvement needed
Many corporate leaders well known for their leadership in sustainability too often lack the rigor in accounting for the financial benefits of their sustainable business strategies. In addition, companies sometimes focus too narrowly on just the financial analysis of capital investments. In some cases, these investments can reduce costs by conserving natural capital or enhance employee retention and productivity. This is why companies must expand the lens in which they analyze capital investments and quantify the monetary value of their sustainability activities with the same diligence and discipline that they use to quantify the value of their core operational activities.
Whelan highlighted the critical nature of having visible ownership of sustainability at the most senior levels of the company leadership, including the chief legal officer, the chief financial officer, and the chief information officer.
In fact, company management and the board of directors should discuss embedding a sustainability strategy and ROSI-inspired key performance metrics (KPIs), in addition to enhancing reporting and compliance.
Indeed, boards already are being held accountable for greenwashing and for inaction on material negative impacts, Whelan notes, adding that there is still a ways to go before boards demonstrate they have the right level of expertise. In 2018, 21% of board members among Fortune 100 companies had Social experience — the S of ESG — and only 6% of corporate directors had expertise in the E and G, according to CSB’s analysis. By 2023, almost half of the 1,171 board members had ESG credentials (13% E credentials, 15% G credentials and 21% S credentials) — an significant rise over five years. To many, however, that is not enough given the urgency.
To help expedite urgency, Whelan said she urges companies to use ROSI to assess the financial risks associated with inaction vs. action — or simply the value of maintaining the status quo vs. making investments to ensure the sustainability of the business. The consequences of inaction on the existential threat of climate change will disproportionately affect vulnerable populations, exacerbating human rights violations (including the right to life, health, and dignity), and thwarting access to basic needs like clean water, food, and safe shelter.
It will also threaten business viability if not addressed.
