Sustainability 2.0 - May 2013

Sustainability should be a key consideration for major capital projects

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Meghan Harris

Executives in every sector face difficult decisions about where they should allocate their capital spend, which major capital projects (MCPs) to develop and how to assess the associated opportunities and risks.

At the same time, they face a number of challenges, such as growing demand from leadership to demonstrate return on investment (ROI), barriers to funding, growing stakeholder expectations and a restrictive regulatory environment. When moving forward with a new capital project, executives need to take all these factors into account.

Today there’s an additional layer in the decision-making process: companies are facing growing pressure to invest in local communities in order to maintain their “social licence” to operate. Also known as investing in sustainability, it’s becoming an increasingly important and integral component of many companies’ strategic planning.

The common challenge faced by all industries is how to qualify and quantify the business value of incorporating sustainability into project planning and operational decision-making. That has never been rigorously quantified, and can prevent the achievement of important objectives, including:

  • Maximization of the positive impact of sustainability investments
  • Understanding the business benefits and ROI of investing capital spend in sustainable initiatives
  • Prioritization of investment in sustainability programs
  • Comparison of sustainability investments against other possible investments

As the pressure grows for companies to measure and quantify the return on sustainability investments, there is an aggressive push for managers to take the following steps:

  • Understand the true business case of sustainability investments, to support capital spend and align sustainability investments in other business priorities and functions
  • Integrate sustainability across the organization in areas such as risk, finance, community investment, environment, health and safety, human resources, legal and procurement, and measure the impact of initiatives
  • Maximize ROI from sustainability investments and track their financial performance over time
  • Optimize the capital investment and operating budget planning cycles

It’s often challenging to justify spending millions to mitigate issues that can’t be anticipated or quantified. However, the price of overlooking these issues can be more costly in the form of delays, disruption, additional scope, changed orders, added costs, cancellation/expropriation, claims and post-project litigation.

By considering an investment in sustainability at the outset of capital project evaluation, companies can reduce costs in the long term. For example, investing in training programs to develop a local workforce enables the substitution of expensive expatriates with local talent and can generate long-term operational cost savings, as well as goodwill in the local community.

By using an effective measurement tool — such as the software tool the International Finance Corporation has developed that focuses on the valuation of sustainability investments at the project level — organizations can better understand the impact their sustainability investments have in financial terms, and how that translates into tangible business value.

It’s important to identify risk and embed the cost of sustainability in major capital projects at the outset of project planning and evaluation. Incorporating sustainability early in the overall project strategy will increase the likelihood that the investment will have the most meaningful impact on the project outcome and the impacted communities.