Sustainability Pays Off: Return on Sustainability Investment (ROSI) Methodology Makes the Business Case

Companies today often find themselves in a quandary when it comes to sustainable initiatives. While sustainability leaders focus on enhancing environmental and social performance by decreasing emissions, conserving resources, minimizing waste, and partnering with responsible vendors, financial leaders have additional concerns.

How do sustainability initiatives impact the bottom line and drive top-line growth? Will the initiative boost reputation and market share by connecting with clients or consumers? How certain are these benefits, and will the financial returns be significant?

“In order for organizations and entire industries to address the sustainability challenges that are accelerating in terms of risk — as well as opportunity — they need to be able to scale their sustainability efforts much more quickly,” said Tensie Whelan, the director of the New York University (NYU) Stern Center for Sustainable Business. “Scaling up requires understanding the business case to make larger investments, but it’s difficult for companies to calculate the financial returns, particularly when it comes to more intangible benefits like recruitment and retention of talent.”

The NYU Stern Center for Sustainable Business, in part in collaboration with ALO Advisors, developed the open-source Return on Sustainability Investment (ROSI™) methodology to bridge the gap between sustainability strategies and financial performance.

With ALO Advisors now a part of SWCA Environmental Consultants, we had the opportunity to sit down with sustainability and management consulting experts John Platko, Miriam Cavazos, and Kathia Elizondo, along with Whelan.

In our conversation, we learned about the ROSI methodology and how the team has applied it in various industries and discovered how these opportunities to build business cases for innovative initiatives allowed clients to advance their goals in decarbonization, circularity, climate change resilience, and more.

Understanding Value Drivers for Sustainability Investments

Sustainability investments have grown in the last decade, partially because of pressures from investors for companies to improve their performance and disclosures on environmental, social, and governance (ESG) criteria, and partially because organizations have recognized a host of additional benefits.

When a company invests in sustainability strategies and practices, it can positively impact a range of areas, including customer loyalty, employee retention and productivity, innovation, media coverage, operational efficiency, risk management, sales and marketing, supplier relations, and stakeholder engagement. To identify, quantify, and monetize these particular benefits, enter the ROSI methodology.

When companies embed sustainability, this influences a suite of mediating factors that drive financial benefits for businesses and society, which can be quantified and monetized. Image source: NYU Stern Center for Sustainable Business.

To monetize these areas, also referred to as mediating factors, a systematic process is required. ROSI helps bring a common language and measurement scale to the potential benefits and costs associated when pursuing sustainability strategies and practices. Centered around the mediating factors that have been shown to drive profits, increase corporate valuation, and reduce costs, the ROSI framework enables companies to assess the financial returns on their sustainability projects and initiatives.

Organizations can apply ROSI to look retrospectively at the value created by sustainability strategies, to track sustainability-related financial performance, and to assess the potential return on investment of future sustainability initiatives.

“ROSI is a flexible, fit-for-purpose tool that can be applied to any organization, sector, or particular sustainability effort,” explains Cavazos, project sustainability analyst at SWCA. “We help companies analyze, for example, how water scarcity will impact their business in the future. We work with the energy sector to help companies understand if switching energy sources is a viable case. ROSI can even be used to evaluate the consequences of inaction, helping businesses understand how much it will cost them if they don’t invest now – and then, identify the best time to invest.”

The ROSI Methodology Walks Through Five Steps:

• Assess Opportunities and Risks: Identify the material sustainability strategies for the sector and the company, using rating or reporting tools such as the Sustainability Accounting Standards Board (SASB) or Global Reporting Initiative (GRI) as guides. These strategies are often as broad as improving waste management or investing in water conservation and can encompass many activities, so it is important to define which are material* to focus the analysis. For example, an oil and gas company that sees a risk in its water usage might focus on assessing the feasibility of decreasing its freshwater usage.
  • *Materiality, in the context of environmental, social, and corporate governance (ESG), refers to the effectiveness and financial significance of a specific measure as part of a company’s overall ESG analysis. Material factors are financial elements deemed fundamental to the long-term success of a company’s ESG strategy.
• Identify Associated Strategies: For each sustainability strategy, identify the necessary changes in business practice. What specific practices can be implemented to impact these strategies? Referring to the oil and gas company example, a specific practice aligned with the challenge around freshwater is to explore alternative sources or to increase the use of non-potable water to reduce the use of potable or freshwater sources.
• Determine Expected Benefits: Determine the potential or realized financial and societal benefits of these practices, through the lens of the mediating factors of financial performance (innovation, operational efficiency, supplier loyalty, etc.). For instance, better waste, energy, and water management generally improve operational efficiency. Others may not be as obvious. Take mining companies, for example. By investing in a sustainability initiative and engaging with the community (which falls under the stakeholder relations mediating factor), the company can speed up regulatory approval and reduce the amount of time needed to move projects forward.
• Quantify Results of Benefits: Define how to assess the financial value of these benefits through established benchmarks and available data. For example, a power company could consider changes to its cost of equity by switching to sustainable power sources. The company could use external studies to understand the percent reduction in the cost of equity realized by companies with high corporate social responsibility scores, apply those factors to their forecast calculations, and compare them with their current values.
• Monetize the Benefits: Apply a monetization process to calculate monetary values for the intangible and tangible benefits. For example, in the case of the oil and gas company exploring how to decrease its freshwater usage, the company could calculate the cost of recovering wastewater and compare it to the cost of reusing water or even changing water sources for internal processes to see what sustainability practice drives the most financial value.

“Quantifying and monetizing the tangible and intangible benefits is the fun part. It’s complex, but that’s where our passion and expertise align,” says Elizondo, strategy management team lead at SWCA. “Based on a variety of data sources, we develop the formulas and calculations specific to the organization’s sustainability desires to run two analyses – one that models if they continue their work business as usual and one that accounts for implementing a particular sustainability strategy. It’s the difference between those two that demonstrate the financial return on investment or the costs of inaction.”

Power Producer Applies ROSI to See Value of Expediting Decarbonization

When Canada announced its decision to phase out coal-fired electricity by 2030, a North American power producer’s coal fleet suddenly became a significant risk. Recognizing the consequences of inaction, the company partnered with ALO Advisors and NYU Stern Center for Sustainable Business to apply the ROSI framework to assess whether it should phase out coal sooner than required.

“Because it’s based on financial and practical analyses, ROSI is a key tool to support decision making and deciding if a sustainable investment makes economic sense,” says Platko, vice president of sustainability and management consulting at SWCA. “When the economics work, the environmental and social benefits that we try to create last. When the economics don’t work, the benefits don’t last.”

As the initial step in this process, the company conducted a materiality assessment. Key internal and external stakeholders were engaged to identify the most impactful ESG issues for the company. Climate change emerged as the most substantial risk. It became clear that the company needed to formulate a business plan to transform into a more sustainable energy provider.

Leaders from various corporate functions participated in a comprehensive two-day workshop aimed at defining an action plan to address ESG issues, with a strong emphasis on climate change. The group concluded that a pivotal step toward becoming a more sustainable business would involve accelerating the reduction in the use of coal as a fuel source and establishing competitive greenhouse gas emission reduction targets.

Subsequently, the team analyzed which of the mediating factors could reflect the benefits and value of a quicker transition away from coal. Key factors included lower cost of debt, lower cost of equity, and improved employee productivity and retention. Several studies have shown that companies with good sustainability practices are perceived as less risky, and therefore have lower costs to take on debt. Sustainable companies also have lower expected rates of return from investors, and therefore lower costs of equity. Studies have also shown that employees are more engaged, and therefore more productive and less likely to leave when they feel their employer values sustainability.

“Through the ROSI methodology, we can provide all the data and insights to make visions into reality, which is the backbone of creating and implementing sustainability strategies that are supported by economics and research,” explains Elizondo.

Working closely with the power producer’s corporate finance team, the consulting team established equations to estimate the value increases resulting from each of these mediating factors. As a result, it became evident that all four benefits had a positive effect on the company’s bottom line. Consequently, the company made a public commitment to accelerate its transition to natural gas at one of its generating stations that had previously relied on coal. The company expects to save approximately $31 million over ten years by switching to natural gas at the generating station. By considering the potential financial gains stemming from sustainability initiatives, the company was able to make an informed and profitable decision.

“You have better tools to determine where you should be making and scaling up investment,” says Whelan, underscoring the significance of using ROSI to reach this decision.

See a detailed case study in “Using the Return on Sustainability Investment (ROSI) Framework to Value Accelerated Decarbonization.”

ROSI Uncovers the Advantages of Adopting Green Hydrogen

In 2022, ALO Advisors analyzed the added advantages of adopting green hydrogen as a step to reduce reliance on natural gas for a consumer goods manufacturer’s facility in the United Kingdom.

The project didn’t initially advance as the cost of implementing green hydrogen was found to surpass that of natural gas, owing to its experimental nature as well as the associated production expenses.

“In this case, the initial cost analysis showing green hydrogen to be more expensive than natural gas is not surprising. Implementing green hydrogen strategies is still in the early stages, and initial investments can be higher,” explains Cavazos. “However, with ROSI, we consider the long-term benefits, including intangible opportunities and enhanced resilience in a changing market.”

Upon reevaluation through the ROSI methodology, it became evident that the project entailed intangible benefits in addition to the enhancement of energy efficiency that far outweighed its costs. The analysis revealed fewer greenhouse gas taxes, forecasted sales growth, and the ability to secure a federal grant in the United Kingdom, in support of the company’s commitment to exploring innovative energy sources.

With the project moving ahead, this global consumer products company now anticipates the elimination of more than 25,000 metric tons of greenhouse gases annually, representing an approximate 35% reduction in Scope 1 emissions across all its operations in the United Kingdom. They are also receiving public recognition for their leadership as the first among competitors to pursue decarbonization of thermal energy sources by planning this switch from natural gas to hydrogen made with renewable power.

This strategic move also enables the company to incorporate a further testament to its sustainability efforts into its product portfolio, which could attract new sales and revenue. Research from the NYU Stern Center for Sustainable Business found that products made sustainably experience double the growth rate compared to their conventional counterparts, commanding an average premium of 28%.

By using the insights derived from the ROSI analysis, the manufacturer shared its project plans and articulated the anticipated impact on the company’s 2030 sustainability goals.

Primary Advantages of Return on Sustainability Investment

• Understanding the risks and opportunities of pursuing sustainable initiatives
• Understanding the financial value and return on investment of sustainability initiatives
• Aiding decision-making with a stronger business case for sustainability initiatives
• Leveraging a tool to test different scenarios within the same investment
• Fostering cross-collaboration across departments within an organization, particularly between sustainability and finance teams, by improving communications
• Helping sustainability teams talk with their boards, directors, and CFOs by creating a common language for everyone
• Encouraging companies to focus on the intangible benefits when considering financial returns

Learn more about Sustainability and Management Consulting at SWCA and Return on Sustainability Investment at NYU Stern Center for Sustainable Business.

Meet the Experts

John Platko has more than 30 years of business, sustainability, and environmental, health, and safety leadership experience. He develops and executes strategies that prioritize the creation of business, environmental, and social value for a diverse range of clients, including private sector companies, non-government organizations, and multilateral organizations on a global scale. Platko’s experience spans across 40 countries, encompassing sustainability, innovation, digital technology, and collective action initiatives addressing water security, climate resilience, and waste management.

Contact John

Miriam Cavazos is an economist specializing in data analysis and its application to enhance decision-making and operational improvement. She applies her expertise in various areas, including water security, climate, water replenishment, risk management, environmental governance, and circularity.

Contact Miriam

Kathia Elizondo is a sustainable development engineer with experience in water efficiency in operations, water security, circular economy, collective action, and monetization. With a background in both the private and public sectors, Elizondo focuses on integrating sustainability comprehensively into projects by conducting thorough assessments aligned with regulations and standards.

Contact Kathia

Tensie Whelan is a Clinical Professor of Business and Society at NYU and serves as the Director of the NYU Stern Center for Sustainable Business. Whelan also serves as a member of ALO Advisors’ Advisory Board. She has an extensive 25-year background in sustainability, engaging businesses spanning various industries in proactive sustainability initiatives. Whelan is widely recognized for her influence on business ethics.

Contact Tensie