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Challenge: Linking Sustainability & Financial Value. Companies struggle to evaluate the financial value of their sustainability initiatives. In the past, sustainability has been “ the right thing to do ” with implicit trust that it will bring value.

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Challenge: Linking Sustainability & Financial Value

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challenge linking sustainability financial value
Challenge: LinkingSustainability & Financial Value
  • Companies struggle to evaluate the financial value of their sustainability initiatives. In the past, sustainability has been “the right thing to do” with implicit trust that it will bring value.
  • In particular, extractives have known intuitively that sustainability investments made around their operations can bring significant value.
  • This value generally takes the form of direct value creation (i.e., positive cash flow) or indirect value protection (i.e., risk mitigation).
  • Nevertheless, this value perception was never rigorously quantified preventing managers from: 1) understanding the true benefits of such investments, and 2) being able to prioritize investments.
  • The inability to articulate the costs and benefits has traditionally left sustainability initiatives outside the core project planning process impeding cross-functional integration and communications.

Solution: Planning & Financial Valuation Tool

  • Evaluation of site-specific sustainability portfolios applied to extractive industry
  • Excel-based tool (new desktop software being developed)
  • Estimates expected net present values (NPVs) of sustainability investment portfolios
  • Answers two critical questions:
      • 1. “what” is the right portfolio of sustainability investments
      • 2. “how much” financial return they will likely bring?
objective assess value creation protection
Objective: Assess Value Creation & Protection
  • Model objective: articulate reasonable ranges for the value of sustainability investments
  • Value is defined as direct value (creation) and indirect value (protection).

Indirect value (protection) refers to the indirect risk mitigation potential of sustainability investments.

Direct value (creation) results from the direct cost-benefit of the sustainability investments.

  • Cost of inputs decreases or productivity rises
  • Value created can be readily calculated
    • e.g., workforce training enables substitution of local hires for expensive expatriates
  • Less risk of delay, disruption, and/or expropriation
  • Value protected is not readily calculated

- e.g., investments in social cohesion, reputation, cultural heritage, etc.

full flexibility to select investments evaluated
Full Flexibility to Select Investments Evaluated
  • Architecture : The model estimates the difference between the value impact of two user-defined scenarios which allows full flexibility to decide the scope of the investments to be evaluated:

Scenario B : user defined, most often a greater investment than scenario A e.g. proposed sustainability portfolio

Scenario A: user defined, e.g. business as usual, or base case

Estimated NPV ranges of the sustainability investmentsvs. base case

quantifying risk within your control
Quantifying Risk within Your Control

Defining Risk Reduction Potential:

To determine risk reduction potential, the FV Tool subtracts macro-level risks (country risks) as assessed by the Multilateral Investment Guarantee Agency (MIGA, political risk insurer part of World Bank Group) and prompts the user to consider industry specific risks using sector level data provided by Independent Project Analysis (IPA, owner of 25+ year database on extractives) to determine the potential volume of risk a sustainability investment portfolio can manage.

sustainability program quality
Sustainability Program Quality
  • Sustainability Program can reduce the level of sustainability risks by reducing their occurrence, duration and financial impact.
  • Two key parameters used to determine the risk reduction potential of investments:
  • Importance: reflects the weight of each issue evaluated by project teams including the stakeholder engagement process.
  • Quality of Sustainability Program for Scenario A & B.
generic values to guide assumptions on risks
Generic Values to Guide Assumptions on Risks
  • Pre-defined neutral values for risks are embedded in the model to guide assumptions on risks.
  • The possible ranges of neutral (base) values for event risk and magnitude are derived from IPA (Independent Project Analysis) global project database.

IPA Capital Project Data – 734 Observations

  • Capital Projects Between US$15 million and US$11 billion
  • Completed and Ongoing Projects (Selection not limited to projects using sustainability practices or with associated sustainability investments.)
  • 255 Mining, Minerals, and Metals (MMM) Projects;
  • 479 Petroleum Exploration and Production (E&P) Projects

Value Protection Ex: Cairn Farmers SMS Text Program

  • Partnership with Reuters
  • Regular two-way communication through mobile phones
  • Reach 10,000 farmer families in 2010
  • Developed to respond to concerns and needs of stakeholders ie:
    • Soil restoration requests / irrigation pipeline laying assistance
    • Information on farming productivity,
    • Information in case of pipeline sabotage, leaks or complaints

Farmer Benefit:

  • Ex. Cumin seed sowed by farmer in Gujarat and sold in local market at market rate (informed by SMS). Farmer received 200 more rupees in market versus middleman. Farmer sold approx 1000 kg-- approximately $14-15k profit to farmer.

Business Benefit :

  • 5 cases of pipeline security issues reported by farmers so far
  • In one case Cairn response avoided pipeline damage that could stop crude flow for at least one day at a cost of USD 2 million
monte carlo simulation embeds randomness
Monte Carlo Simulation Embeds Randomness


  • Monte Carlo is a:
  • Statistical technique by which a quantity is calculated repeatedly
  • Using randomly selected “what-if” scenarios.
  • Results approximate the full range of possible outcomes

Value in Billions

value protection value creation combined
Value Protection & Value Creation Combined
  • Value protection (no cash inflows means indirect value) is one side of the value coin.
  • Value creation (direct cash flows back to the company or cash saved) is the other side.
  • By adding them together we assess the overall value of the portfolio.
output financial value of sustainability investments
Output: Financial Value of Sustainability Investments

Dashboard - Total Sustainability Value Added

For $2billion CAPEX project, sustainability investments can return as much as $187 million of NPV.

value protection distribution
Value Protection Distribution

Initiatives Relative Share on Value Protection

lessons learned
Lessons Learned
  • Tool provides the ability to answer critical business questions :
      • “how” sustainability creates value;
      • “what” investments are needed to capture this value;
      • “how much” financial value may be protected/generated.
  • Reinforces cross-functional integration & improves decision-making:
    • Assists non-finance functions to articulate financial drivers;
    • Encourages increased interaction E & S, Risk, Finance , Procurement, HR, etc;
    • Improves capital investment decision-making process.
  • Pilots with Cairn and Newmont
  • Cairn found new way to return on investment in SMS program
  • Newmont realized huge value gains through land access program improvements
  • “It is clear that the model has potential if we commit the time to put the inputs in well. It takes time, but once built, will give a good indication of value.”
  • -- Walter Richards, Controller, Newmont Gold Ahafo
areas being improved
Areas Being Improved
  • The tool has been developed over 2 years, tested with real extractive industry projects, and is now fully functional.
  • Focus is now on improving the frameworks and inputs to facilitate its application, e.g.:
    • The integration of MIGA macro country risk assessment into the evaluation of sustainability-related risks
    • The definition of generic risk values from an expanded fact base in order to derive better, narrower risk assumptions
    • The refinement of the qualityassessment methodology that drives risk reduction, along with issue importance.
  • Talking with O & G: IPIECA, Total, Exxon, Statoil, PAE, Cairn