Sustainability is increasingly being integrated into high-level decision-making at corporations, public sector agencies, non-governmental organizations, and other groups. This brings many benefits, but can also create challenges – including vocabulary issues, like defining words and phrases related to sustainability.
It’s important for sustainability practitioners to understand the terms and concepts of traditional financially oriented analysis, and for executives to have a grasp of the metrics and frameworks that now allow environmental and social considerations to be incorporated into project evaluations.
We hope the definitions will prove useful to both groups, and serve as an aid to effective collaboration. This sustainability glossary was prepared by our colleague John Parker, chief product officer and co-founder of Impact Infrastructure, developers of Autocase, with input from the EarthShift Global team; we thank John for his excellent efforts, and invite our readers to send suggestions for other terms or words you would like to see added.
Definition — Sustainable Return on Investment (S-ROI)
Definition — Triple Bottom Line Cost Benefit Analysis (TBL-CBA)
Definition — Multiple Account Cost Benefit Analysis/Stakeholder Analysis
Definition — Social Return on Investment (SROI)
Definition — Triple Bottom Line Analysis (TBL)
Definition — Cost Benefit Analysis (CBA), also known as Benefit Cost Analysis (BCA)
Definition — Life-Cycle Cost Analysis (LCCA)
Definition — Life Cycle Assessment (LCA)
Definition — Life Cycle Analysis
Definition — Economic Impact Analysis (EIA)
Definition — Net Present Value (NPV)
Definition — Internal Rate of Return (IRR)
Definition — Return on investment (ROI)
Definition — Benefit Cost Ratio
Definition — Discounted Payback Period
Definition — Simple Payback Period
Sustainable Return on Investment (S-ROI) is an enhanced form of cost benefit analysis that includes probabilistic assessment and stakeholder engagement. The framework takes into account the entire scope of risk-adjusted costs and benefits related to sustainable design, including traditional internal cash impacts (such as savings on energy or water costs), but also all other appropriate internal and external non-cash impacts (such as the dollar value of environmental savings from reduced potable water use or air emissions). The analysis results in different sets of output metrics in terms of probabilities; one from the perspective of the organization on a cash flow basis and others from the perspective of various stakeholders, including society or future generations, which often includes the value of externalities such as health & safety benefits expressed in dollars. Finally, the analysis allows for transparency and incorporates a process for expert and stakeholder opinion on the model structure and inputs.
Triple Bottom Line Cost Benefit Analysis (TBL-CBA), also called screening level S-ROI, is a systematic evidence-based economic business case framework that uses best practice Life Cycle Cost Analysis (LCCA) and Cost Benefit Analysis (CBA) techniques to quantify and attribute monetary values to the Triple Bottom Line (TBL) impacts resulting from an investment. These TBL outcomes are typically represented as People, Planet, Profits or Social, Environmental and Financial. The framework quantifies these impacts in dollars over the life of the project and discounts them to the present in order to calculate the Net Present Value of an investment from the financial viewpoint of an organization, as well as from society’s perspective. An example of the financial benefits would be items such as cost savings on an energy or water bill; a social benefit could be the benefit of reduced flooding or improved health & safety; and an environmental benefit might be a reduction in CO2 emissions or enhanced water quality. The primary reason for adding the TBL qualifier to CBA is to make it absolutely clear that all relevant social and environmental factors must be rigorously quantified in dollars and included in the analysis. TBL-CBA differs from S-ROI in that the assessment uses readily available information for risks, opportunities, costs and benefits, whereas a full S-ROI uses input specific to the current project or policy.
Multiple Account Cost Benefit Analysis/Stakeholder Analysis provides a breakdown of the costs and benefits to each account type (e.g. financial or direct financial value, government, economic, environment or Envision category such as quality of life, leadership, climate and risk, natural world or resource allocation). Multiple Account Cost Benefit Analysis effectively does a mini-CBA for each stakeholder group (users or beneficiaries of the project, government or taxpayers, and non-users living nearby for example) or account (e.g. the environment or the local economy). This allows a project sponsor to understand each group’s perspective and think about how to structure a deal so that benefits and costs are equitably distributed. S-ROI and Triple Bottom Line Cost Benefit Analysis (TBL-CBA) are forms of multiple stakeholder/account cost benefit analysis where the accounts are financial, social and the environment. Multiple account CBA makes CBA more relevant in helping to understand stakeholder objections and provides a framework for working towards a project that benefits all of society as well as sub-groups within that broader context.
Social Return on Investment (SROI) is a principles-based method for measuring extra-financial value (i.e., environmental and social value not currently reflected in conventional financial accounts) relative to resources invested. The SROI method accounts for stakeholders' views of impact, and puts financial 'proxy' values on those impacts identified by stakeholders which do not typically have market values. While SROI is similar to S-ROI or CBA it is different in that it specifically excludes environmental impacts. In addition, some SROI users employ a version of the method that does not require that all impacts be assigned a financial proxy. Instead the "numerator" includes monetized, quantitative but not monetized, qualitative, and narrative types of information about value. While this type of information is typically included in SROI reports, the goal is to monetize as much as possible.
Triple Bottom Line Analysis (TBL) evaluates a project or policy based on its combined financial, social and environmental impacts (sometimes known as profit, people, planet impacts). The financial (profit) impacts are the life-cycle costs associated with the project (e.g., capital expenditures, operations and maintenance, replacement costs, residual value of assets). Life Cycle Cost Analysis (LCCA) can be used as the financial analysis in a TBL analysis. The social (people) impacts are the effects of a project on the broader community, quality of life or society. Finally, the environmental (planet) impacts are the effects of a project on the surrounding environment, habitat or climate. These three values presented together form the TBL valuation. The three separate accounts cannot easily be added up.
Cost Benefit Analysis (CBA), also known as Benefit Cost Analysis (BCA), is a formal way of organizing the evidence on the good and bad effects of projects and policies. The objective of a CBA may be to decide whether to proceed with a project, to see if the benefits justify the costs, to place a value on a project, or to decide which of various possible alternatives would be most beneficial. To facilitate comparison of different projects, or alternatives of the same project that may have costs and benefits occurring in different years, discounting is often used to convert future benefits and costs to a current-year perspective. The best criterion for deciding whether a project can be justified is whether the Net Present Value (NPV) is positive. The NPV is the discounted monetized value of expected net benefits (i.e., benefits minus costs). Other metrics (such as the return on investment, internal rate of return, benefit cost ratio, simple payback period, or discounted payback period) can also be used to summarize the CBA results. CBA is the primary methodology underpinning S-ROI, and TBL-CBA.
Life-Cycle Cost Analysis (LCCA) or Life Cycle Costing (LCC) quantifies all financial costs of a project alternative. The financial costs in LCCA include up-front capital expenditures, ongoing operations and maintenance costs, replacement costs, and the residual value of assets at the end of the life-cycle. LCCA is typically thought of from the perspective of a user of a product, process or investment. Alternatively, companies can use the concept to assess new product development efforts where it includes research and development costs, piloting, launch, life time revenues, and the cost to retire the product when it becomes obsolete. The financial costs of each alternative are discounted into present value terms to account for different timing of costs. LCCA only quantifies financial costs, not environmental or social costs, and is in no way akin to LCA. LCCA has been used to encourage users to adopt more sustainable products, such as compact fluorescent lamps, where the up-front cost was higher, but the product lasted longer than the preceding incandescent lamps.
Life Cycle Assessment (LCA) quantifies the effects of a product or service on the environment over the product or service’s life-cycle. LCA assesses environmental impacts associated with all stages of a product’s or service's life (e.g., raw material extraction, materials processing, manufacturing, distribution, use, repair and maintenance, disposal or recycling). LCA provides a holistic evaluation of environmental effects over the full life-cycle of the product or service. This is compared to more basic assessments which may only evaluate the environmental effects of a product or service during the life of a project. Life cycle assessment is often confused with LCCA but they are not at all the same, as LCA does not quantify the financial costs of the products or services. LCA is also often confused with Product Life-Cycle Management (PLM) which is the management of a product by the manufacturer from research and development through its retirement as obsolete.
Life Cycle Analysis is similar to Life Cycle Assessment; however, it stops at the analysis phase and does not include interpretation. ISO 14040 (ISO 14040, 2006a) differentiates the two methods and standardizes the requirement that interpretation is included. This ensures that studies are transparent and can be acted upon.
Economic Impact Analysis (EIA) calculates the economic impact of a project in terms of jobs created, GDP, and/or income created. Direct (from project expenditures), indirect (from project suppliers’ expenditures), and induced (from the spending of wages of those affected) impacts can be estimated from input-output tables of the economy. Impacts such as GDP, jobs, and taxes, which all scale with the project dollars spent, are a poor measure of value. As long as you spend money you will generate income, output, jobs and tax revenue - the more you spend the bigger the impacts. While these statistics may have public relations value, there are more reliable and impartial statistics for measuring welfare or value. A simple example is that if a company hires skilled workers to build a project by hiring them away from other jobs (a likely scenario) then there are no jobs created. It is now well-known that GDP is a measurement of economic activity that includes both helpful and harmful activities and is therefore not a suitable metric for sustainability (or ecological economic) analyses. Growth of the economy can be economic growth (producing net benefit) or uneconomic growth (depleting natural capital and producing net detriment).
Net Present Value (NPV) is the present-day value of benefits minus present-day value of costs. It is calculated by discounting cash flows over time and summing the discounted values. Cash flows further into the future become more discounted. This metric allows the time-value of money to be taken into account. NPV is used in go/no-go, whether-to-proceed decisions. It is a measure of worth or value. An NPV greater than zero means project is economically efficient. Projects or alternatives can be ranked in terms of NPV. NPV is a more accurate reflection of value to the business.
Internal Rate of Return (IRR) is a measure of profitability or investment efficiency. IRR is a discount rate that makes the net present value (NPV) of all cash flows from a particular project equal to zero. IRR may give better insights than ROI in capital constrained situations. However, when comparing mutually exclusive projects, NPV is the appropriate measure.
Return on investment (ROI) is the benefit to the project from the investment of resources. ROI can be expressed as: (profit, gain or benefit of investment – cost of investment)/cost of investment As a performance measure, ROI is used to evaluate the efficiency of an investment or how efficiently the investment is used. ROI can be used to compare the efficiency of several different investments.
Benefit Cost Ratio is the present value of benefits divided by present value of costs. The Benefit Cost Ratio or B/C ratio is used in go/no-go, whether-to-proceed decisions. It indicates dollars of benefit per dollar of cost. A ratio greater than one means project is worthwhile. The definition of benefits and costs and negative values can affect interpretation and so caution is advised when using this measure.
Definition — Discounted Payback Period is the number of years or months until capital is recouped by flow of benefits or cash-flow. The Payback Period is used to determine timing of the project or the length of time capital is at risk. A shorter payback means less risk. The Discounted Payback Period uses discounted benefits or cash-flows. In other words, the cash-flows from the project are discounted by the discount rate before determining the payback period. For this reason, the Discounted Payback Period is usually longer than the Simple Payback Period.
Definition — Simple Payback Period is the number of years or months until capital is recouped by flow of benefits or cash-flow. The Pay Back Period is used to determine timing of the project or the length of time capital is at risk. A shorter payback means less risk. The Simple Payback Period uses undiscounted benefits or cash-flows. In other words, the cash-flows from the project are taken at their nominal value to determine the time until the project pays back. For this reason, the Simple Payback Period is usually shorter than the Discounted Payback Period.
About the Author — John C. Parker, CPO
John C. Parker is an expert in triple bottom line cost-benefit analysis of infrastructure projects, Sustainable-ROI and is Chief Product Officer for Autocase by Impact Infrastructure.