What is the True Return on Investment – ROI?
Your business activity has financial, as well as internal and external ESG impacts. You need to measure all three to calculate your true ROI.
Plant, property, and equipment to support a new or expanding business are expensive. Before making an investment, you will consider many questions that have a bearing on financial impact, including:
- What are the technology, market, customer, regulatory, and other drivers of the investment?
- What are the investment options, and the up-front and ongoing financial costs associated with each?
- What is the expected return on investment?
Internal ESG Impacts
While financial return is critical, additional considerations also determine business success.
What impact will your investment have on the environment? Which greenhouse gasses, and how much, will the proposed business activity emit (scope 1 emissions)? Where will the power to operate the facility come from, and what emissions will result from the power you purchase (scope 2 emissions)? What are the combined emissions from the entire supply chain that is required for the product to be produced at the proposed facility (scope 3 emissions)?
Knowing your total emissions is an important first step in assessing the environmental cost of your business activity. Next, it is important to consider the consequences of those emissions.
If the electricity you purchase burns a fuel that pollutes the air of the community where you operate, those affected include your employees and their families. Their illnesses affect you. If an employee is ill for a week, you must find a replacement, or slow down production. This is another impact to include in your investment analysis.
Beyond emissions and air pollution, and the consequences of both, there are other potential environmental impacts to consider, such as:
- Water. Will your utilization threaten the availability of water in your area of operation? If water becomes scarce, will you be able to continue your business activity? If you must curtail activity, how will that affect your financial return? If your activity threatens the community’s water supply, how will that affect your reputation and ability to attract customers and talent?
- Waste. What waste will your production processes produce? How will you re-use, re-purpose, or dispose of it? What is the cost of each alternative? If your business plan calls for disposing of waste in economically disadvantaged locations, what is the potential fallout to your reputation?
- Location. Will your proposed business activity be located in a coastal area where ocean levels are rising? Are property and flood insurance available, and if so at what cost? How long will it be before you need to relocate?
Be sure that your business case includes a consideration of all significant environmental risks, and the foreseeable impact (financial, reputational, and other) of each.
Business plans only succeed with people. Some social issues to consider when building your business plan are:
- Location. Large manufacturing facilities are often located in remote areas, where land is easily available and less expensive. But is this where your workforce lives? Will you be able to attract the workers, engineers, accountants, human resources, and other talent you need to work at your new site? If so, at what cost and retention risk?
- Health Care. Will adequate health care be available to your employees? Will they need to travel to secure care, and if so at what cost to you and risk to them?
- Diversity. Will your proposed business location have the diversity of talent, skills, training, and perspectives needed to ensure success? Will your employee base reflect the diversity of your customers and their customers? How much will it cost you, and how difficult will it be, to find, train, retain and promote the diverse skills and talents you need for future growth?
An investment plan that foresees social issues and risks is stronger, and more resilient, than one that only takes account of financial impacts.
Your board of directors has decision rights, oversight duties, or both, regarding significant investment decisions. In addition to the financial, environment and social impacts discussed above, the board’s involvement is required for issues including:
- Cybersecurity. Businesses run on many things — facilities, equipment, people — and data. For many businesses data is THE valuable asset. The board has an important role to play regarding the overall cybersecurity of a business, as well as the data security implications for a new business venture.
- Risk Management. In addition to a financial impact analysis, your board should expect a risk impact assessment as part of the business case for significant investment decisions, which includes an assessment of financial, environmental and social risks.
External ESG Impacts
We’ve examined some of the environmental and social costs that your business bears internally. To complete your analysis of the true cost of your new venture, you should also account for business costs that are borne by others. (Read Sustainability – Why? Why Now? to learn more.)
Returning to the examples above, the costs to your company of employee ill health and absenteeism caused by air pollution are real. But the total cost of dirty energy might be even higher. The health of the entire community where you operate is impacted by the emissions generated by your electricity provider. Who pays for those health impacts? You pay the portion included in the employee health insurance you provide, but the balance is paid for, or subsidized, by others. How long will others be willing to subsidize these costs that benefit your business? How long will it be before the plaintiffs’ bar tries to collect them from you? What will the impact be if you are required to assume these costs? This risk management question should be part of your investment business planning.
Consider long commutes. Traffic caused by business activity is an everyday cost borne by governments and the public. When your new business activity causes heavier traffic, the risk of accidents involving your employees on their way to and from work increases. The impacts extend outward from there, to your employees’ families, the other drivers, their families and employers, first responders, and the community at large. Whether these costs can be passed on to you is an important risk management consideration.
These are just two examples of impacts that your business activity can have on external stakeholders. (Learn more about Multi-Stakeholder Reporting.)
- Who your stakeholders are and asking them how your business activity will impact them,
- What the costs of those impacts are, and
- Whether you will have to pay for those impacts now or in the future
will help you build a stronger, more resilient business plan. (Learn more about Clear ESG Strategy)
Make Sure Your Business Case Calculates the Real ROI with ESG Impacts
A business case that accounts for financial, together with internal and external environmental and social costs, will give you a more complete view of the risks and opportunities presented by your investment options than one that is limited to a financial analysis alone. Contact firstname.lastname@example.org to learn more about building a sustainable business case.