Wednesday, March 24, 2010

Mo' money, Mo' Money. Mo' Money.

A difficulty of the triple bottom line is the entrenched position that only profit matters. So justifying sustainability expenditures must occur in the context of return on investment (ROI). Redrawing the sustainability system diagram in terms of the profit aspect shows that not much actually changes:


Most of the considerations and feedback loops are still included because they all affect profitability in one way or another. However, since the focus is now on ROI, the message changes slightly to focus on comparing what each aspect costs vs what it brings. At a high level:

Contingency expenses vs Materials Cost
  • Does it add more in materials or procurement costs than it saves in insurance, continuity plans, taxes / cap & trade costs, relocation costs and opportunity costs (business disruptions)? 
  • Admittedly, the impact of one company on the overall environment is probably small which is why pricing the externalities helps (e.g. carbon pricing) as it focuses everyone on those externalized costs in a consistent, material way.
Utilities Costs vs Building Cost
Productivity Gains & Decreased Training Costs vs Building Costs
  • Does it cost more to add indoor environmental quality improvements (e.g. daylighting, thermal controls, exterior views, higher ventilation rates) than you gain through improved worker productivity and retention?
  • It helps to consider that payroll costs are generally a much larger fraction of business costs than facilities + real estate costs. So if you can spend 7% in building cost to improve productivity of payroll by 2%, you will still come out very much ahead. Something like:
    • For 1000 employees @ 250 sq. ft /ea in office space built in San Francisco is ~ $50M. Amortize over 30 years = $1.6M/yr. A 7% increase is ~$117k/yr.
    • For the same 1000 employees @ $150k/yr in payroll costs = $150M/yr. If you can improve productivity by 2%, that is ~$3M/yr.
    • ROI ~ 24.
So Mo'Money, Mo'Money, Mo'Money and sustainability really do get along.