5 Steps to Calculating Your Sustainability ROI
Traditional ROI calculations look at the financial return of an investment relative to the cost of that investment. While some sustainability initiatives can lend themselves to this calculation, many also have additional qualitative benefits that are tougher to quantify. Some of these benefits include improved organizational reputation (and as a result, increased trust from customers), enhanced branding, acquisition of new talent, and decreased risk, all of which can be the result of sustainability actions.
Calculating an accurate sustainability ROI prior to the start of a project can get complicated but it is also important in order to be able to make a stronger business case for sustainability to your colleagues.
That being said, calculating sustainability ROI does not need to be daunting, and if you are looking at your first or one of your first sustainability projects, don’t be discouraged. This article is here to walk you through the process.
If you work in a SME (small or medium enterprise), start calculating the sustainability ROI on smaller, more straightforward projects. As those projects gain momentum, you will be able to enlist the help of others to get the information needed to complete more complex ROI calculations in the future.
Begin by identifying concrete sustainability actions that can provide measurable results. Simple projects that have direct costs associated with them will lend themselves to a more traditional ROI calculation. For example, switching to an electronic document management system or moving to teleconferencing for a majority of business meetings both have costs that can be calculated relatively simply. Even conducting a month-long recycling challenge can directly be measured with a little tracking of before and after results. This will enable you to more easily calculate that straightforward sustainability ROI and build momentum for your sustainability initiatives in the long run.
So, how can you measure not only the direct financial returns of a straightforward project but also intangibles such as increased productivity as a result of more motivated staff, and obtain an accurate image of the ROI and qualitative benefits?
The first thing is to realize that the intangibles, while they can be estimated, are tougher to pin down. That doesn’t mean that you can’t estimate what the added ROI will be for those intangibles, if you think they apply and are worth the effort to calculate.
For example, you can measure resulting sales due to sustainability by looking at long-term marketing trends and benchmarking current performance. This, of course, means more effort up front to determine what marketing actions correlate to current sales, and everything being equal, how the addition of sustainability and external communications around sustainability directly correlate to an increase in sales. This type of calculation is easier to do and get support for after you have gained momentum with your sustainability initiative and have brought others on board, so let’s first focus on gaining momentum – and calculating a more straight-forward ROI.
Here are five steps to calculate the ROI of a sustainability project, and an example of a sustainability project that this can be applied to. As you are likely aware, this is just one example – you have many options when looking to begin and/or grow your sustainability efforts; this one is used for illustrative purposes.
Before going further, you may want to download your free ROI worksheet and walk through these steps for your project. If you would like to calculate the ROI for a project that you are working on, we can help you do that for free - just enter the requisite information in the survey here. Once you’ve completed the survey and entered the relevant data, you can schedule your 45 minute complimentary session, during which we will walk you through the results.
1. Identify the project
Start with one that has clear deliverables. Many organizations, especially small and medium sized businesses, do not own their physical space, and therefore will want to start with something that is within their control and that is not building-based.
For the sake of this example, let’s assume that your organization does not own its space, but rather leases it, and would still like to take sustainability actions that make an impact on its bottom line. The next logical place to look is at the organization’s operational and administrative tasks, to identify ways to streamline and ‘green’ those. Let’s also assume that a sustainability action that you think your organization should take is to switch to double-sided printing, to reduce paper use.
2. Calculate current usage and cost
Start off by doing some background research and seeing if there are any case studies available that can give you a ballpark of what the potential savings could be.
In the case of double-sided or duplex printing, studies have shown that actively managing office printing can lead to a 10% to 30% reduction in spending on document output; organizations can save up to 30% in printing costs when switching to duplex printing. There are additional potential savings from actions such as reducing the density of ink and toner, but in order to keep this calculation simple, we will focus solely on switching to duplex printing.
Once you have some ballpark background data, you’ll want to look at existing printing paper costs for your organization, along with the amount of paper that is being used on a monthly and annual basis. You can look to see how often paper is being ordered and figure out the costs from that. To get a more accurate monthly average, you’ll want to look at orders for the last twelve months then divide the total by twelve.
Average monthly paper use = last 12 months’ total sheets of paper ordered/12
Average monthly paper cost = last 12 months’ total expenditures for printer paper purchases/12
The monthly paper use will be useful later on in that it is a more tangible data point for conversation. You can also calculate the average paper used per person in your office by taking the average monthly use and dividing it by the total number of staff.
Average paper use per person = average monthly paper use/total number of staff
In this case, let’s take some national averages – which may or may not correlate with your organization’s usage, so again, be sure to get that number first. The average US office worker uses 10,000 sheets of paper per year. Let’s say you work in a 50 person office - that comes out to an average of 500,000 sheets of paper annually. Again, the average paper use per person will be useful for discussion purposes when you make the business case.
Another cost item to take into consideration is your time spent on this project. In this case, the time allocation should be minimal; let’s assume three hours per week for three months, which will be spent in communications, behavior change, making signs, benchmarking and tracking results. Assuming a salary of $50k per year, and 48 weeks worked per year, the total cost of your time on the project would be about $937.50 (see breakdown of calculation below):
Total hours worked annually: 48 weeks x 40 hours per week = 1,920
Hourly rate: $50k/1,920 = $26.04
Estimated time on project: 3 hours per week x 12 weeks = 36 hours
Estimated cost of time on project: 36 hours x $26.04 = $937.44
3. Identify potential savings
Since the initial background research showed that on average, double-sided printing leads to a 10-30% paper reduction, let’s estimate that your project will result in a 20% reduction.
Next, you will want to gather information to determine the cost per sheet. Let’s assume that a standard case costs $30. A case typically contains five reams of five hundred sheets each, for a total of 2,500 pages. That comes out to 1.2 cents per page ($30/2,500 pages).
For this part of the calculation, we will look at annual costs to simplify the calculation. If 500,000 sheets are used annually, that equals $6,000 in total costs (1.2 cents per page x 500,000 pages). If you can print double-sided, and decrease the cost of paper by 20%, that saves 100,000 sheets of paper and reduces total costs to $4,800. This represents an annual, recurring savings of $1,200 – and this calculation doesn’t include reduced ink and toner costs.
4. Calculate the ROI
When calculating the ROI, keep in mind that this is still an estimated number, even when the numbers you are working with are relatively concrete. This is because the project depends on people, timelines, and material costs, among other things. Therefore, the assumptions made when calculating ROI include that the project will be on time, individuals will take the required actions, and costs will not change. This is an important caveat to any ROI calculation. As a reminder, ROI looks at the gain from an investment minus the costs, and divides it by the cost, so:
Net project benefits = Benefits – Costs
ROI (%) = (Net project benefits/Project costs) X100
Net project benefits = $1,200 - $937.44 = $262.56
ROI (%) = ($262.56/$937.44) x 100 = 28%
5. Estimate additional benefits
The next question is – are there any additional benefits resulting from taking this action, aside from the financial savings? Some examples in this instance can include:
Environmental benefits from using less paper
Decreased time spent on ordering products
Savings from reduced waste to landfill
Take each of the above benefits and determine whether there is a way to quantify it and whether that figure makes sense to include in the ROI. These will be estimates in many cases, and some might fall into the financial ROI bucket more easily than others. For example, the 'reduced waste to landfill' and 'decreased time spent on ordering products' could arguably be quantified and added to the ROI if it is a significant amount, while the environmental benefits are a softer externality that doesn’t usually directly impact the business’ bottom line.
Environmental benefits: There are quite a few free calculators available to quantify environmental benefits of the most common sustainability actions. Here is a paper calculator you can use for this example and that we’ve used in the past.
Decreased time spent on ordering products: This is likely a small cost and you may choose to exclude it since it doesn’t much alter the ROI. But let’s find out. Let’s assume that paper is ordered every two months, and can now be ordered every three months instead. This means that the person ordering has gone from ordering six times a year to ordering four times a year, a reduction of 30%. Let’s say that person spent 10 minutes each time ordering, and is now spending a total of 40 minutes instead of 60 minutes ordering each year, that’s only a saving of 20 minutes per year. This is a cost savings that is not worth including in this case because it will not significantly impact the ROI.
Reduced waste to landfill: Since less paper will be printed and therefore going to landfill, it is safe to assume that printing double-sided will result in reduced waste to landfill and potentially reduced waste disposal costs. You will need to break this down into two parts: a) the waste diverted from landfill; and b) potential cost savings from sending less paper to landfill. Here is a simplistic example (which will not go into the complete calculations):
a) Environmental impact of waste diverted from landfill: According to the EPA, paper and paperboard account for 27% of municipal waste to landfill. Let’s say 10% is office paper on average (this is an estimate – you can also calculate the percent of waste to landfill that your organization’s paper use represents by doing a waste audit). This means that your waste to landfill could be reduced by 2% ((20% paper use reduction X 10% office paper to landfill) x 100 = 2%). You can use a calculator such as this one to determine the resulting greenhouse gas emissions averted as a result of your reduced waste to landfill.
b) Cost savings of waste diverted from landfill: Since for this example, waste will only decrease by an estimated 2%, it will likely not have a significant impact on your waste bill and therefore is not worth including in the ROI figures. However, for a larger project where waste is reduced significantly, you will want to look at the estimated waste reduction to see if the frequency of pick-ups can be reduced, along with the cost, as a result of the initiative.
In conclusion, the total savings from implementing this project, given the above assumptions, is $262.50 annually. This is the number to share with your colleagues, along with the ROI of 28% and additional environmental benefits! Don't forget to also suggest ways that this annual savings could be reallocated to a project that would benefit the organization. It seems like a small figure in this example, but these savings add up!
Now it's your turn - download your free ROI worksheet by clicking on the image below and do this for your own project!
If you want to find out the ROI on a project you are considering, we can help you do that for free - just enter the requisite information in the survey here . Once you’ve completed the survey and entered the relevant data, you can schedule your 45 minute complimentary session here. If there are no available slots, you can try again in a few days or email Anca Novacovici at anca@eco-coach.com to schedule a time.