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A practical guide to embedding sustainability into capital investment appraisal
There is a clear business case for embedding sustainability into capital investment appraisal:
- Material costs savings can be achieved
- Capital projects can be made more resilient, or future-proofed, against emerging sustainability risks
- The costs of inaction are potentially material
- Taking into account sustainability issues drives innovation in your supply chain
- Demonstrating your sustainability commitment can build trust and reinforce or enhance your licence to operate
- Adopting sustainability practices can help to reduce financing costs and increase access to capital
Building upon the existing capital investment appraisal process is most effective. Most companies already have sophisticated capital investment appraisal processes that focus on managing project risk. Sustainability is simply one type of risk to be managed.
Why the project was chosen
Global capital project and infrastructure spending is expected to grow to more than $9 trillion annually by 2025, up from $4 trillion annually in 2012. Ensuring that this spend takes sustainability issues fully into account will be vital in “future proofing” these investments.
Capital investment decisions have typically incorporated traditional business risks and impacts. To respond to a changing world where sustainability risks and opportunities play a growing role, fundamental changes to capital investment decisions are needed – we need to think about how new information can better inform our decisions.
The capex project was initiated to provide guidance for finance professionals to think more broadly about their investments, both the impacts of the investment on the environment and society e.g. carbon emissions or job creation and the potential risks to the success of an investment e.g. flooding or skills shortage.
Four common elements to integrating sustainability into capital investment appraisals
We have observed four common elements in our approaches to integrating sustainability issues into capital investment appraisal processes:
- Who to involve and governance: Establishing accountability (through leadership) and changing mind-sets (through culture) are the foundations for embedding the change. Involving the right mix of people with appropriate roles and capabilities is crucial.
- What to assess: To identify and prioritise sustainability issues for consideration in the capital investment decision, it is useful to think about:
- Types of sustainability issues (social, environmental, economic)
- The whole lifecycle (from construction to operation to end-of-life)
- The value chain (from suppliers to own operations to customers)
- How to assess: To assess the sustainability issues identified, there are four main approaches:
- Qualitative e.g. high / medium / low rating
- Quantitative e.g. KPI scorecards
- Monetary, using shareholder / company value e.g. energy costs
- Monetary, using stakeholder / or societal value e.g. pollution cost to society
- How to decide: In order for decision makers to make sense of a sustainability assessment, they need frameworks. Key considerations when developing a framework include:
- Setting clear decision-making criteria: Non-financial or financial depending on type of assessment undertaken
- Choosing between investment options: Holistic frameworks and structured decision-making methods can help formalise the consideration of sustainability as core to the investment case
- Exploring funding options: The way in which funding is sourced can influence how capital is allocated between investment options from simply using your mainstream capital budget as the sole source of funding to identifying new sources of specialist funding