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Challenge: Linking Sustainability & Financial Value
• Companies struggle to evaluate the financial value of their sustainability
initiatives. In the past, sustainability has been “the right thing to do” with
implicit trust that it will bring value.
• In particular, extractives have known intuitively that sustainability
investments made around their operations can bring significant value.
• This value generally takes the form of direct value creation (i.e., positive
cash flow) or indirect value protection (i.e., risk mitigation).
• Nevertheless, this value perception was never rigorously quantified
preventing managers from: 1) understanding the true benefits of such
investments, and
2) being able to prioritize investments.
• The inability to articulate the costs and benefits has traditionally left
sustainability initiatives outside the core project planning process
impeding cross-functional integration and communications.
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Solution: Planning & Financial Valuation Tool
• Evaluation of site-specific sustainability portfolios applied
to extractive industry
• Excel-based tool (new desktop software being developed)
• Estimates expected net present values (NPVs) of
sustainability investment portfolios
• Answers two critical questions:
1. “what” is the right portfolio of sustainability investments
2. “how much” financial return they will likely bring?
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Background
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Objective: Assess Value Creation & Protection
• Model objective: articulate reasonable ranges for the value of
sustainability investments
• Value is defined as direct value (creation) and indirect value
(protection).
Direct value (creation) results
from the direct cost-benefit of the
sustainability investments.
 Cost of inputs decreases or
productivity rises
 Value created can be readily
calculated
‒ e.g., workforce training enables
substitution of local hires for
expensive expatriates
Indirect value (protection)
refers to the indirect risk mitigation
potential of sustainability
investments.
 Less risk of delay, disruption,
and/or expropriation
 Value protected is not readily
calculated
- e.g., investments in social
cohesion, reputation, cultural
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heritage, etc.
Key Components of Planning & Financial Valuation Tool
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Risk Assessment & Stakeholder Engagement
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Full Flexibility to Select Investments Evaluated
Architecture : The model estimates the difference between the value
impact of two user-defined scenarios which allows full flexibility to decide
the scope of the investments to be evaluated:
Scenario B : user defined,
most often a greater
investment than scenario A
e.g. proposed sustainability
portfolio
Scenario A: user defined,
e.g. business as usual, or
base case
Estimated NPV ranges of
the sustainability
investments vs. base case
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Case Study – Main Project Characteristics #1
as Entered into Model
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Case Study – Main Project Characteristics #2
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Case Study – Main Project Characteristics #3
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Quantifying Risk within Your Control
Defining Risk Reduction Potential:
To determine risk reduction potential, the FV Tool subtracts macro-level risks
(country risks) as assessed by the Multilateral Investment Guarantee Agency
(MIGA, political risk insurer part of World Bank Group) and prompts the user to
consider industry specific risks using sector level data provided by Independent
Project Analysis (IPA, owner of 25+ year database on extractives) to determine
the potential volume of risk a sustainability investment portfolio can manage. 12
Value Creation Results from Direct Costs & Benefits
Sustainability investments evaluated
Cost drivers
Benefit drivers
Technical training program

Resettlement program

Biodiversity protection

Local suppliers development

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Community health program


Agriculture development program

Ex. Workforce
• 11 M$ (over
lifetime of the
project)

• Construction:
172 M$ (4 yrs)
• Operations:
20 M$ (per
13
year)
Value Creation: Example Local Workforce
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Value Creation Example: Land Access
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Value Creation Example: Land Access cont.
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Sustainability Program Quality
Sustainability Program can reduce
the level of sustainability risks by
reducing their occurrence,
duration and financial impact.
Two key parameters used to
determine the risk reduction
potential of investments:
1. Importance: reflects the
weight of each issue
evaluated by project teams
including the stakeholder
engagement process.
2. Quality of Sustainability
Program for Scenario A & B.
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Value Protection: How to Characterize Risks
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Generic Values to Guide Assumptions on Risks
• Pre-defined neutral values for risks are embedded in the model to
guide assumptions on risks.
• The possible ranges of neutral (base) values for event risk and
magnitude are derived from IPA (Independent Project Analysis)
global project database.
IPA Capital Project Data – 734 Observations
 Capital Projects Between US$15 million and US$11 billion
 Completed and Ongoing Projects (Selection not limited to projects using
sustainability practices or with associated sustainability investments.)
 255 Mining, Minerals, and Metals (MMM) Projects;
 479 Petroleum Exploration and Production (E&P) Projects
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Value Protection: Example of Risk Profiles
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Value Protection Ex: Cairn Farmers SMS Text Program




Partnership with Reuters
Regular two-way communication through mobile phones
Reach 10,000 farmer families in 2010
Developed to respond to concerns and needs of stakeholders ie:
 Soil restoration requests / irrigation pipeline laying assistance
 Information on farming productivity,
 Information in case of pipeline sabotage, leaks or complaints
Farmer Benefit:
 Ex. Cumin seed sowed by farmer in Gujarat and sold in local market at market
rate (informed by SMS). Farmer received 200 more rupees in market versus
middleman. Farmer sold approx 1000 kg-- approximately $14-15k profit to farmer.
Business Benefit :
 5 cases of pipeline security issues reported by farmers so far
 In one case Cairn response avoided pipeline damage that could
stop crude flow for at least one day at a cost of USD 2 million
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Intervention Effectiveness Drives Risk Reduction
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Occurrences
Monte Carlo Simulation Embeds Randomness
Value in Billions
Monte Carlo is a:
• Statistical technique
by which a quantity is
calculated repeatedly
• Using randomly
selected “what-if”
scenarios.
• Results approximate
the full range of
possible outcomes
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Value Protection & Value Creation Combined
 Value protection (no cash inflows means indirect value)
is one side of the value coin.
 Value creation (direct cash flows back to the company
or cash saved) is the other side.
 By adding them together we assess the overall value of
the portfolio.
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Output: Financial Value of Sustainability Investments
Dashboard - Total Sustainability Value Added
For $2billion CAPEX project, sustainability investments can return
as much as $187 million of NPV.
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Value Protection Distribution
Initiatives Relative Share on Value Protection
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How to Use Results in Strategic Decision-making
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Lessons Learned
• Tool provides the ability to answer critical business questions :
 “how” sustainability creates value;
 “what” investments are needed to capture this value;
 “how much” financial value may be protected/generated.
• Reinforces cross-functional integration & improves decision-making:
 Assists non-finance functions to articulate financial drivers;
 Encourages increased interaction E & S, Risk, Finance , Procurement, HR, etc;
 Improves capital investment decision-making process.
Pilots with Cairn and Newmont
 Cairn found new way to return on investment in SMS program
 Newmont realized huge value gains through land access program improvements
“It is clear that the model has potential if we commit the time to put the inputs in
well. It takes time, but once built, will give a good indication of value.”
-- Walter Richards, Controller, Newmont Gold Ahafo
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Areas Being Improved
• The tool has been developed over 2 years, tested with real
extractive industry projects, and is now fully functional.
• Focus is now on improving the frameworks and inputs to
facilitate its application, e.g.:
The integration of MIGA macro country risk assessment
into the evaluation of sustainability-related risks
The definition of generic risk values from an expanded
fact base in order to derive better, narrower risk
assumptions
The refinement of the quality assessment methodology
that drives risk reduction, along with issue importance.
• Talking with O & G: IPIECA, Total, Exxon, Statoil, PAE, Cairn
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For additional inquires, please contact:
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