EHS & sustainability investment case

19 minuteslast update: 03/09/2024

Written by Mouttou Natanasigamani

For over 20 years, I have worn many hats as both a Management Consultant and Client Strategy Leader, dealing with companies and their HSE&S challenges in many industries. To understand and help my clients, I browse through their annual reports and keep track of their evolution. When I specifically focused on the mission, vision and values that companies communicate annually to the external world over the past five years, I noticed the following trend: Companies are starting to strongly exhibit the importance that they give to their people and planet on top of profit. Some of them project this with their social, environmental and economic values. The key takeaway is:

It becomes an absolute requirement that you invest in safety and standards for your employees and environment.

If your firm wants to operate in this competitive and disruptive environment and to make profits, it becomes an absolute requirement that you invest in safety and standards for your employees and environment by allocating the right level of your budget towards these goals. My topic today is to highlight some of the key dimensions that matter when making the case to invest in a Environment, Safety, Health and Sustainability (EHS&S) solution. I will take you on a journey to kindle your thought process by

• defining your challenges,
• exploring the critical elements of an effective EHS&S solution,
• and developing an understanding of your current situation or systems and processes to better expose your unique challenges.

You will receive a PDF template for your potential investment case. We will go step by step through all parts of that template in order to

• assess the value-add that a new EHS&S solution brings,
• quantify all attributes into appropriate numbers utilizing the example templates,
• and financially evaluate the potential investment of the EHS&S solution from the calculated net present value, payback period and respective return on investment.

The aim is to help you reinforce your EHS&S department to align with your business strategy and respective stakeholders.  

Defining the challenges

First and foremost, define the EHS&S related challenges that your organization faces. Regardless of which industry you are operating in, each organization has both generic and specific challenges. These challenges can create risks of small, medium or high magnitude for your organization. These risks can disrupt either your routine operations or impact you strategically. Failure to account for these risks can impact your operations with anything from a mild disturbance to a huge legal dispute. Repercussions could affect not just your organization as a whole but also the larger public. If the obligatory legal compliance statutes in place wherever your organization operates are not followed, this could also result in financial penalties. But, most importantly, the challenges that need attention once discovered or could have been prevented by consistent monitoring of appropriate parameters, could at any stage lead to fatalities. Strategically, your organization’s reputation will take a short or long-term toll, which will cast a shadow over the relationships with all key stakeholders.

Discovering the right solution

Obviously, it is essential that you deploy the right resources to monitor and resolve the EHS&S related challenges, such as a state-of-the-art EHS&S software and respective processes. Some of the key areas that can be addressed through an EHS&S software are:

• Health & Safety: Prevent incidents, assess and mitigate risks and provide guidance through online instructions,

• Risk & Audit Management: Clearly set objectives for your programs, consider all aspects of risks, audit all levels internally and align with external stakeholders,

• Legal Compliance: Maintain legal register, handle inspections, absolute management of changes, regular content updates,

• Register of Hazardous Substances: Workflow-oriented approval process, fully compliant chemical management, tracking of application and storage areas, dangerous goods management,

• Air, Water & Waste management: Environmental reporting, sustainability reporting,

• Control of Work: Managing permit to work, safeguards, etc.

Moreover, as with the incorporation of any new technologies, the focus is also to profit from:

• Rich and proven user experience

• Fully integrated modules with an all-in-one platform

• Smart reporting on-the-go

• High-performing Customer Success and Consulting services teams

• Flexibility to adapt to requirements

• Cloud-based, easy updates and very low effort to maintain

• ISO certified management systems, etc.

Assessing Value

Along with pulling what you define as your organization’s potential EHS&S challenges and considering  OSHA’s hazard categories, such as Biological, Chemical, Ergonomic, Physical, Safety, and so on, it is essential to also assess the value that a HSE&S solution will bring to your organization by resolving hazards, monitoring proactively and preventing problems at early stages.

Ideal “To-Be” Scenario:

Although it’s very complex to assess what value a EHS&S solution can bring to your organization specifically, I will attempt to spell out generic types of value drivers that could help ignite the thought process here:

• Based on the specific challenge and respective hazard identified, it’s obvious that your organization has certain expectations for what a EHS&S solution should deliver. Tracing the high-level requirements of the solution can be your first driver.

• The breadth of functions and it’s the solution’s capability to address and mitigate the risks.

• How your organization’s reputation can be kept intact without any damages incurred due to the hazards that we discussed earlier, not just in the immediate but also in the long term.

• Not only the product itself, but also the level of services and warranties that can be provided by the EHS&S solution vendor.

• How much trust and confidence in mutual success the EHS&S solution vendor inspires.

Now that the value drivers have been hashed out, the business and technical requirements also need to be drafted. So, we as the EHS&S solution vendor can work on the cost of the respective solution including implementation. By this first step (let’s call it “New Solution Cost”) we will have the estimated total cost of your new EHS&S solution, including the value that it will add.

Factual “As-is” Scenario:

Beyond understanding the new solution cost, it is obvious to understand the financial consequence to the whole investment. Note that, like the value drivers can be different to different organizations, the same applies for the financial aspect.

• It’s very important to understand the cost of the systems & processes that are in place today (could be Excel or any other standard solution). You should also consider the scenario of you having no solution currently.

• Quantify the issues that you are facing with current systems and processes. Don’t just consider Total Cost of Ownership of such systems, but also note the impact of:

  • Incidents you are unable to manage

  • Situations which made your organization vulnerable due to non-compliance

  • Low engagement and higher employee attrition due to the risks that they could face

  • Ad-hoc scenarios leading to hazards

  • Inability to bring your products to market on schedule due to these issues

  • Unhappy customers who are wary of buying from a risk-prone organization

  • Competition having an advantage due to a lack of ability to compete effectively in the market

  • All the negative numbers you accounted so far due to these issues

Through this step (let’s call it “Expected Savings”), we will have total costs of your current systems & processes including the issues quantified monetarily. Thus, we can derive the savings that will be realized during the operational Ideal “To-Be” Scenario.

The buck doesn’t stop here!!!

Crunching the Numbers

Considering the numbers from the above As-Is and To-Be scenarios, the next step is to have an in-depth look at the long-term cash flow. When considering a time frame such as Year 0 to Year 5, where in Year 0 you consider all the capital expenditures that may be needed and subsequently from Year 1 on you consider the net pre-tax income (which is deduction of your new solution cost from expected savings). Knowing the % cost of capital and applying it to the cash flow over a five-year term, the net present value of the project for the whole term can be found. To determine the period where the investment’s benefits exceeds the cost during the whole term of 5 years, the payback period can be calculated and indicated in months. And the percentage of ROI is derived by considering the net pre-tax income for the 5 years term divided by the total cost of the project throughout the whole term. I guess the swirl of calculations have confused some of you. In practice, having the numbers and a clear break down of steps will make this evaluation process much simple.

For increased clarity on the calculations, the following is a rough template with respective steps described for your convenience:

Instructions for using the template

To use the template efficiently, follow the detailed explanations below, for all template elements.

Objective of Table A above: To calculate the expected savings when your organization gets rid of current EHS&S related issues and existing legacy solution.

i. Quantified issues : Annual average predictable costs over next years (for e.g. costs of accidents, human loss, recovery time, replacements, trainings, bringing back-to-normal stage, non-compliance, etc.) based on the history in the past years.

ii. Current solution costs : The cost of current outdated legacy solution and additional resources to maintain.

iii. By adding the above costs (i + ii), the expected savings as benefits in Euros can be derived.

Objective of Table B above: To calculate the Net pre-tax income for future years, considering the expected savings and total cost of the New EHS&S solution.

iii. The expected savings from getting rid of the current issues and legacy solution as calculated in Table A.

iv. The total cost of ownership of New HSE&S solution for future years (years 1 to 5). The initial cost on hardware and one-time software license fees if any need to be captured as Capex in Year 0.

v. The annual Net Income before taxes can be derived by subtracting the new solution cost from expected savings.

Objective of Table C above: To calculate the net present value of the project as a whole.

vi. First determine the present value for respective years by :

1. A. Filling the cash flow for years 0 to 5 in the above table. The cash flow = Annual Net pre-tax income as calculated in step v.
2. B. For respective years’ cash flow,  calculate the present value by either
   1. Using Excel PV function (with Excel help)  or
   2. Using formula PV = FV / (1+r) ^n where PV is Present Value, FV is Future Value from the cash flow, r is Cost of Capital, n is Number of the time period

vii. The Net Present Value of the project is sum of the present values for the whole term of 5 years.

Objective of Table D above: To calculate the Payback period of the project.

vii. The steps as follows:

1. A. Fill the Present Value of cash flow for respective years as calculated in step vi
2. B. Calculate the cumulative values for respective years from year 0 to 5.
3. C. Payback period = (i – c)/o where
   1. i = Initial investments in year 0
   2. c = Cumulative present value in the year just before break-even
   3. o = Original cash flow in the break-even year

vii. Payback period can be represented in months or years.

Objective of Table E above: To calculate the Return on Investment of the project.

• Steps ix. & x. are explained as above.

In summary the following financial results can be revealed after using the right euros in the templates above:

1. Net Present Value of your HSE&S investment today, considering all your future savings and costs, in long term,

2. Payback period in months/years during the project term, when you start realizing the benefits of your HSE&S investment.

3. Return on your HSE&S Investment % across the whole term.

Closing Statement

It is important to note that each organization has their own specific challenges. In addition, the values that can be gained with the new EHS&S solution depend on various factors such as your industry, region(s), the market you serve, the products you produce, etc. This article was meant to provide you with high-level insights and inspire you to prioritize building a factual investment case that covers your specific EHS&S end-to-end process needs, aligning with your organizational strategy. Some elements as part of the investment evaluation such as quantifying the issues and not only considering the cost of new solution but also quantifying the value around it, needs specific in-depth analysis to come to near approximates. To pursue such analysis and pitch a final investment case, I can be of help. If interested, please drop me an email at mouttou.natanasigamani@quentic.com for a short discovery call and potential workshop as next productive steps.

Finally, extensive research and experience has affirmed that the euros you will invest in a EHS&S solution result in abundant returns. Although one of the core emphases here is to evaluate the financial attractiveness of the project, it is even more crucial to remember that high value will be perceived by the people throughout over your organization and by those you serve across the planet.