This is first of three parts of this article which was originally published with Arie Polichuk on LinkedIn. The full pdf of the article can be found here: ESG_Business_Value_Model

Part II: Value Model Development

Part III: Illustrative Value Model

Introduction

As part of our research to explore if ESG initiatives are indeed profitable for business (research article coming soon), we set out to develop a framework which can be used to measure and track the business value of such initiatives. But let’s define what the value framework consists of.

At a minimum, a value model consists of measuring the net present value of benefits vs. costs over a defined time period of evaluation. For ease of organization, we usually tackle the benefits and costs under broad buckets which we will call benefit levers and cost levers. Inside each of the levers are key metrics which are then quantified to derive an internal rate of return (IRR).

What is ESG?

“ESG stands for Environmental, Social, and Governance. First coined in 2005, ESG covers a wide range of issues that may have a direct or indirect impact on financial relevance. Some of these issues that come under the purview of ESG reporting include resource management, supply chain management, organizational health, safety policies, and building trust through transparency.” – ESG.org

In this article, we will discuss how we developed a framework to measure the business value of an ESG initiative. We will show how we arrived at common benefit and cost levers used in the framework. We will present the equations used to calculate the key benefit and cost metrics along the assumptions we made. Finally, we will execute the model against a representative manufacturing company and explore the value proposition.

All of the models, work and equations are able to you through a free template available on Valufy. See instructions on downloading Valufy and the ESG value model template in the appendix of this article.

Framework Development Methodology

To develop the value framework, we had to decide on the benefit and cost levers that we wanted to use in our framework. Obviously, we wanted these levers to be as generic as possible to be applicable in as many ESG initiatives as possible. We used a combination of design thinking based primary research as well as data based secondary research to arrive at a common set of benefit and cost levers.

To develop the initial benefit and cost levers, we conducted design thinking exercises which are described below.

Benefit Levers Identification:

In the design thinking exercise, we used eight different dimensions to begin exploring in a guided fashion:

Benefits relating to the employees of the company
Benefits relating to operations and processes
Benefits relating to circular economy
Benefits relating to market and competition
Benefits relating to social, community, health and safety
Benefits relating to data and reporting
Benefits relating to risk and regulatory concerns
Benefits relating to innovation in recyclables and renewables.

Please see actual exercise output in the next section.

To validate that the arrived benefits were indeed representative of actual companies, we did a textual word analysis of ESG reports of a sample of corporations across the globe.

Cost Levers Identification:

Similarly the design thinking exercise to identify costs, we used the following five dimensions:

Costs relating to people
Costs relating to processes
Costs relating to technology
Costs relating to customer
Costs relating to regulatory concerns

In part 2 and part 3 of this article series, we will discuss the development of the value model as well as showcase it through an illustrative use case.

DOWNLOAD & REUSE VALUE MODEL TEMPLATE

Here are the steps to use this customizable ESG value model template for your own organizational needs:

Go to https://valufy.net and click on “Get Valufy from Windows Store” from the top menu. It is free for individual usage.
After you download and register to use the tool, click on “Download Templates”.
In the ensuing drop down dialog, select “Valuso ESG Template”.
You can use it as is or customize it to your needs by adding your new metrics, benefit and cost levers.