This is the last 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 I: Introduction

Part II: Value Model Development

Illustrative Value Model

For the purposes of describing the value model, we developed a hypothetical case for a large manufacturing company with the following characteristics:

Number of Employees:	70000
Annual Revenue (in US Dollars):	$75B
Evaluation Period:	5 years
Corporate Tax Rate:	15%
Net Profit:	22%
Discount Rate:	3.5%
Adoption Rate of Solution (% per year)	5/15/30/60/100

As described above, each of the benefit levers were calculated with the following assumptions:

Assumption	Source
Annual Average Fully Burdened Salary of Employee (per year): US$ 60000	Manufacturing Data USA: Average Manufacturing Salary in US: $65449
Average % additional revenue due to innovative ideas (%age):5	Tough Venturing: ~27% additional revenue from new product innovation
Average annual facility cost per employee (per employee):1000	MIT: $2000/year
Average cost of employee fire (Annual):$5000	LinkedIn: Hiring + Firing Cost ~30-50% of annual salary
Average cost of employee hire (Annual):$10000	LinkedIn: Hiring + Firing Cost ~30-50% of annual salary
Average percentage reduction in facility usage (%age):20	McKinsey: ~35% of workforce are able to work from home post COVID
Average rate of employee turnover in the company (%age):12	APQC Employee turnover rate: Top=8.08; Median=14.78; Bottom=17.91. SHRM Report: 12%
Cost of goods sold as a percentage of revenue (%age):70	APQC Direct materials and services value as a percentage of cost of goods sold: Top=17.4; Median=30.5; Bottom=48.5
Energy Cost as a percent of revenue (%age):10	CDP Energy usage (MWh / $M in revenue): Top= 95.58; Median=171.34; Bottom=367.36
Expected percent acceleration in innovation (%age):10	Representative Model of a Large Manufacturing Company
Expected percent decrease in COGS (%age):0.02	Forbes: up to 45%
Expected Percent Decrease in Energy Consumption (%age):10	Constellation: Up to 30%
Expected percent improvement in operations efficiencies (%age):5	Forbes: up to 23%
Expected percent increase in annual revenue due to improved market perception (%age):1	APQC Percentage of revenue from completely new products/services launched in the past year: Top=16.3; Median=13; Bottom=9
Expected percent reduction in material waste (%age):10	APQC Scrap and rework costs as a percentage of cost of goods sold: Top=3; Median=5; Bottom=8
Expected percent savings in facility operations (%age):30	Authors’ assumption for a representative Model of a Large Manufacturing Company
Expected percentage increase in overall employee productivity (%):1	Authors’ assumption for a representative Model of a Large Manufacturing Company
Expected reduction in employee turnover (%age):20	Authors’ assumption for a representative Model of a Large Manufacturing Company
Facility Maintenance Cost as a Percent of Revenue (%age):0.5	APICS Total cost of repair and maintenance as a percentage of gross value of fixed assets: Top=0.74; Median=1.32; Bottom=3.5
Operating costs as a percentage of annual revenue (%age):70	Authors’ assumption for a representative Model of a Large Manufacturing Company
Percentage of COGS attributable to materials (%age):40	Financestrategists.com: 50 to 70% of total product cost.

Since costs are so subjective and specific to individual customer situations, we assumed that the organization will likely spend .01% of their revenue in ESG initiatives annually and about 0.02% of initial outlay to setup the ESG initiatives. This is a conservative estimate based on a survey of average spending outlined in published corporate ESG reports.

Based on the above benefit and cost levers, we worked out a tentative benefit and NPV schedule as follows:

Benefit	Initial	Year 1	Year 2	Year 3	Year 4	Year 5	Total
Employee Engagement		45M	44M	42M	41M	39M	211M
Enhanced Safety & Operating Conditions		219M	211M	204M	197M	190M	1B
Recycling Economy		57M	55M	53M	51M	49M	265M
Optimized facilities and resources management		43M	42M	40M	39M	37M	201M
Increased Shareholder Value		14M	13M	13M	12M	12M	64M
Accelerated Innovation		8M	8M	7M	7M	7M	37M
Benefit Realization Rate		5.00%	15.00%	30.00%	60.00%	100.00%
Realized Benefits		19M	56M	108M	208M	334M	725M
Costs	15M	7M	7M	7M	7M	6M	49M
Net Cash Flow	-15M	12M	49M	101M	201M	328M

Based on the above, the IRR works out to about 227% when calculated for a discount rate of 3.5%.

The net cash flow looks as shown in the figure below.

The full details of this value model are available by downloading the template from the Valufy website. Please see section at the end of this article.

Conclusion

We ran the value model for three different industry verticals: manufacturing, retail and oil & gas. For each of the verticals, we created value models for three company profiles: large, medium and small. The table below summarizes our results.

Key Takeaways

There is usually a positive IRR for ESG initiatives.
IRR ranges from 140-250% over five years
Payback is usually between 1.5 and 2.5 years.

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.