Business Planning and Budgeting
Businesses that commit to environmental and social responsibility – sometimes referred to as corporate social responsibility or sustainability – begin incorporating environmental and social priorities into their business decisions, including their business plans, purchases and financial investments. This approach is often referred to as the triple-bottom line (rather than a single bottom line that only looks at financial aspects), or the “blended bottom line”. In so doing, the business becomes concerned with environmental and social factors, in addition to economic ones when measuring its success and planning for the future.
Firms with business plans who are following the path to become more sustainable often begin to incorporate their environmental and social objectives into their annual and long-range plans. This way they are better equipped to monitor their performance towards their “non-financial” objectives and introduce course corrections as necessary.
Since some environmental initiatives require upfront investments in order to achieve environmental goals and realize cost-savings, their costs must be incorporated into financial plans and budgets. An obvious example of this is retrofitting your premises for energy efficiency. The costs of building upgrades might not be realized for three or four years. These costs need to be budgeted for and factored into the annual budgeting process. Social initiatives, such as offering a health and extended benefits package for your employees or improving the accessibility of your facility must similarly be accounted for through your budgeting process. In many cases, the financial benefits realized through improved employee morale, increased employee retention and growth in market share might only be realized over the longer term, and often in very intangible ways, making it difficult to quantify.
Firms that incorporate social and environmental factors in their business cases and financial analyses, often incorporate extended timelines in payback cycles, consider supply chain implications, look at end of life or lifecycle issues, and consider additional stakeholder interests. By applying this wider lens to decision-making, businesses are able to take into account hidden costs and unrealized opportunities in their business, investment and purchasing plans. For instance, comparing the costs of using a toxic product with a greener alternative is not a simple purchase price comparison, but rather must include other hidden costs like worker health and safety, product handling/storage and regulatory issues.
Incorporate Social and Environmental Objectives into Business Plans and Budgets
An important success factor in environmental management is to ensure that environmental programs and initiatives are integrated into regular planning and budgeting cycles and business cases, rather than considered as side projects. When sustainability aspects of the business are managed in this way they become a second bottom line to report on, plan and resource.
Once you have identified your top environmental and social initiatives, you need to identify the resources you will require in time and money to carry them out. Some organizations find the cost-savings they generate from simple environmental measures (such as reductions in paper consumption, energy savings from energy efficiency measures or facility improvements that reduce workplace accidents) can be used as a set-aside to fund other environmental initiatives. The University of BC, for example, has saved approximately $23M since 2000 as a result of avoided energy costs and they use these savings to fund their Sustainability Office which designs and implements campus-wide sustainability initiatives, many of which identify additional annual cost-savings for the university. A further step would be to mandate your purchasing and financial staff to consider longer-term social and environmental aspects in business investments, such as capital projects. BC Hydro has done this in a process they call “Structured Decision-Making” in which they incorporate their social and environmental objectives in their business case requirements.
Use Lifecycle Costing
Lifecycle assessment or lifecycle costing is a business case process that incorporates many of the costs that are not included in traditional financial accounting. The lifecycle cost is the sum of all recurring and one-time (non-recurring) costs over the full life span or a specified period of a good, service, structure, or system. It includes purchase price, installation cost, operating costs, maintenance and upgrade costs, and remaining (residual or salvage) value at the end of ownership or its useful life.
In traditional models, lifecycle costs such as health and safety, environmental impacts and other costs are often seen as external to the decision at hand and not incorporated into financial and business case analysis. For instance, a business may choose a toxic product for a cleaning application because the toxic product is cheaper than the greener option. However, if it takes the lifecycle costs into account, the business also includes the value of other related costs in the product’s lifecycle such as the use or disposal aspects. In the case of the toxic cleaning product, the business might consider other hard costs such as the need for hand and eye protection to use the toxic product, employee work downtime when accidents happen, and indirect costs like the environmental harm associated with the product. The resources below provide guidance on how you can start to implement lifecycle costing in your financial assessments.
- IC Structured Decision-Making Framework
- Sustainability Purchasing Network Total Cost of Ownership Workbook
- BC Hydro - Structured Decision-Making
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