There’s no denying that sustainability is in the spotlight for businesses around the globe. According to Bloomberg, over a third of managed assets expected to have ESG mandates by 2025.
Each company is at a different place in its sustainability journey— some lead the pack with aggressive targets and investments to keep pace while others only focus on keeping up with the dynamic mandatory reporting landscape.
At the end of the day, anyone trying to affect serious change in the sustainability of their operations is asking the same three questions: where are we now, where do we need to be in the future, and how will we get there?
Numerous standards and frameworks already exist to help companies understand where they are now and where they need to be in the future. The Greenhouse Gas Protocol (GHG Protocol) is perhaps the most widely used standard to measure GHG emissions. Similarly, emissions targets are being set seemingly every day by corporations. Over 4,000 companieshttps://sciencebasedtargets.org/companies-taking-action are working with the Science Base Targets Initiative (SBTi) to reduce their emissions.
The effort and collaboration required for the development and widespread implementation of these frameworks was substantial. With climate change already affecting the lives of millions, the final (and potentially most difficult) question still needs to be answered: How will we get there?
For companies without a team of sustainability experts, it can be daunting to start answering this question, and sustainability projects often rely on evaluation criteria that differ from traditional projects. The metrics for defining a successful project shift from strict financial focus to include evaluating positive impacts on the planet.
Here are a few approaches industry leaders are taking to include sustainability in their project portfolios:
- Prioritize sustainability projects by their Marginal Abatement Cost (MAC): The Marginal Abatement Cost is the cost of reducing a marginal unit of CO2 equivalent (CO2e). For project developers, this metric requires a deep understanding of the project from a financial and emissions perspective. MAC is a useful metric in comparing projects that primarily impact emissions. A negative MAC indicates the project simultaneously generates financial value and reduces emissions.
- Reduce the hurdle rate for sustainability projects: The hurdle rate represents the minimum amount of return a project must meet to be executed. Hurdle rates are set internally and are often set company wide. This can disadvantage sustainability projects that have an impact on non-financial company targets and ambitions. By lowering the hurdle rate for sustainability projects, additional projects can be eligible for execution.
- Set a fixed yearly budget for sustainability projects: One of least metric-heavy approaches, creating a fixed budget for sustainability projects ensures the company is investing towards its sustainability goals. Project evaluation is still an important step to ensure the budget is being spent in the most efficient way possible.
These approaches can be combined with the company’s existing project portfolio evaluation criteria or with approaches not included here. Sustainability projects are necessary to future-proof many businesses— whether through capital generation or risk mitigation. Building a framework for incorporating these projects is critical to achieving targets and measuring impact.
Our Approach and Solution
The Energy Transition Management towards Net-Zero content (SXY) in SAP Profitability and Performance Management (PaPM) outlines an example of how businesses can measure their environmental impact aligning with the GHG Protocol. It allows them to analyze several emission-reduction projects from a financial and emissions-reduction perspective.
The content consists of three pillars:
- Emissions Calculations – This pillar covers an example of calculating a multinational oil refinery’s GHG Emissions Key Performance Indicators (KPIs) based on company survey-based data and following the principles of the GHG Protocol. Users can collect their company’s relevant inventory and invoices from their business units and upload them into the corresponding queries. The survey-based approach may also be replaced by a fully automated approach by leveraging the company’s existing ERP system.
- Net-Zero Target Setting – The second pillar provides a blueprint to understand current emissions and set near-term and long-term targets aligned with the methodology established in the Science Based Targets Initiative Net-Zero Standard. This allows for the companies to commit to Net-Zero and plan their operations accordingly to meet their goals. Our solution has considered the minimum ambition scenario as per the Net-Zero Standard. Our users also have the flexibility of increasing their emission reduction percentages to accelerate their progress.
- Emission Reduction Projects – Financial and Environmental Impact Analysis – The final pillar presents the economics of six emission reduction projects. Two of the projects: fuel switching and steam trap maintenance, are specific to a refinery context. The remaining four projects: virtual power purchase agreements, fleet electrification, energy attribute certificates, and purchasing carbon credits through offset projects, are sector-agnostic. The calculations present the Net Present Value of each of these projects based on their project costs as well as the emissions they would help avoid. From these values, the marginal abatement cost is calculated giving the users a clear picture to decide which projects would best fit their business goals. The projects only serve as an example to the powerful calculation engine of PaPM. The customer can fully customize which and how many projects they would like to consider in their portfolio.
The graphics (Figure 1 and Figure 2) presented below explain the logic behind the calculations related to the fuel switching project. These calculations include financial and emissions reduction KPIs. Of course, custom indicators can be configured in PaPM.
The key financial KPIs calculated are the incremental cash flow, the discounted cash flow, and the net present value.
The environmental KPI calculated is the quantity of emissions that are offset through this project. The NPV of the project is divided by the offset emissions multiplied by negative one to arrive at the MAC.
Additionally, our solution provides the users with a Scenario Analysis that enables them to choose any number or type of project based on their climate ambitions and analyze the impact of offsets against their emission target and fiscal budget. The three scenarios considered here are:
- Business as Usual: No projects are implemented
- Moderate: Only projects with negative MAC are implemented
- Aggressive: All projects are implemented
Closing the Gap
The Energy Transition Management towards Net-Zero content in SAP Profitability and Performance Management (PaPM) provides companies a viable solution to evaluate the financial and sustainability impacts of their projects. SXY provides business users the following benefits:
- Calculate Greenhouse Gas Emissions: Easily calculate Scope 1, 2, and 3 emissions according to the GHG Protocol for all company locations in one tool.
- Set Near and Long-Term Targets: Create future emission targets in line with the SBTi Net-Zero Standard and compare to historic emissions.
- Evaluate Emissions-Reduction Projects: Evaluate emission reduction projects from an emissions and financial perspective to provide relevant data for determining sound investments.
- Consider Ambition Scenarios: Projects can be grouped into scenarios to understand how to successfully meet emission reduction targets and stay under budget.
- Run Real Time What-If Analysis: Dynamic calculations allow for the possibility to understand how project economics are affected by changing assumptions
- Create Compelling Visualizations: Visualizing data and including relevant context can be achieved in the Qualitative Report.