sustainable asset valuation tool brochure
Sustainable Asset
Valuation (SAVi) Tool
Assessing the financial impact
of climate and other environmental,
social, economic and governance
risks on infrastructure
FOR MORE INFORMATION:
Oshani Perera: operera@iisd.org
David Uzsoki: duzsoki@iisd.org
Fida Rana: frana@iisd.ca
Andrea Bassi: andrea.bassi@iisd.org
THE CHALLENGE
Conventional project finance valuation methodologies
ignore a range of material risks, intangibles
and externalities.
2
IISD.org
The inancial impacts of climate and other environmental, social, economic and governance
(ESEG) risks are not adequately assessed throughout the infrastructure deployment cycle. The
Financial Stability Board (FSB) has recently issued recommendations to encourage the disclosure
of such risks. This is especially important for long-term assets such as infrastructure that have an
operating lifetime of several decades. Understanding the long-term financial impact of these
risks would not only allow a more informed project-selection process, but would also enable
investors to monitor their exposure under various climate change scenarios.
Traditional valuation methodologies often provide a less
The problem lies in the
convincing business case for sustainable assets than for
business-as-usual infrastructure, due to elements such
fact that inadequate
as higher upfront capital costs, prominent technology
identiication and
risks, greater attention to safeguards, and higher project
pricing of risks
preparation costs. The problem lies in the fact that
leads to inaccurate
inadequate identification and pricing of risks leads to
asset valuation and
inaccurate asset valuation and feasibility assessments.
Governments face additional challenges as they seek to
feasibility assessments.
position infrastructure as a catalyst for sustainable and
inclusive development Infrastructure locks in land use, design, technologies and capital for long
periods of time. It will therefore be a missed opportunity if these assets are not planned, designed,
procured and inanced in a manner that optimizes environmental stewardship, builds skills and
crowds in domestic businesses and investors.
IISD.org
3
THE SOLUTION
IISD has developed the Sustainable Asset Valuation
(SAVi) tool to assess the environmental, social,
economic and governance (ESEG) risks of
infrastructure projects.
4
IISD.org
HOW CAN SAVI ADD VALUE TO INVESTORS?
→ The Financial Stability Board has recommended that institutional investors and inancial
institutions identify and assess inancial impacts stemming from climate-related risks and
opportunities. SAVi can be deployed to identify and assess these impacts and risks across all
infrastructure investment portfolios. The outcomes can subsequently be used in corporate
sustainability reports and dedicated climate risk disclosure statements.
→ Infrastructure projects and portfolios can be stress tested under the climate scenarios
identiied by the Financial Stability Board, including change in precipitation patterns, rising
mean temperatures (physical risks), increased pricing of greenhouse gas emissions and more
stringent regulation of existing assets (transition risks), among others. The output generated
by IISD can be used as a more reined set of inancial inputs in the inancial model of the
project, calculating how the internal rate of return (IRR) and credit ratios (e.g., debt service
coverage ratio, loan life coverage ratio) change under these scenarios.
HOW CAN SAVI ADD VALUE TO GOVERNMENTS AND CITIES?
→ SAVi can be deployed to identity, quantify and monetize the various co-beneits and avoided
costs (economic, social and environmental) of infrastructure projects, enabling decision
makers to make more informed choices during project selection and design. Public policymakers can thus have the necessary quantitative evidence to assess if the additional capital
costs of resilient and sustainable infrastructure are indeed good value for money and
contribute to fulilling development policy objectives. In the same vein, policy-makers and
taxpayers will be able to assess how sustainable infrastructure projects reduce risks (and
associated costs) across the project life cycle and why these assets can be easier and cheaper
to use and operate.
→ Policy-makers can also use SAVi to prepare sustainable infrastructure projects in a manner
that crowds in domestic value chains and investors. Only then can infrastructure be
positioned as a motor for sustainable growth.
→ SAVi can also be used to prioritize infrastructure projects based on their potential to provide
sustainable public services, build skills, provide employment, trigger green industrialization
and innovation, steward the environment, attract foreign direct investment and much more.
Prioritizing is a critical step in the development of infrastructure project pipelines and
broader infrastructure master plans.
→ SAVi can also be deployed to forecast and monetize how infrastructure projects contribute
toward realizing the UN Sustainable Development Goals (SDGs). Governments will soon
seek to report on the progress of policies and programs associated with the SDGs, many of
which will be related to infrastructure.
IISD.org
5
THE SECTORS
SAVi has been developed for four sectors/asset categories:
Energy, buildings, roads, water infrastructure.
These assets were selected based on lending volumes and
consultations with stakeholders. In the latter of half of 2017,
we will focus on expanding focus on natural infrastructure.
6
IISD.org
SUSTAINABLE ASSET VALUATION TOOL (SAVI) IN USE
How would the financial viability of a 600 MW gas-fired combined cycle power
plant change under three climate scenarios?
Table 1 is an example of an output IISD has generated for a 600 MW gas-ired combined cycle
power plant, limiting our calculation to two climate variables in this case: gradual rise of air
temperature and decrease of water availability. The table shows how the plant load factor (annual
capacity) and eiciency (rate of conversion of feedstock to energy) change under three diferent
scenarios
Base Case
Scenario 1
Scenario 2
Scenario 3
Air temperature
(also proxy for water temperature)
24
+1.0 in 2050
+1.5 in 2050
+2.0 in 2050
Water availability
100%
95% at
summer time
90% at
summer time
85% at
summer time
Plant load factor (% change)
0%
-0.14%
-0.42%
-0.91%
Plant efficiency (% change)
0%
-1.45%
-2.21%
-3.38%
For example, under Scenario 3, we can see a decrease of about 1 per cent in load factor and a
decrease of more than 3 per cent in plant eiciency. These inancial inputs in the project inance
model can be adjusted accordingly, calculating the impact on the overall bankability of the asset.
Depending on user preference, IISD can also run these numbers through a generic inancial model
(customized for each asset type and developed following Corality’s SMART modelling approach)
and demonstrate how key inancial indicators change under each scenario.
Table 2 is another example of an output from our model. It was generated taking into consideration
policy-makers who are prioritizing employment creation as a main
policy objective.
Coal
Gas
Solar
Wind
Jobs created during construction
3,202
786
13,538
1,877
Jobs created during operation
116
159
689
439
This table shows the number of jobs created during construction (including manufacturing and
installation) and in the operating phase (operation and maintenance) for four diferent technologies:
coal, gas, solar and wind, based on the assumption of all generating 600 MW
of power.
Finally, table 3 shows the lifecycle CO2 emissions (generated during manufacturing, construction
and operation) for four diferent technologies: coal, gas, solar and wind, based on the assumption of
all generating 600 MW of power.
Coal
Gas
Solar
Wind
100.4 million tons
95.2 million tons
11.29 million tons
2.8 million tons
IISD.org
7
THE SERVICE
IISD seeks to work with policy-makers, project
developers, sponsors and investors, to assess
the climate and other ESEG-related risks and
externalities of their projects, portfolios and
project pipelines.
8
IISD.org
IISD CAN PROVIDE ASSISTANCE IN THE FOLLOWING AREAS:
→ Work with governments and cities to prioritize and deploy
infrastructure projects based on their ESEG co-beneits and
avoided costs.
→ Work with investors to analyze their infrastructure portfolios
and prepare climate and other ESEG-related risks and
opportunities mapping.
→ Customize SAVi to it a speciic portfolio, run diferent scenarios
to assess potential impact stemming from climate-related risks
and opportunities, demonstrate relevance to realizing SDGs.
→ Assess and report on how infrastructure projects contribute toward
realizing the SDGs.
→ Assist in preparing climate and other ESEG-related risk disclosure.
IISD.org
9
METHODOLOGY
Using the System Dynamics Methodology allows us
to define problems dynamically, calculating complex
correlations using feedback loops and delays in a
non-linear fashion.
10
IISD.org
The Sustainable Asset Valuation Model (SAVi) is based on the System Dynamics Methodology.
It serves as a knowledge integrator, generating a conventional cost-beneit analysis as well as a
more comprehensive assessment of the broader social, economic and environmental impacts of
infrastructure projects. This includes the quantiication of co-beneits, avoided costs and project
risks. For example, forecasted impacts could include reduced ish stock following the installation
of a hydropower dam. Avoided costs could be reduced energy consumption in sustainable
buildings or reduced construction costs in the case of better road siting. Finally, added beneits
could be increased productivity triggered by improved human health, which in turn was achieved
by improved ambient air quality. This methodology also allows project risks to be identiied and
estimated, illing an important information asymmetry for investors. Examples of these risks are
provided below:
→ Regulatory risks: Carbon taxes, changes in feed-in tarifs, changes in availability payments,
air pollution laws.
→ Market risks: Price volatility and disruptions in supply of inputs (coal, building materials,
water, feedstock) and outputs (energy and water services).
→ Technology risks: Unexpected costs in installation and O&M, losses related to poor
performance, cost of decommissioning, losses related to extreme weather, insuicient
track records.
→ Social risks: Issues related to land acquisition, disputes and delays related to environmental
impact assessments and social impact assessments, disputes and delays related to other
safeguards such as clearances and permits.
Investors use project inance models to estimate the inancial viability of the project by modelling
how project cash lows can service debt and generate return for sponsors. Using inancial models
following Corality’s SMART Financial Modelling approach, SAVi demonstrates how the diferent
project variables (such as capital expenditures, construction time, operation costs, operation
eiciency, corporate tax rate, etc.) change under a range of risk scenarios. These include delays in
construction, disruption in operation due to social or technological risks, and the impact of climate
change—such as heat waves—on the operation of the asset, among others.
IISD.org
11
© 2017 The International Institute for Sustainable Development
Published by the International Institute for Sustainable Development.
INTERNATIONAL INSTITUTE FOR SUSTAINABLE DEVELOPMENT
The International Institute for Sustainable Development (IISD) is one of the world’s leading centres of
research and innovation. The Institute provides practical solutions to the growing challenges and opportunities
of integrating environmental and social priorities with economic development. We report on international
negotiations and share knowledge gained through collaborative projects, resulting in more rigorous research,
stronger global networks, and better engagement among researchers, citizens, businesses and policy-makers.
IISD is registered as a charitable organization in Canada and has 501(c)(3) status in the United States.
IISD receives core operating support from the Government of Canada, provided through the International
Development Research Centre (IDRC) and from the Province of Manitoba. The Institute receives project
funding from numerous governments inside and outside Canada, United Nations agencies, foundations, the
private sector, and individuals.
The IISD Public Procurement and Infrastructure Finance Program is a multidisciplinary team of experts
on procurement, public–private partnerships and project inance laws and policies, infrastructure inance, tender
cycle advisory, project preparation, environmental and social safeguards, among others. Our core focus is to
increase value for money for the public purse in procurement of goods, services and infrastructure.
For more information on the SAVi tool please visit:
http://www.iisd.org/project/SAVi-sustainable-asset-valuation-tool
12
Head Office
Geneva Office
111 Lombard Avenue, Suite 325
Winnipeg, Manitoba
Canada R3B 0T4
International Environment House 2
9 chemin de Balexert, 1219 Châtelaine
Geneva, Switzerland
Tel: +1 (204) 958-7700
Website: www.iisd.org
Twitter: @IISD_news
Tel: +41 22 917-8683
Website: www.iisd.org
Twitter: @IISD_news
IISD.org
Valuation (SAVi) Tool
Assessing the financial impact
of climate and other environmental,
social, economic and governance
risks on infrastructure
FOR MORE INFORMATION:
Oshani Perera: operera@iisd.org
David Uzsoki: duzsoki@iisd.org
Fida Rana: frana@iisd.ca
Andrea Bassi: andrea.bassi@iisd.org
THE CHALLENGE
Conventional project finance valuation methodologies
ignore a range of material risks, intangibles
and externalities.
2
IISD.org
The inancial impacts of climate and other environmental, social, economic and governance
(ESEG) risks are not adequately assessed throughout the infrastructure deployment cycle. The
Financial Stability Board (FSB) has recently issued recommendations to encourage the disclosure
of such risks. This is especially important for long-term assets such as infrastructure that have an
operating lifetime of several decades. Understanding the long-term financial impact of these
risks would not only allow a more informed project-selection process, but would also enable
investors to monitor their exposure under various climate change scenarios.
Traditional valuation methodologies often provide a less
The problem lies in the
convincing business case for sustainable assets than for
business-as-usual infrastructure, due to elements such
fact that inadequate
as higher upfront capital costs, prominent technology
identiication and
risks, greater attention to safeguards, and higher project
pricing of risks
preparation costs. The problem lies in the fact that
leads to inaccurate
inadequate identification and pricing of risks leads to
asset valuation and
inaccurate asset valuation and feasibility assessments.
Governments face additional challenges as they seek to
feasibility assessments.
position infrastructure as a catalyst for sustainable and
inclusive development Infrastructure locks in land use, design, technologies and capital for long
periods of time. It will therefore be a missed opportunity if these assets are not planned, designed,
procured and inanced in a manner that optimizes environmental stewardship, builds skills and
crowds in domestic businesses and investors.
IISD.org
3
THE SOLUTION
IISD has developed the Sustainable Asset Valuation
(SAVi) tool to assess the environmental, social,
economic and governance (ESEG) risks of
infrastructure projects.
4
IISD.org
HOW CAN SAVI ADD VALUE TO INVESTORS?
→ The Financial Stability Board has recommended that institutional investors and inancial
institutions identify and assess inancial impacts stemming from climate-related risks and
opportunities. SAVi can be deployed to identify and assess these impacts and risks across all
infrastructure investment portfolios. The outcomes can subsequently be used in corporate
sustainability reports and dedicated climate risk disclosure statements.
→ Infrastructure projects and portfolios can be stress tested under the climate scenarios
identiied by the Financial Stability Board, including change in precipitation patterns, rising
mean temperatures (physical risks), increased pricing of greenhouse gas emissions and more
stringent regulation of existing assets (transition risks), among others. The output generated
by IISD can be used as a more reined set of inancial inputs in the inancial model of the
project, calculating how the internal rate of return (IRR) and credit ratios (e.g., debt service
coverage ratio, loan life coverage ratio) change under these scenarios.
HOW CAN SAVI ADD VALUE TO GOVERNMENTS AND CITIES?
→ SAVi can be deployed to identity, quantify and monetize the various co-beneits and avoided
costs (economic, social and environmental) of infrastructure projects, enabling decision
makers to make more informed choices during project selection and design. Public policymakers can thus have the necessary quantitative evidence to assess if the additional capital
costs of resilient and sustainable infrastructure are indeed good value for money and
contribute to fulilling development policy objectives. In the same vein, policy-makers and
taxpayers will be able to assess how sustainable infrastructure projects reduce risks (and
associated costs) across the project life cycle and why these assets can be easier and cheaper
to use and operate.
→ Policy-makers can also use SAVi to prepare sustainable infrastructure projects in a manner
that crowds in domestic value chains and investors. Only then can infrastructure be
positioned as a motor for sustainable growth.
→ SAVi can also be used to prioritize infrastructure projects based on their potential to provide
sustainable public services, build skills, provide employment, trigger green industrialization
and innovation, steward the environment, attract foreign direct investment and much more.
Prioritizing is a critical step in the development of infrastructure project pipelines and
broader infrastructure master plans.
→ SAVi can also be deployed to forecast and monetize how infrastructure projects contribute
toward realizing the UN Sustainable Development Goals (SDGs). Governments will soon
seek to report on the progress of policies and programs associated with the SDGs, many of
which will be related to infrastructure.
IISD.org
5
THE SECTORS
SAVi has been developed for four sectors/asset categories:
Energy, buildings, roads, water infrastructure.
These assets were selected based on lending volumes and
consultations with stakeholders. In the latter of half of 2017,
we will focus on expanding focus on natural infrastructure.
6
IISD.org
SUSTAINABLE ASSET VALUATION TOOL (SAVI) IN USE
How would the financial viability of a 600 MW gas-fired combined cycle power
plant change under three climate scenarios?
Table 1 is an example of an output IISD has generated for a 600 MW gas-ired combined cycle
power plant, limiting our calculation to two climate variables in this case: gradual rise of air
temperature and decrease of water availability. The table shows how the plant load factor (annual
capacity) and eiciency (rate of conversion of feedstock to energy) change under three diferent
scenarios
Base Case
Scenario 1
Scenario 2
Scenario 3
Air temperature
(also proxy for water temperature)
24
+1.0 in 2050
+1.5 in 2050
+2.0 in 2050
Water availability
100%
95% at
summer time
90% at
summer time
85% at
summer time
Plant load factor (% change)
0%
-0.14%
-0.42%
-0.91%
Plant efficiency (% change)
0%
-1.45%
-2.21%
-3.38%
For example, under Scenario 3, we can see a decrease of about 1 per cent in load factor and a
decrease of more than 3 per cent in plant eiciency. These inancial inputs in the project inance
model can be adjusted accordingly, calculating the impact on the overall bankability of the asset.
Depending on user preference, IISD can also run these numbers through a generic inancial model
(customized for each asset type and developed following Corality’s SMART modelling approach)
and demonstrate how key inancial indicators change under each scenario.
Table 2 is another example of an output from our model. It was generated taking into consideration
policy-makers who are prioritizing employment creation as a main
policy objective.
Coal
Gas
Solar
Wind
Jobs created during construction
3,202
786
13,538
1,877
Jobs created during operation
116
159
689
439
This table shows the number of jobs created during construction (including manufacturing and
installation) and in the operating phase (operation and maintenance) for four diferent technologies:
coal, gas, solar and wind, based on the assumption of all generating 600 MW
of power.
Finally, table 3 shows the lifecycle CO2 emissions (generated during manufacturing, construction
and operation) for four diferent technologies: coal, gas, solar and wind, based on the assumption of
all generating 600 MW of power.
Coal
Gas
Solar
Wind
100.4 million tons
95.2 million tons
11.29 million tons
2.8 million tons
IISD.org
7
THE SERVICE
IISD seeks to work with policy-makers, project
developers, sponsors and investors, to assess
the climate and other ESEG-related risks and
externalities of their projects, portfolios and
project pipelines.
8
IISD.org
IISD CAN PROVIDE ASSISTANCE IN THE FOLLOWING AREAS:
→ Work with governments and cities to prioritize and deploy
infrastructure projects based on their ESEG co-beneits and
avoided costs.
→ Work with investors to analyze their infrastructure portfolios
and prepare climate and other ESEG-related risks and
opportunities mapping.
→ Customize SAVi to it a speciic portfolio, run diferent scenarios
to assess potential impact stemming from climate-related risks
and opportunities, demonstrate relevance to realizing SDGs.
→ Assess and report on how infrastructure projects contribute toward
realizing the SDGs.
→ Assist in preparing climate and other ESEG-related risk disclosure.
IISD.org
9
METHODOLOGY
Using the System Dynamics Methodology allows us
to define problems dynamically, calculating complex
correlations using feedback loops and delays in a
non-linear fashion.
10
IISD.org
The Sustainable Asset Valuation Model (SAVi) is based on the System Dynamics Methodology.
It serves as a knowledge integrator, generating a conventional cost-beneit analysis as well as a
more comprehensive assessment of the broader social, economic and environmental impacts of
infrastructure projects. This includes the quantiication of co-beneits, avoided costs and project
risks. For example, forecasted impacts could include reduced ish stock following the installation
of a hydropower dam. Avoided costs could be reduced energy consumption in sustainable
buildings or reduced construction costs in the case of better road siting. Finally, added beneits
could be increased productivity triggered by improved human health, which in turn was achieved
by improved ambient air quality. This methodology also allows project risks to be identiied and
estimated, illing an important information asymmetry for investors. Examples of these risks are
provided below:
→ Regulatory risks: Carbon taxes, changes in feed-in tarifs, changes in availability payments,
air pollution laws.
→ Market risks: Price volatility and disruptions in supply of inputs (coal, building materials,
water, feedstock) and outputs (energy and water services).
→ Technology risks: Unexpected costs in installation and O&M, losses related to poor
performance, cost of decommissioning, losses related to extreme weather, insuicient
track records.
→ Social risks: Issues related to land acquisition, disputes and delays related to environmental
impact assessments and social impact assessments, disputes and delays related to other
safeguards such as clearances and permits.
Investors use project inance models to estimate the inancial viability of the project by modelling
how project cash lows can service debt and generate return for sponsors. Using inancial models
following Corality’s SMART Financial Modelling approach, SAVi demonstrates how the diferent
project variables (such as capital expenditures, construction time, operation costs, operation
eiciency, corporate tax rate, etc.) change under a range of risk scenarios. These include delays in
construction, disruption in operation due to social or technological risks, and the impact of climate
change—such as heat waves—on the operation of the asset, among others.
IISD.org
11
© 2017 The International Institute for Sustainable Development
Published by the International Institute for Sustainable Development.
INTERNATIONAL INSTITUTE FOR SUSTAINABLE DEVELOPMENT
The International Institute for Sustainable Development (IISD) is one of the world’s leading centres of
research and innovation. The Institute provides practical solutions to the growing challenges and opportunities
of integrating environmental and social priorities with economic development. We report on international
negotiations and share knowledge gained through collaborative projects, resulting in more rigorous research,
stronger global networks, and better engagement among researchers, citizens, businesses and policy-makers.
IISD is registered as a charitable organization in Canada and has 501(c)(3) status in the United States.
IISD receives core operating support from the Government of Canada, provided through the International
Development Research Centre (IDRC) and from the Province of Manitoba. The Institute receives project
funding from numerous governments inside and outside Canada, United Nations agencies, foundations, the
private sector, and individuals.
The IISD Public Procurement and Infrastructure Finance Program is a multidisciplinary team of experts
on procurement, public–private partnerships and project inance laws and policies, infrastructure inance, tender
cycle advisory, project preparation, environmental and social safeguards, among others. Our core focus is to
increase value for money for the public purse in procurement of goods, services and infrastructure.
For more information on the SAVi tool please visit:
http://www.iisd.org/project/SAVi-sustainable-asset-valuation-tool
12
Head Office
Geneva Office
111 Lombard Avenue, Suite 325
Winnipeg, Manitoba
Canada R3B 0T4
International Environment House 2
9 chemin de Balexert, 1219 Châtelaine
Geneva, Switzerland
Tel: +1 (204) 958-7700
Website: www.iisd.org
Twitter: @IISD_news
Tel: +41 22 917-8683
Website: www.iisd.org
Twitter: @IISD_news
IISD.org