Making Sustainability Relevant in Financial Terms

March 11, 2017

By: Paul J. Yaroschak, President, Sustainable Methods, LLC, and THG Senior Advisor for Sustainability, Site Cleanup, and Chemical Risk Management

Sustainable Decision-Making. Corporate CEOs and government agency executives generally understand the concept of sustainability and support it. That said, day-to-day decisions are primarily made on the basis of the corporate balance sheet, return to investors, cost/benefit expectations, budget limitations, and government agency missions. In order to fully integrate sustainability into business decisions, sustainability must be translated into financial terms that executives can understand. In the early design phases of consumer products and large systems such as aircraft, there are numerous decisions that have substantial environmental, human health, and cost impacts throughout the life cycle. These decisions can involve choices in energy sources, chemicals and materials, water and land use, and noise levels. A robust analysis of the impacts and associated costs of the alternatives can often sway design decisions in favor of a more sustainable solution.

Traditional Life Cycle Assessment (LCA) can display the life cycle impacts of design alternatives, but lacks some important financial information needed by executives in order to make fully informed decisions. LCA must be combined with robust and thorough Life Cycle Costing (LCC). This is particularly important for the Department of Defense (DoD). Large military systems and platforms can have a life cycle of 30 years or more. Resources are costly and, in some cases, dwindling. Without a full understanding of life cycle impacts, significant impacts and costs may be unintentionally inserted during development and design phases of acquisition and later incurred by the logistics, installations, and operational communities. Early sustainable design choices can make a significant difference in these costs. In an effort to promote sustainable decision-making, DoD developed a methodology called a Sustainability Analysis (SA) that combines LCA with LCC.
The Role of Life Cycle Assessment. LCA is a method for evaluating impacts resulting from alternative uses of resources (inputs) to produce, use, maintain, and dispose of a system or product. ISO Standard 14040 is considered the most robust LCA method. However, use of the ISO standard is time intensive and requires extensive data for the life cycle inventory (e.g., data for various industrial processes). DoD developed a streamlined LCA method specifically for the DoD Acquisition process. It combines “process level” LCA with Economic Input-Output (EIO) LCA. The EIO LCA can be used, if desired, as a shortcut to estimate “upstream” impacts from materials extraction and product manufacturing. Sustainability attributes cover the use of resources such as energy, water, land, and chemicals/materials. The impacts of using these resources are divided into the following general categories: mission, human health, and environment. Within these categories, there are a number of possible specific impacts, depending on the system, with associated life cycle costs. Examples of specific impacts include global warming, human carcinogenicity, water depletion/degradation, and land use/degradation.
The Role of Life Cycle Costing. In order to make sustainability relevant to decision makers, the costs associated with impacts can be added to the direct life cycle costs of each alternative analyzed. For example, the choice of energy source or specific chemicals or materials can have significant life cycle cost implications during the operation, maintenance, and disposal phases of a system. The SA divides these costs into three types: (1) Internal costs are those paid by the company or agency at some point in the life cycle. Examples include the “fully burdened cost of fuel,” cost of materials and labor in production and maintenance activities, medical monitoring of employees, hazardous waste handling, emission/discharge controls, environmental permitting, and system disposal. (2) External costs are the costs typically borne by society at large, for example, as a result of emissions and their associated environmental and health costs. One of the innovations in the Sustainability Analysis is the ability to monetize impacts, using peer-reviewed and government agency values. (3) Contingent costs are costs that may occur as a result of future events or activities, for example, the increased cost of testing and acquiring new chemicals/materials due to regulatory induced phase-outs of chemicals/materials that present unacceptable human health risks. Examples include the EPA Chemical Management Plans developed under the Toxic Substances Control Act and the European Union’s chemical management regulation called “REACH.”
Key Steps in a Sustainability Analysis. DoD developed a draft SA guidance document that lays out a series of steps starting with identifying the “functional unit” for which all alternatives will be compared and for which all data and metrics will be based. The functional unit is the same as, or similar to, a DoD Key Performance Parameter for a system or a specification/performance requirement for a component. In other words, what is the system or component required to do? Other steps include developing the important Life Cycle Activity Profile, collecting data for estimating life cycle costs, and deciding which impacts are most important for the system being analyzed. The concept of deciding which impacts are most important is often called “materiality.” The final step in the process is the comparison of alternatives. Users can modify the order of the steps as necessary. The steps are sometimes iterative depending on the complexity of the system.
Pilot Projects with Industry. To test the methodology and draft guidance, DoD conducted extensive outreach with engineering teams from companies such as Boeing, Lockheed-Martin/Sikorsky, General Electric, BASF, 3M and others. In FY-13, DoD completed pilot projects with Boeing and Sikorsky to test the methodology on two design alternatives related to acquisitions of the P-8 aircraft and H-60R helicopter, respectively. The analysis examined the impacts and costs of hexavalent chromium coating systems versus a safer substitute. Lessons learned from the projects were applied to version 2.0 of the draft SA guidance document.

As part of the continuing peer review, pilot projects, using version 2.0 of the guidance, were completed by LCA experts in Lockheed Martin, General Electric-Aviation, and 3M, on various systems, products, and processes. For example, General Electric’s “Ecoassessment Center of Excellence” conducted an analysis using the DoD SA that compared a traditionally manufactured vital jet engine aircraft part with the same part using additive manufacturing. The additive manufactured part, a fuel nozzle, resulted in less material waste, had a life span five times longer than the traditional part, and was lighter in weight. The pilot project analyzed a twin-engine transport plane with 19 fuel nozzles per engine during 60,000 landing and takeoff cycles with a 2-hour flight time. Use of the additive manufactured part resulted in weight reduction of approximately 100 pounds per engine. GE engineers calculated a 0.15% reduction in fuel consumption per 100 pounds of engine weight. Multiplying the weight reduction for two engines per aircraft, hundreds of aircraft in a fleet, and a 30-year life span, the fuel savings and greenhouse gas reduction are substantial. In this analysis, the additive manufactured part reduced life cycle costs by $1.14 million per aircraft. If scaled to a fleet of 1000 aircraft, the savings would be over a billion dollars. We saw this effect in a number of pilot projects and called it the “power of cost magnification.” In other words, what seems to be a small design change (e.g., the use of non-hexavalent paint), can prove to have substantial less impacts and total life cycle costs when estimated over many units and many years.
Integrating Sustainability Analyses into the Evolving DoD Acquisition Process. Keep in mind that the SA is an “overlay” on performance. In other words, of the alternatives that can meet the performance requirement, which alternative has the least human health and environmental impacts and total life cycle costs? The SA can be integrated into the traditional Systems Engineering process and will help inform design, trade space, and long-term supportability decisions.

DoD is incorporating sustainability considerations into its “Defense Acquisition Guidance”, the primary guidance for the acquisition community. The SA guidance thus provides the detailed process for incorporating sustainability considerations. A recently completed draft version 5.0 of the SA guidance incorporates lessons learned from the most recent pilot projects. Most importantly, a web-based tool is being developed by the private sector to automate the estimation of impacts and the impact monetization calculations. It functions similar to an income tax preparation program in that it guides the user through the SA process using simple language, a flow diagram, and automated calculations. Input data are supplied by the user. The framework was reviewed by the industry peer review group and a “Validation & Verification” was conducted on the tool in 2016. The validation process noted a number of improvements needed for long-term viability and ease of updating embedded data. Those improvements are underway.
Summary. An SA can help uncover previously hidden or ignored human health and environmental impacts and their associated life cycle costs. Such an analysis can help inform both design decisions when making choices among alternatives and also inform long-term supportability requirements and end-of-life actions once a design has been chosen. An SA provides a consistent, practical, and flexible method for a fully informed analysis of alternatives. In summary, use of SA will better link design and investment decisions to long-term impacts and Total Ownership Costs, thus making sustainability more relevant to corporate CEOs and government agency executives.
Mr. Yaroschak previously served as Director, Environmental Compliance & Restoration Policy in the Office of the Assistant Secretary of the Navy (Installations & Environment). Most recently, he served as the Deputy for Chemical & Material Risk Management within the Office of the Secretary of Defense. He is currently President of Sustainable Methods, LLC and THG Senior Advisor for Sustainability, Site Cleanup, and Chemical Risk Management

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