March 20, 1995
Why do so many businesses walk away from the highest–and safest–legal rate of return in the global economy?
Granted, the investment game can get dicey. Orange County, one of the wealthiest in the US, is thrown into bankruptcy by overindulgence in derivatives. England’s Baring Bank is brought to its knees by the actions of a single overaggressive young trader (whether on his own or with a nod and a wink from management). US investors in Mexico, who somehow couldn’t figure out that bonds offering 25%-50% rates of return just might be risky, are bailed out by the US taxpayer–who is still handing hundreds of billions of dollars over for the savings and loan shell game.
It’s enough to give a serious headache to anyone wondering where to park their cash. Yet one of the most lucrative, risk-free investment programs available today–available to any business, regardless of size or industry–is seriously underinvested, and faces management obstacles that make little sense from a fiduciary point of view. That investment is eco-efficiency.
Eco-efficiency means improving both environmental quality, efficiency and profitability by reducing unnecessary input and outputs to the production process–what architect/inventor Buckminster Fuller liked to call “doing more with less.” Eco-efficiency can include energy efficiency, water conservation, waste minimization, process re-engineering, design for environment–and the systematic integration of all of these. It provides a strategic focus that makes sense at the level of the firm, the region and the nation.
These sorts of changes all make sense in environmental terms. Look at some examples of what they mean in financial terms.
“A 1992 cross-industry survey of seventy-five case studies of pollution prevention found an average payback for industrial investments in waste reduction of only 1.58 years: an annual return on investment [ROI] of 63 percent,” according to Joseph Romm, in his book Lean and Clean Management. “The Louisiana Division of Dow Chemical has audited 575 energy- and waste- reducing projects since 1982. The average annual return on investment for those projects came ton astonishing 204 percent.”
Romm goes on to cite other specific examples: Boeing’s Green Lights program paid back its capital costs in two years, at a 53% ROI. Lighting retrofit programs at the St. Francis Hotel in San Francisco earned a 112% ROI, and 120% ROI at Elkhart (Indiana) General Hospital. A large office in New England showed a two and a half year payback from a lighting retrofit.
The “side effects” of these programs can provide even more striking benefits. Lighting improvements at the Control Data Corporation operations center in Sunnyvale, California, generated a 50% ROI from the 65% reduction in energy use–and a 187% ROI with productivity gains factored in. A lighting upgrade at Hyde Tools produced a 49% ROI–96% ROI with utility cost share, 146% ROI factoring quality improvements, 646% ROI considering the increased sales resulting from increased quality! (These analyses don’t include other eco-efficiency benefits like reduced compliance and waste management costs, market advantage.)
Of course, results will vary. But these numbers are compelling enough that you would think CFOs would be lined up trying to achieve these rates of return. (In fact you’d think Congress would be boosting, rather than cutting, Federal investment in energy efficiency…but that’s another story.) But the reality lags significantly behind the potential.
In northern California, for example, Pacific Gas & Electric Company (PG&E) has invested several more than a billion dollars in one of the country’s most aggressive Demand Side Management programs, designed to use investment in customer energy efficiency reduce the need for investment in utility generating capacity. Yet despite outreach programs, generous cost sharing offers and a business relationship with every business and residence in the region, these programs have reached only an estimated ten percent of area businesses.
But the problem does not lie just with the utility companies. All too often, businesses pass up these substantial savings, even when utility cost-sharing dollars are available. In many cases, companies set ROI “hurdle rates” on energy efficiency projects 3 and 5 times higher than ROIs they would demand of other capital projects.
In the next installment of The New Bottom Line, we’ll explore why this happens. Why would smart managers not take advantage of such an evident easy success? What obstacles stand in the way of more companies implementing eco-efficiency programs? What can be done to overcome those obstacles? Where can your company turn for help?