New Bottom Line Volume 4.7 – Eco-Efficiency: A Winning Investment Strategy (2)

April 5, 1995

In the last installment of The New Bottom Line, I discussed the impressive rates of return on investment (ROI) that are often available from investments in eco-efficiency–energy efficiency, water conservation, waste minimization, process re-engineering, design for environment–and their systematic integration. And I observed that all too often, businesses pass up these substantial savings, which represent some of the highest–and safest–legal rates of return in the global economy.

Why does this happen? 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?

According to a recent study entitled “Designing Industrial DSM (Demand Side Management) Programs that Work”, Steven Nadel and Jennifer Jordon of the American Council for An Energy Efficient Economy, there are many reasons why companies have not implemented all of the cost effective energy efficiency projects identified in their facilities, including:

  • Energy costs are often small relative to other costs; energy efficiency projects are often considered non-strategic and take a low priority when firms allocate scarce capital.
  • Many firms have concerns about the long term persistence of energy efficiency savings, the amount of production downtime that will result from measure installation and maintenance, and the effects of process changes on productivity and on-going operations.
  • Payback periods may exceed customer investment criteria. [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.]
  • Companies have substantial technical expertise in their own fields, but often lack the human and capital resources to identify, evaluate or implement energy efficiency improvement projects, and may lack good information about future environmental control costs that may be deferred by efficiency investments.

Other reasons may be less rational, but just as impeding. The investment in energy efficiency may come out of one department’s budget, while the savings benefit another’s, and the greater corporate good gets lost in turf battles. Or a manager observes “we tried something like that once before, and it didn’t work,” without considering specifically what didn’t work, or why, and how it could work better.

Utility companies have attempted to lower the financial barriers by providing companies with access to the long term capital and technical resources needed to identify, evaluate and implement energy efficiency projects. Cost sharing is often available to reduce the capital investment required. In the meantime (since the Utility role in energy efficiency may change as the industry is deregulated in many parts of the US), here are some things your company can do:

  • Make developing and implementing profitable eco-efficiency improvements, and documenting the results, part of someone’s management responsibility–and performance evaluation.
  • Conduct regular eco-efficiency audits to monitor resource use and identify opportunities; chart and disseminate the results like any other production or quality data. You might start with an energy audit, since that’s easiest to obtain from local utilities or energy service companies (ESCOs), but don’t stop there. There may be other savings possible in water efficiency, waste minimization and the like, and often synergies when these systems are looked at together. Examples: cutting hot water use saves energy as well as water; waste minimization strategies may reduce possible future liabilities, as well as procurement costs and waste management costs.
  • Collect case study examples of similar initiatives in related companies. Some people like to be the first to try a new innovation; others want to be sure the risks of “proof of concept” have been taken somewhere else.
  • Stay up to date on cost sharing and technical assistance for eco-efficiency projects that may be available from your local utility companies; these can reduce your capital outlay and thus improve project ROI.
  • Contact an ESCO or environmental consulting firm that can assist with evaluation and/or implementation. Some ESCOs will actually finance project costs, and take their payment as a percentage of savings realized, freeing your company of financial risk.
  • Subject your eco-efficiency investments to comparable hurdle rates (expected ROI) as other capital investments; if your finance people argue for a significantly higher hurdle rate, be sure they justify why. And be sure the analysis accounts for the multi-resource benefits–and possible productivity gains–that may be generated.

Above all, make the case in terms your managers or shareholders will understand. As Rob Shelton of Arthur D Little observes, in his article “Beyond the Green Wall”, environmental managers often fail to effectively communicate the benefits of their initiatives in business terms, not just “environmentalese”. Successful environmental managers today must be multi-lingual, speaking the language of engineering, biology–and finance.

(c) 1995 Gil Friend. All rights reserved.

New Bottom Line is published periodically by Natural Logic, offering decision support software and strategic consulting that help companies and communities prosper by embedding the laws of nature at the heart of enterprise.

Gil Friend, systems ecologist and business strategist, is President and CEO of Natural Logic, Inc.

May be posted intact–including this notice–in any non-commercial forum.
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