Everybody’s talking about it: the cost of going green

Read the papers, listen to pundits, and you will know that everyone says it costs money to “go green” – and in a recession, it’s a luxury few firms can afford. This is consistent with other things we know – we think of environmental regulations, and we know that regulations often add cost to business. Take waste electrical goods – these now have to be disposed of correctly (WEEE regulations), and you can’t just hide them in the skip with the rest of your trash. So if everyone says it, and it makes sense, the logical conclusion is that it must be true.

Why would lemmings commit suicide?

There is a lovely example in this month’s news from an organisation that should know better: The Carbon Trust. This non-profit organisation has laboured with ingenuity and style for many years to help UK businesses become more cost competitive by reducing their emissions. Yet the first line of their press release says that four public sector organisations will “defy” the economic downturn by reducing their carbon footprints and slashing their energy costs by 25%. How cutting costs by reducing waste energy amounts to defiance in the face of pressure to reduce costs, is not made clear in the article. Could the strategy here be to use a standard prejudice about the cost of going green in order to lure readers in?

Many years ago, I was given a selection of books as a leaving present from a generous boss, of which my favourite was You Know What They Say... The Truth About Popular Beliefs. This book tackled a huge number of well-known “truths”, and examined the evidence for them in detail. These varied from things that just about everyone over five years old will tell you (“No two snowflakes are alike”) to beliefs that have serious consequences (“Rewards motivate people”). In some cases the evidence was mixed or reasonably good, but for most, the real evidence was so poor or non-existent that you wondered how people could go on saying these things (“Lemmings commit mass suicide”).

So what’s the evidence for the cost of going green? It is overwhelmingly in favour of saving money. There are of course rare exceptions – green initiatives that attract nothing but cost. In their excellent book Green to Gold, Winston and Esty describe how “going green” can (accidentally) reduce profits – most notably, through misunderstanding the market, for example by expecting a price premium, or planning on customer tastes fitting your planned innovations. However, the book mainly focuses on the plentiful examples of companies generating huge profits through environmentally sound strategies that are implemented well.

Recent research has continued to support the benefits of pursuing a green business strategy. For example, research published in January showed that firms that report emissions produce a bounce in their share price – especially if they’re small. In a study published last month, ISO 14001 certification in Brazilian firms was shown to correlate directly with improved profitability. There is a rapidly growing literature that looks at “green strategy” from a variety of perspectives, and shows that when executed well, green strategies pay dividends.

So, the next time someone tells you that going green will hurt your profitability, ask them if they know anything about lemmings.

Will the Green Deal help my business be more energy efficient?

Greg Barker and Green Deal providers.  Credit: DECCgovuk

The government wants businesses to become much more energy efficient, and the Green Deal was meant to be one of the ways to encourage it.  Big firms may be able to finance their own improvements, but finance was seen as an obstacle for SMEs in particular.  This was to be the purpose of the Green Deal for business customers – to provide affordable financing for energy efficiency on a “pay-as-you-save” basis.  Yet the media is full of assertions that it will do no good.  Do we have a problem?  Is the Green Deal a big deal for your company?

Delay

DECC announced recently that the Green Deal will roll out for domestic properties in October as planned, but that it won’t be available to non-domestic properties until later.  Ostensibly this is because it is more complicated.  Whatever the reason, this does mean that only home-based businesses will qualify in October – as long as they apply under the umbrella of the domestic Green Deal.  Any firm that has outgrown the dining room or barn conversion will have to wait – and as yet we don’t know exactly how long.

Landlord – Tenant problem

The Green Deal improvements are paid for by a financing company, while the beneficiary pays for them over the life of the project through their electricity bill.  How will this work for business tenants?  Apparently this has not been thought through, even though there are plans in place for ensuring domestic tenants and landlords can take advantage of Green Deal offers.  Commercial tenancies may be sufficiently different from their domestic counterparts that significant alterations need to be made to the scheme to make it suitable for companies.

So now we can see some problems.  However, just because a policy is coming under fire from the media and commentators, that doesn’t mean it will be no good, nor does it mean that you shouldn’t be interested.

So does my company need the Green Deal?

Most companies can save substantial sums by revisiting their use of energy and other resources.  However, the largest companies – and some smaller ones – have already been gaining enormous profits from doing this, without the Green Deal.  Why might your company need it?

First, the Green Deal specialises in sorting out energy usage.  This will give your organisation focus, if that’s what you need.

Second, the Green Deal will have specially trained energy advisers who will give your firm a report on energy efficiency opportunities.  Many such people exist already, and some NGOs even offer this service for free to qualifying companies, but if your firm hasn’t located this sort of expertise, the Green Deal might simplify the process.

Third, and by far the most compelling, is that the Green Deal offers finance.  The “pay-as-you-save” approach to efficiency improvements has been tried elsewhere and can be very attractive to a firm short of cash.  The concept is simple: a finance firm pays for the efficiency investment.  Payments to the finance firm come from the beneficiary’s electricity bill.  The “Golden Rule” means that the extra payment to the finance company must be less than the savings made through efficiency, so the beneficiary still saves a bit of money (and much more once the finance firm is paid off), but doesn’t need to invest their own capital.

This may be attractive to those firms eager to invest, but without other access to capital at affordable rates.  For firms that are sitting on cash, or whose credit rating makes loans affordable, the Green Deal may not offer a better rate than they would have been given elsewhere.

What should my business priorities be as regards the Green Deal?

Here there is no question.  Your priority should be to invest in people, technologies, processes and knowhow that cost-effectively reduce your environmental footprint – your use of energy, water and other resources, and your emissions of greenhouse gasses and waste.  This is a tall order – it’s hard work and takes commitment from the top of the business and engagement of every stakeholder in the firm.  If the Green Deal has no place in your sustainable strategy because it doesn’t offer what you need, then forget the Green Deal and do what you need to do.

Competition on sustainability is not about installing energy efficient technology.  It’s about making money now, and doing it in a way that means you will still be making money in 40 years’ time – that is sustainability.  That might or might not involve solar panels and insulation, but it definitely involves thinking strategically about the way you do business in terms of resources in and out.  Get to know what is available to you from the Green Deal, but don’t let it lead your strategy.  Your firm has its own place: you should take the lead, and use the Green Deal if – and only if – it suits your strategy.

Are companies that actively manage their environmental impacts worth more?

Waste heat is invisible to the naked eye but costly.

In short – yes.  They’re worth more money than those that don’t.  Regardless of your feelings about the environment, as long as you care about money, then you should be more willing to invest it in a firm that manages its impacts.

Some of you will say that of course, that’s because such companies know about regulations and meet them, so they face lower risk of fines or emergency costs.  That is certainly true, but it is not the main reason such companies are worth more.  Even without any fines or emergencies, those companies are likely to grow faster than their peers.

This is the finding of a recent piece of research from academics at the University of California.  They don’t look at why this would be so, but they do demonstrate that it works.  Companies that disclose their emissions aren’t just being “good citizens”, they’re also doing smart business.

In fact, there are two likely reasons for this – and both point to a conclusion that managing your environmental impacts will boost the value of your business. 

First, the group is self-selecting.  Those that benefit from reporting will do so.  That means the reports will almost always come from those companies that a) measure their impacts already, so there’s little extra cost in reporting, and that also b) will suffer no great embarrassment – in particular, it will be those for whom impacts are falling, or rising slower than the business as a whole is growing.

Second, the old saying “what gets measured, gets managed” is true, and this is especially true for cost areas like energy and materials.  Business leaders hate seeing cost per unit of output go up, because it means that they either need to accept less profit or charge more money.  When impacts are reported, they are usually directly connected to the use of resources – for example Greenhouse Gas Emissions relate to the use of fuel and power.  If the measures of consumption per unit of output go down, it’s good news – but no one will be working hard on the process of making that happen if there is no one measuring the result.

Should your firm report its emissions, or other environmental impacts?  My view is that this is the wrong question.  Yes, the research showed that this was associated with growth and value, but in my view it is not the reporting itself that generated this – it is the act of measuring impacts and thinking about cost-effectiveness that led to these firms outperforming the markets.  Because they were in a position to manage their costs down, they thrived.  Companies that measure their impacts will manage them better.  Managing impacts drives company value.  The reporting was just a signal to the market.

Would you like to explore how managing your firm's impacts could boost your growth and increase value?  Contact Julia at julia@jlsbm.co.uk, or (07766) 333864.

How much energy can your company save?

Lights are often left burning in offices at night.  Photo: caribb

With no end in sight to our tight economic times, companies are redoubling their efforts to reduce costs.  The continued high cost of energy makes this a favourite area to target.  Just how much can a company actually save on its energy bills?

Savings from equipment

Anything that uses power – electricity or process heat – should be your number one priority.  Lighting uses about 40% of a building’s power and is a top target, with savings of 40-70% of lighting energy within reach.  The Carbon Trust estimates that investing in better lighting equipment can reduce electricity consumption by 20%.  Motors and drives are another area with great potential for savings – up to 60% according to ABB – and payback periods are usually very quick for switching to variable speed drives.

Virtually all machines have potential for improvement, either through replacement of less efficient technology, or introduction of controls to make the best use of the technology you have.

Savings from buildings

Buildings are great wasters of energy.  The principle problems come from heating and cooling.  Older building stock often suffers from inadequate insulation – the standards and practices set in the past were based on lower energy costs.  Even newer buildings designed with high energy efficiency in mind may not perform as expected if commissioning was rushed, or if building use differs from what was initially envisaged.

Savings from waste

Waste costs far more than most firms realise.  The cost of disposal is a tiny fraction of the true cost of waste.  Consider the cost of producing that waste in the first place – not just materials but also the labour and facilities time.  Even worse is the waste that slips past quality controls and isn’t identified as waste until it reaches a dissatisfied customer.

Figures on waste vary dramatically, but most firms waste considerably more than they realise.  In the food industry it totals around 30% of production – in developing countries most is lost at harvest and storage, and in the developed world it is lost most through consumers and distribution.

Much waste is actually visible to employees, but often considered unimportant, or impossible to eliminate.  The source of these attitudes is often in a failure to realise just how much waste costs.  Also, it is difficult to tackle waste that is unintentionally designed in to agreed processes and systems.

Savings from behaviour change

How often have you passed an empty office building at night and seen all the lights blazing?  For those of you who have worked in production facilities, how many times have you seen refrigeration unit doors left open, or machines left idling between shifts?  In the service industry, have you ever seen an open plan office where all the computers and printers were shut off at night?  Who has seen windows opened because the air conditioning or heating was set too high?

We need control over the equipment that serves us, but often in the rush of work people make choices that waste energy.  Replacing equipment may mean that the waste is reduced, and in some cases controls can help, but an even better solution is to eliminate this waste altogether – and without capital cost – by changing behaviour.  Of course this is no easy task – but there are approaches to educating and motivating the people that really work.

How do you know how much you can save?

There are three essential steps in estimating how much you can save.  First, you must footprint your firm – find out how much energy you use, in what forms, when, and for what purpose.  This takes time to set up, but it is well worth it in terms of the savings it prepares you for.

Second, you need to estimate the potential to change each area of energy consumption.  This can be done at a high level, through benchmarking and similar comparative exercises, or at a more granular level by looking at technology alternatives or proportions of energy wasted.

Third, you need to pull together this analysis to show the big areas of energy spend, and the top areas of potential improvement.  Bring together the key people from across your organisation to examine the results.  Chances are that any area of potential savings is going to involve many departments – this is one of the reasons energy efficiency opportunities are often not spotted.

If you need help with any of this, please contact us: enquiries@jlsbm.co.uk.  We offer unbiased advice and expert consultative assistance to UK firms.

Durban makes adaptation a priority for business

The Durban Platform agreement on climate change has been welcomed, if only because expectations were so low.  Of course, it is just an agreement to agree something by 2015, and to do whatever is agreed by 2020.  But is this just a bit of political positioning, or does it hold important messages for businesses in the UK?

Floods in Thailand wreaked havoc on supply chains

Durban is an important “heads up” for businesses all over the world.  Some countries not previously committed to emissions reductions under Kyoto have now said they will definitely agree something in the next few years – including China, the world’sbiggest emitter.  For energy-intensive businesses competing head on with companies in developing countries, this may be good news.   For those firms in countries that will now have to commit, it may sound worrying.  However reducing energy intensity is good business – and because the change is some way off, those companies have an excellent opportunity to invest thoughtfully now, save money, and be ready for 2020.

In Europe, emissions are already regulated, and governments are using grants, taxes, and other powers to encourage industries to become more efficient.  Does this mean that there will be no particular change for firms in the UK and on the continent?

The biggest news for companies here (and big-ish news for firms everywhere) is that global emissions are likely to keep rising for some time.  A view from a growing number of experts suggests that this means we might face a narrower set of options by 2020: either to cut emissions much more dramatically than if we started now, and at enormous cost, or to risk temperature increases of greater than 2C.

On the assumption that the world will not opt for dramatic, extremely expensive emissions cuts, firms face an imperative to work now on adaptation, even though the exact impacts of 2C+ warming, and their timings, are still uncertain.  There are a number of tactics companies will be pursuing to mitigate the risk of more frequent extreme weather events and their impacts.  For example, some will relocate facilities away from areas at risk of floods and hurricanes.  Others may invest further in back-up solutions to deal with everything from power failures, to transport shut-downs, to extensive supply chain disruptions.

If your firm has an emergency planning process, now is the time to make sure it covers all the predicted impacts of climate change for your region, with an understanding of the potential severity and likely timescales involved.  If you have no such process, it is more urgent than ever that you get started.  Adaptation to an environment of growing risks is now a clear priority for business.

Which retailers are most efficient?

Retailers are under considerable margin pressure, so you would expect them to take any measures possible to reduce cost.  Much work has focussed on labour productivity, or getting more sales per staff person, for example by introducing self-checkout.  However there is still much to be done on resource productivity.

A recent data set on leading retailers’ greenhouse gas emissions, sales, and employee numbers shows a wide variation in labour productivity and sustainability.  Interestingly, the most labour efficient retailers are also the most emissions efficient – no company is just “green” or solely focussed on automation or scale.

CVS (a pharmacy retailer) and Costco (a warehouse club) exceed their peers on both measures, but amongst the others there are some interesting differences.  Walmart and Tesco do not achieve the labour productivity of Kroger (a leading US supermarket), but both are significantly more efficient on greenhouse gas emissions.  This is probably no accident – both Walmart and Tesco have made bigger commitments to reducing emissions.  

Tesco aimed to reduce energy use by 50% from 2000 to 2010, versus Kroger’s target of a 30% reduction over the same period.  Walmart gave themselves just 4 years to achieve a 30% reduction (from 2005-2009), and they aspire to supply their stores with 100% renewable energy.

There are big savings for retailers who make efficiency their priority.  Improved lighting systems, daylighting, energy controls, heat recovery, behavioural change, and many other approaches can reduce costs significantly, often with a 2-3 year payback period.  For any firm in the retail sector, sustainability in terms of a reduced carbon footprint should have a leading role in their effort to thrive in these challenging times.

Why your business customers want you to cut carbon

Recent research from The Carbon Trust reveals a potentially unsettling truth for the B2B market: multinationals are not just addressing their own greenhouse gas emissions.  They are also increasingly including carbon in their selection criteria for suppliers.  Within three years, the vast majority will do so – only 10% say otherwise.

Why this move – is it part of these multinationals’ attempts to look green?  The report ascribes the trend to “shareholder pressure”.  Are these shareholders investing in an increasingly ethical way, or are they looking for financial value?  I would suggest the latter - in other words, this isn't a fad.  It's part of a trend towards shareholders actively looking after the value of their investments.  Suppliers should take note.

It is not only shareholders who know that low carbon can translate into good value.  Sourcing professionals look for signs of quality and efficiency to ensure that they are getting the best goods at the best price.  Low carbon emissions signal efficiency – that a supplier is using less inputs for the same output.  That will translate into a sustainably lower cost structure, from which the buyer hopes to benefit.  Multinationals are sourcing low carbon because it’s often cheaper, and is likely to get even more competitive if fossil fuel costs rise further.  Shareholders and management want to know that their companies are managing for value.

A quote from Chris Harrop of Marshalls plc is particularly revealing: “By choosing suppliers of responsibly sourced goods not only do we cut carbon emissions but invariably there are cost and efficiency gains to be had, which all adds up to a strong competitive advantage.”  Perhaps it’s nice to be green, but it’s good business to be cost competitive, and paying attention to carbon in the value chain helps firms solidify this advantage.

So, suppliers now have another reason to address emissions, if cost competitiveness itself were not enough.  Multinationals will be expecting suppliers to report on, and compete on, greenhouse gas emissions.   Their suppliers will be asking the same questions right down the supply chain.  If your business customers are not already asking you to reveal to your carbon footprint, they soon will.