Opinion: An Efficient Way to Save

6 March 2008

"Where can we save money?" is a familiar question in any boardroom. "Where can we save money by saving energy?" is less common.

But increasing evidence shows that energy efficiency will be one of the most effective ways for companies to both save cash and tackle climate change. Simple energy-saving measures already exist, have short payback times and can result in cheaper and cheaper operational costs. Despite this, mainstream business is proving slow to pick up on this win-win opportunity. Why?

It cannot be for lack of evidence. First, Sir Nicholas Stern's 2007 UK government-sponsored review of the economics of climate change pointed to the cost benefit of tackling climate change now. Second, Swedish utility company Vattenfall's research, with the help of consultants McKinsey, produced a "cost curve" indicating that at least 20 per cent of all carbon reductions needed to prevent dangerous climate change could be delivered through known solutions and would actually save money.

Measures like insulating buildings and upgrading ancient air conditioning units will save cash even if it means spending a bit in the first year or so.

A new report from McKinsey suggests that applying existing energy saving technologies will take industry even closer to making the emissions reductions needed to avoid dangerous climate change than was previously thought possible. Not only that, but there is a financial advantage to doing it. The research, published in February, suggests global investment in energy efficiency of about $170 billion a year to 2020 would generate energy savings ramping up to $900 billion a year, with an average internal rate of return of 17 per cent. In other words, investing in energy saving projects is business as usual.

There are lots of examples of trail-blazers proving the business case for greater energy efficiency - to an extent, the recent reports lend weight to something that many leading businesses have been reaping the benefits from for years. Unilever saved almost £190 million during 2000-2005 through improvements in energy management. 3M, the global conglomerate with thousands of products, including Post-it notes and Scotchlite reflective materials, saved more than $15 million in 2006 from the implementation of energy efficiency measures including life-cycle management analysis in product development.

The Climate Group's 2007 report "Carbon Down, Profits Up" provides a catalogue of examples where companies have saved carbon emissions and cash - enough to support the argument that ignoring the cost benefits of improving a company's energy efficiency is simply poor management. As News Corporation boss Rupert Murdoch puts it, "being environmentally sound is not sentimentality. It is a sound business strategy".

Understanding where energy is being wasted and stopping this wastage through basic steps such as insulating warehouses, fitting automated lighting systems in offices and upgrading vehicle fleets and rusty boilers can deliver bottom-line savings that can really reduce the operating costs of a manufacturing site or whole division.

Strategic hurdle

It may take a while, however, for a company to draw up and implement an energy efficiency strategy. A number of companies are still engaged in an energy audit process and have yet to start implementing a strategy. Others do not yet have readily available capital earmarked to upgrade equipment or fleets. One barrier is that companies often need to be the owner, not just the lessee, of assets for a hassle-free transition to more energy efficient operations.

According to a January survey by the Management Consultants Association and the consultancy Arup, more UK businesses leaders are making climate change a priority but most are still only "scratching the surface" in their efforts to reduce their carbon emissions.

As a harsher economic reality bites, companies could look for opportunities to save money by saving energy. We face another year of rises in energy prices, as well as the growing threat of green taxation and wider-reaching carbon cap-and-trade schemes.

The lack of energy efficiency targets in the EU's draft climate legislation package announced in January may not have reflected the urgency to save energy. But it remains the basic responsibility of any company director to seek opportunities to improve shareholder returns.

At the United Nations investor summit in February, investor coalition Ceres warned that global warming would be the next sub-prime mortgage meltdown if investors failed to calculate the risk a carbon price presented to business. Indeed, it will not be long before we see investors becoming more vocal in demanding energy efficiency.

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