How important is the Chief Financial Officer in the relationship between business and society?
Increasingly, the answer is “critical”. Today’s CFO has a remit beyond reporting, audit and compliance. She has spent time outside finance – in operations, strategy or marketing – and understands what would have previously been considered “touchy feely”.
On the 6th January, we were delighted to welcome a panel of some of the leading minds in finance. After a keynote from the CFO of Sainsbury's, we were joined by finance chiefs from Standard Chartered, BT and Prêt A Manger, with Emma Howard Boyd as chair. We explored issues such as;
Getting ideas past the CFO can sometimes feel like a maze, and our aim for this event, through the panel and roundtables, was to find the common language between the finance, corporate affairs and sustainability teams.
Many water efficiency investments don’t make financial sense with the nominal cost of water. This table will explore the real cost of water, and whether investment cases are being made effectively. It will consider indirect costs, such as effluent disposal charges, water-pumping and heating expenses, and risks such as water scarcity, flooding, financial and regulatory risks.
- Not all aspects of water are easily priced because the price of water is made up of the ‘extraction/ treatment costs’ and the ‘opportunity cost.’ Whilst the extraction and treatment cost can easily be measured the opportunity cost is much harder and brings in issues such as ‘user conflict.’
- The cheap cost of water in comparison to energy means that companies are more interested in energy efficiencies. The direct cost of energy can be easily identified and as a result the pressure and encouragement to reduce usage is greater.
- Water only comes on to the discussion table when it is not in a ready supply e.g. the cost of not having the water.
- The methods of measuring water are often different and therefore make it hard to compare water usage in comparison to carbon. Water usage tends to be based on local and regional knowledge and therefore often difficult to compare on a world scale.
- At what point do you stop when it comes to measuring the cost of a company’s water usage. In Peru, there are issues for miners where the mines have an effect on glaciers. Should the effect on the glaciers also be taken into consideration when looking at ‘the real cost of water.’?
Red Flags (warnings)
- In areas, where commodity costs are low such as China, we are increasingly seeing companies setting up businesses to take advantage of these low costs. This can be damaging to the local area.
- The population is growing and with this there are increasing opportunities for business. However, businesses need to realise that in order to grow they will have greater water needs. As water scarcity increases this will also affect prosperity.
- The risk of liabilities- Developing countries are suing the West for their use of Carbon and contribution to the Greenhouse effect. There are therefore, big liabilities that need to be owned and similar liabilities could exist for water.
- To stop large corporations taking advantage of low commodity costs regulation appears to be the main solution.
- To review water on a local scale because a company maybe operating in one country with a water abundance and therefore, the water usage is not such a great issue. However, in a water scarce region such as Africa, it would be a greater issue.
- When looking at solutions, we should consider the timescale that we are predicting? At present, the water outlook appears to be 25 to 50 years and therefore, should we start looking into restrictions on the amount of water we use each week and potentially desalination. Desalination has greater energy costs.
- Water needs to be an issue on the Boards agenda. In SAB Miller, they have had trials to make beer with 50% less water. Initiatives similar to that carried out by SAB Miller need to be carried out by all companies.
- In Saudi Arabia, yoghurt manufacturers have set up because the price of farming cows to make yoghurt is very cheap. These yoghurts are then shipped across the world.
- One company recently took over another company and had to shut down a number of plants because they were based in water scarce regions. It therefore, provided a platform to force senior management to review the investment case.
The difference between a company that does “sticking plaster” CSR and one that considers sustainability in core business decisions can boil down to how well the business case is being made. The leaders are finding ways of putting a value on “intangibles” such as community engagement, reputational risk, environmental harm and other non-financial risks. What’s the future?
Segueing from the talk given by the evening’s key note speaker, the round table discussion topic was: “The difference between a company that does “sticking plaster” CSR and one that considers sustainability in core business decisions can boil down to how well the business case is being made. The leaders are finding ways of putting a value on “intangibles” such as community engagement, reputational risk, environmental harm and other non-financial risks. What’s the future?”
As participants introduced themselves they gave examples of organisations that have, in their minds, made significant strides in this. The answers fell into two categories:
There is little evidence of a causal relationship between corporate sustainability and success in the competitive corporate world:
• One participant had research dozens of corporate sustainability reports and found no convincing examples of sustainable practice being causally linked to commercial success, although acknowledged that it was possible to make correlative associations.
• Another participant could think of no convincing examples explicitly linking sustainable strategy to business success but was in favour of the dialogue opened by the Environmental Profit and Loss (EPL) scheme introduced by Puma with the caveat that the collapsing of diverse environmental impact metrics onto a single ‘cost’ indicator necessitated many assumptions.
• A report produced for the UNEPP was mentioned that could also find little evidence of robust cost-benefit analyses of sustainable strategy in the literature.
Some organisations have been able to demonstrate the value of corporate sustainability:
• Marks and Spencer were cited as a company that attributed a financial benefit (£185 million) to its sustainable business strategy in its 2012 How We Do Business Report.
• A participant proposed that although causal links between input and output in business strategy may be very difficult to establish, perhaps this was not necessary and that measuring ‘intangibles’ such as employee satisfaction could, in some situations, suffice.
• The impending water scarcity in Southern and Eastern England was used as an example. Anglian Water Business uses social metrics such as the education of children to reduce water usage. Its value to the business was considered: reducing the need for future capital investment in e.g. reservoirs.
• The introduction was concluded by considering whether measuring the intangibles in terms of financial return may constrain thinking and whether a causal narrative is necessary. For example, Sainsbury’s board has agreed its 5 values e.g. a great place to work. It measures this intangible with achieving the IiP Gold standard and through responses to its staff engagement survey. It is difficult to value intangibles financially but companies can develop metrics linked to the corporate strategy and goals. Perhaps broader, subjective but cross-sector metrics would be useful?
This provoked the question: does the ‘value’ have to be financial? Securing high-quality employees is essential for a competitive business and whilst graduate interviewees often profess an interest in corporate sustainable strategy, is this reflected in the established workforce? A participant stated that this interest was prevalent in internal graduate/employee workshops. Many business Key Performance Indicators (KPIs) relate to employee turnover/success, so is it possible to link metrics of employee success to sustainability plans? In theory yes, but requires invoking broad assumptions.
This raised the issue of causality again, which is not only relevant to financial profit and loss but any commercial metric one chooses to monitor. The real issue is to understand the underlying mechanism that links the two. If we can do that then organisations can tailor management initiatives to what is known to work. Large institutions were proposed as well placed to deepen our understanding of this problem because they can experiment with different types of management interventions. For example, if a team/division performs particularly well, is it possible to attribute it to sustainable strategy or is it because more motivated and competent employees are drawn to sustainable projects? Large organisations could perform randomisation trials internally, where teams are either preselected or randomly assembled to control for the influence of employee motivation and attempt to isolate sustainable strategy as the causal factor.
The conversation then turned to language and audience. On the one hand, financial profit and loss is the language of CFOs and working with one consistent value ensures we have one consistent conversation whereas using many, sometimes ill-defined and complex KPIs may obfuscate the issue. Marks and Spencer’s 150+ KPIs have though worked for them, they are measurable and have driven behaviour in the business. Lloyds Banking Group is now developing KPIs for its commitment to ‘Helping Britain Prosper’. The table discussed that the different parties in an organisation speak very different languages (e.g. sustainability professionals, consumers, shareholders and the board) and perhaps the right language, and so value system, is peculiar to the target audience. This was quickly considered a dangerous suggestion as it allows duplicitous behaviour from organisations and the ability to deceive various stakeholders. It is better to educate stakeholders that the challenge of business is to meet the competing need of them all rather than to dumb down or change the language for each audience.
Whilst it was agreed that language should be consistent in an organisation’s sustainability dialogue, the nature of the company was also considered highly relevant as to the selection of values and metrics. Loosely, FTSE 100 companies still very much focus purely on profit and loss, the construction industry are increasingly concerned with environmental impact and the retail sector on social impacts.
The discussion then turned to consider how senior management, specifically the CFO, could be encouraged to engage with non-financial metrics. Mandated reporting of emissions was proposed as an example of legislation performing as an effective driver. It was suggested that the form of legislation thus far means this is often little more than a box ticking exercise with no degree of comparability between sectors or even diverse companies within sectors. It was queried as to whether transparency leads to sustainable management. However, the results of a peer-reviewed paper were cited which demonstrated that mandated sustainability reporting significantly decreases levels of corruption and promotes ‘fair’ management of companies.
In conclusion the table considered what the future should hold. CFOs evidently have to consider competing interests for resource allocation but ultimately many consider profit paramount. Transparency of decision making when considering trade-offs of sustainable strategy was considered of crucial importance but the drivers of transparency were less clear: is it legislation, Corporate Social Responsibility or simply best practice?
It was agreed that sustainability is idiosyncratic to each industry: utility boards’ primary social responsibility will be on the safety of customers employees and communities while banks’ social responsibility is the safety of their customers earnings and savings. Sustainability challenges in banking and utilities are very different. Members suggested that the best Boards and Executive team are clear about the sustainability priorities for their business and set KPIs accordingly. If sustainability is not made relevant to the success of the core business it will never be more than window dressing. In the future hopefully more boards will set corporate strategies with KPIs that value all stakeholders and sustainable practices relevant to the business.
Companies have become terrified of discussing their social purpose, for fear of being tarnished with greenwash or such like. But we starting to see a new signs of bravery – be it Tesco’s transparency on food waste, or AT&T’s documentary on the dangers of texting while driving. Is now the time for bold communications?
Table started out by discussing the social purpose of their organisations.
• Improve communications, move away from spin and be more transparent
• Provide finance to companies to be used beneficially for societal benefit
• Have a high level of education across the board of recruiters, be more than a recruiter, rather a coach and increase value through the people they place in work
• Create sound buildings for people to live
• Transparency in shipping and supply chains
Question was posed to two competing grocery stores at the table “do you have the same social purpose?”
• Answer was a resounding no
• Both agreed they have a similar purpose in the food industry of supplying healthy food to people, however both differ on other matters.
• One grocery store had 5 specific brand values and was much smaller in size
• The other covered 13 markets around the globe, so it was hard to compare similar values when there was such a difference.
A member in the public and education sector felt that many in the corporate sector don’t reflect their individual values, but rather the values of the company. She was countered by another at the table in the corporate sector saying, that’s why he likes his company, because the employees individual values and opinions resonated so much in the work place.
Table talked about different controversial industries and whether they could/did have social value.
Examples: Alcohol and Cigarette industry
• There is social value in the way they communicate to the public
o Not promoting smoking to children
o Responsible drinking campaigns
• Social purpose was also reflected in:
o Communities are built around these industries and providing work is a very important social value
o Moving from a toxic product (cigarette) to a more technological and healthy product (electronic cigarettes)
• There will always be a balance of their social purpose
**** An important outcome of the table was I think it is worth pointing out that there is some confusion about what a social purpose is. Some think it is about HOW ethically you operate as a business, as opposed to how you meet societal needs with goods and services.
It’s over a year since Jochen Zeitz, then Chairman of Puma, argued on our stage that a widespread adoption of Environmental Profit and Loss Account (EP&L) would change the way that business relates with nature. The Kering Group is developing this EP&L, and we ask whether the EP&L – or another methodology – will catch on?
• In contrast to the absolute target focus of a few of the plenary speakers, the EP&L reveals materiality. Applying a $ to the environmental impacts creates a consistent metric between impacts providing a more meaningful tool to support decision makers in affecting positive change.
• The EP&L as an extension of LCA. By putting a currency on these measurements though, it’s in a language a CFO can understand and work with and also shows the relativity and specificity of impacts.
• It can really advance understanding – For PUMA, it was deal-breaking that the majority (60%) of their impacts were coming from tier 4 (production of raw materials) of their supply chain. They had been focusing their efforts on operational reductions which accounted for 6% of their impact, so it revolutionised their sustainability strategy.
• EP&L gives companies an opportunity to engage with employees internally and stakeholders across the business.
• Procurement requirements B2B increasing impetus to start analysing and understanding supply chains in new ways.
• While there are limitations to the EP&L, should you let perfect be the enemy of the good?
Solutions and advances in the broader environment
• Competition and transparency; projects like CDP are making it possible to name and shame organisations and there is increasing momentum for disclosure and considerations of materiality.
• Social and human capital projects are emerging such as GIST, headed by Pavan Sukhdev, creating new dynamic opportunities.
• When environmental, social and human capital costs can be calculated together, this could be merged to satisfy fully integrated reporting.
• Perhaps the boat has sailed for some bigger corporations who have now adopted their own sustainability agendas but that EP&L momentum will come back around at the next reassessment of sustainability strategy?
Obstacles to the EP&L
• Can we really put a value on nature, biodiversity and natural resources?
• Inaccessibility of the EP&L to smaller organisations. Should it be open sourced? However, these are extensive and time intensive projects requiring an input-output model. A key role of Trucost is also to help companies interpret and understand the data and how it can be used. How can SMEs with smaller sustainability resources do it?
• PUMA EP&L as a “Victim of its own success” – Companies are nervous to follow suit. PUMA gained so much communications value - it was so pioneering and ground breaking - its success would be difficult to replicate.
• And if the communication value is diminishing as the methodology becomes less novel, how would putting a monetary value on impacts change sustainability strategy asked Sainsbury’s and Unilever.
• How to value something you can’t measure – Very difficult to get a clear picture of complex supply chains e.g. for Sainsbury’s, let alone value their environmental impacts.
• Though it helps to identify material impacts, there remains a challenge of how to use this information to gain traction internally.
• Value of environmental impacts is controversial in the first place – What is the true cost of carbon?
• Unilever have performed an LCA of the entire supply chain, decoupling growth from environmental impacts without explicit reference to an EP&L methodology, though it might be something they’d consider in the future.
Examples of EP&L and valuation studies
• PUMA is the iconic example. But Kering Group is also now developing its own EP&L. Virgin Management as well.
• TEEB for business coalition – Natural Capital At Risk
• MITIE: Net benefit valuation of grid electricity vs. a sustainable alternative. They already had an idea about the financial benefits - the ‘no-brainer’ - but the net benefit analysis provided communications opportunities by highlighting societal value, and also bolstered financial arguments by identifying benefits in terms of future risk reductions.
• Market for EP&Ls is mainly listed companies in Europe and North America, e.g. General Mills and BSF.
• Evolution of the B Team will be an interesting development.
Is it still only CFOs who are engaged in social and environmental issues that take sustainability issues into account? Or, are we now at a point where a variety of drivers – resource cost to customer demand – are creating a business case for even the coldest-hearted CFO? How will this look in 5 years’ time?
Experience of CFOs
• Were CFOs ever the ‘bad guy’? CFOs do focus on the long term & can be a great advocate.
• Dependent on industry – perhaps some don’t have the same pressure from stakeholders?
• Sustainability does have a good business case (depending on the time frame etc.) and the need for a solid business case demonstrates the decisions are not being seen as side issues;
• There is still plenty of scope for improvement in mainstream companies, so there is still a need for good business cases;
• There is a case for an agreed framework, so that not every single business case has to be argued, but the case can be made more broadly for sustainability i.e. mindset change.
• Consumers: difficult as may act differently in different areas of their lives e.g. ethical with buying products but not actively concerned about what their pension is invested in;
• Employees: interviewees starting to take an interest in companies’ behaviour, particularly for graduate recruitment;
• Investors: best investments are finding unrealised value. Companies that have embedded sustainability are a good place to invest long-term. However:
o investors need to be asking the right questions
o shares are now owned for an average of 7 seconds – difficult to engage on long-term
Framing for CFOs
• CFOs often put off by the mention of ‘sustainability’;
• Risk management = good means of engagement with CFOs, although some risks are more intangible and harder to grasp e.g. stranded assets;
• Need to build capacity of leadership to look at the overlap between materiality to the business (& associated risks) and what customers care about;
• No longer niche – CFOs understand the risk of being left behind by the rest of the sector;
• Are CFOs thinking about the licence to operate? Need to get ahead of the curve – as with other issues
Role of CFOs
• Role has changed a lot in recent years – now have better insight into, and engagement with, the company and can be an inspirational source of leadership;
• Once they are a proponent everything can be a lot easier, esp. as a CFO’s decisions carry weight and credibility;
• As a key contact with investors, CFOs have a responsibility to bring up sustainability;
• Current ‘green hush’ for fear of being caught out if it goes wrong; yet need good sustainability initiatives to be communicated to create a race to the top;
• A CFO should lead stakeholder conversations, translating complex information for different audiences.
1. The CFO is good at “risk”. Always had been, always will be. But what has changed is that environmental and social risks have increased, which was well illustrated by John Rogers in the panel when he discussed the disruption Sainsbury’s expects from the food supply chain in the coming years . Does this make the CFO a good guy? No, the table argued, just part of doing their job.
2. Doing the right thing. These words were used extensively in the panel discussion, and our table tried to determine whether they meant “doing the right thing” for society or business, or both. We concluded that at best this was the shift from self interest to enlightened self interest. There wasn’t a significant call from the table for them to go beyond what made business sense, so long as they were looking at the issues correctly.
3. Consumer versus extractives. The panel discussion, which was broadly regarded as inspiring, involved consumer-facing companies. Would it be as easy for a panel made up of extractives and fossil fuel companies to find the same enlightened self interest? It is likely to be harder, with arguments based more around “licence to operate”.
4. Philanthropy v’s embedded. One person made an interesting observation that some of what the CFOs were discussing, particularly Standard Chartered's blindness charity “Seeing is Believing", falls into the philanthropy category. Whilst clearly impressive, this could be argued to be “sustainability 1.0” – should we applaud more the CFOs who find ways of solving social and environmental problems as a way of doing business?
5. The trust agenda. This has arguably changed everything for the CFO – Richard Meddings pointed out that the banking sector has paid over $100bn in fines in the past 10 years, which is an example of the real costs of losing a connection with society. These are the kinds of numbers that CFOs in any sector should be concerned about.
Is the CFO still the bad guy? If being bad meant not considering society and the environment, then one can argue that the CFO is no longer the bad guy. But it is questionable whether his / her intentions have changed. Enlightened self interest is just good business. But if the CFO is pushing the boundaries of innovation within the organisation, as our panel of CFOs seem to be doing, we agreed to give them the benefit of the doubt.....
How can those responsible for managing the relationship with society – corporate affairs, sustainability and CSR – be more effective at presenting their requests for capital? We expect this table to discuss a range of issues from different financial evaluation tools and language to more human things such as taking someone from finance team out for a drink.
Question to the table: the presumption is that the CFO needs to be won over, that they are antagonistic and need persuading to be interested and take on board sustainability and social responsibility. Is this correct?
• In general there was a disagreement to the question. James Russell (Experian) explained that in his experience – CFOs are very interested and keen to create future thinking forecasts and drive sustainability and responsibility issues through. The table agreed explaining that it is not always a case of winning over the CFO who are usually supportive and on-board but about making the proposals relevant to the company.
• This sparked a reflection upon whether a business strategy is needed for sustainability and co-corporate responsibility. The general agreement was that whilst numbers and a strategy can always help and can be used to make proposals credible, you do not always need a strategy for these issues. Often these ideas just makes sense and it is very clear that not only is it the right thing to do but that it also makes good business sense and will bring in a profit.
• A key example can be seen in Experian’s credit history initiative. This project focused upon helping low income and social housing groups acquire good credit history. It is clear that this is good business in the long run.
• A second example from Experian is the work that they do renegotiating debts in Brazil – here it is clear that the CFOs and finance departments are incredibly supportive and go over and above in their efforts.
• A key opportunity outlined is the importance of identifying the people who are passionate about sustainability or social responsibility. You can then use these people as a catalyst to drive change and embed these ideas and strategies into the business.
Question: What is the Rationale behind these initiatives?
• Thoughts from Experian reflected that it is pride that drives these initiatives. Pride throughout the organisations and throughout employees. Employee engagement is hugely important. Experian supported this explaining that when exploring employees’ engagement the number one issue of importance to employers was that they were proud of the company. The table agreed.
• This is further supported with an example from Sainsbury’s - reflecting upon how important finding these passionate people is – to acquire traction.
• A second example from Pizza Hut’s ‘better customer service wow’ programme highlighted the importance of engaging with employees.
o Here customers were encouraged to go online if they had received particularly good customer service and give their server a “WOW”. For each ‘wow’ received, pizza hut would donate 10p to the world food programme.
o This introduced a notion of responsibility and engaged employees to be proud of what they do, and the company they work for.
• The discussion moved onto the challenges of driving these opportunities though. The table reflected once again on the idea that you do not always need a hard numbers driven business case as ‘doing the right thing is the right thing to do.’
• However the majority of the table agreed in the notion that a business rationale including core numbers, facts and projections about how these initiatives will contribute to business value in the widest sense is key.
• Reflecting upon Sainsbury’s work this was further supported with the idea that first you need to understand why something matters- then you need the vision of a business case but not necessarily the hard numbers.
• In Sainsbury’s experience – this is focused upon keeping the customers happy – customers’ wants can be very powerful - they drive the business.
• This was supported and reflected upon how important it is to ensure such strategies fit and align with the company’s ideas, values and focus. Explaining that whilst we may not need hard numbers and projections of proposed ideas CFOs need the ideas to be carefully thought through, relevant and highly aligned to the business. The table agreed.
• Therefore to ‘win over the CFO’ – you need to have a clear idea of materiality. You need to understand and be able to articulate the companies’ environmental and social risks and opportunities.
• You need to have an in-depth understanding of the company value drivers and be able to communicate and articulate this understanding to ensure your proposed sustainability ideas fit. You need to identify where these issues are relevant in your company, understand your companys’ material risks and opportunities.
• When speaking to the CFO it is vital to ensure that the business rationale and business case articulated are of sufficient materiality to be of interest to the CFO.
• A second challenge highlighted here was the difference in culture throughout global organisations. With the example of cultural business mind-sets such as Japan which may have a more finance focused outlook and need a business strategy and hard numbers.
• Therefore you need to acquire an in-depth understanding of the difference in culture and be sensitive to this when proposing sustainable/ social initiatives.
• Reflections from Carbon Credentials - found that whilst large companies are on board with sustainability issues and have often already identified individuals and teams within the company to take these issues on-board – middle to smaller companies do not.
• These mid-range companies prove the biggest challenge, getting these companies on-board and making sustainability relevant and important to their company is crucial.
• From experience speaking in risk terms can often make these company FDs sit up and listen. This challenged was agreed across the table.
• Additionally the CFO from Pizza Hut highlighted that sustainability professionals always have more credibility when ‘they do the free stuff well before asking for a cheque’.
• Finally the table reflected upon how effective using competitors as an example whilst ‘pitching’ these sustainable initiatives. You can ‘win over to CFO’ by identifying the companies which your organisation admires and articulate what they are doing, how they are doing it and the impact that it is having.
Organisations set payback thresholds for social and environmental issues in different ways. Some have the same for all business areas, some vary for non-core business or for sustainability initiatives in recognition of the intangible benefits. Is there an emerging investment criteria methodology that can be applied to most businesses? Is the Payback metric enough or do we need to really talk the language of the CFO and incorporate NPV and IRR into our business cases?
How do hurdle rates affect decision making for sustainable investments?
• Renewable energy investments can have high hurdle rates. E.g. Wind farms at 15%;
• Sustainable investments are worthwhile. Example: Co-op reduced energy consumption by 30%;
• The ‘value’ a company places on sustainability can be measured alongside investment criteria. Example: Sainsbury’s will reduce the hurdle rate if the investment provides a ‘social good’. Additionally, Samsung manufacturers will allow a longer payback period for sustainable investments that do not meet normal CAPEX rules.
• Despite higher IRR, renewable energy investments are becoming more attractive due to rising energy costs and decreasing security of supply;
• High hurdle rates may discourage CFO and sustainable investments. Providing qualitative and quantifiable data, payback models and clear information will assist in decision making; and
• Hurdle rates and can be used to strengthen the case for sustainability. Example: Move away from a philanthropic ideal to a strategic business case.
What methods can be used to engage shareholders in sustainable investments?
• Determine if the shareholder is interested in a short or long term return;
• Establish what are the implications of not being sustainable? Example: Sainsbury’s pay a premium to guarantee a reliable and continuing supply chain for their customers;
• Sustainable investments are important to enhance the brand and increase customer trust. The customer wants companies to take social responsibility and ‘do the right thing’. Will they pay a premium for this?;
• Customers are primarily focused on cost, making expensive sustainable investments difficult to justify to shareholders. The CFO belief is fundamental in educating and inspiring employees and shareholders;
• If a company is competitively priced in the market, its sustainability credentials can be the differentiating competitive advantage;
• What investments are needed to prevent an unsustainable future? Paint a negative picture to shareholders. Example: C40 initiatives to reduce the effects of climate change in cities;
• Pitch future scenarios to shareholders and map backwards to understand what investments are needed now to achieve goals; and
• Use different language to engage different stakeholders, for example, changing ‘sustainable’ to ‘security of supply’ etc.
What is the importance of Big Data?
• Assist in understanding the wider environmental and social footprint;
• Qualitative and quantitative data is important for internal reasoning and decision making; and
• Effective in enforcing initiatives;
• The ability to build an argument for sustainability depends on the brand, the CFO ethics and company values;
• How you approach the CFO and decision makers is equally important as the subject/investment;
• The methodology used to encourage investors can be applied across the public and private sectors; and
• Big data will improve internal decision making and drive the way forward for sustainability.
Most large organisations are sceptical about off-balance sheet financing. Regulations can be opaque, commitments can be long term, and companies prefer to use their own capital. But there is a growing appetitive from investors for longer paybacks than most companies will accept, and we ask this table if the time has come for energy service contracts to take off.
INTRODUCTION & OVERVIEW
With much of the ‘low hanging energy efficiency fruit’ (low cost, short payback) now ‘plucked’, there is an increasing need to finance the higher cost, longer payback projects. However many organisations don’t wish to tie up their core capital, so are looking into other options to finance such investments.
The general consensus round the table was that the subject is very complex, so much so that a considerable amount of time was spent discussing the definition of ‘Off Balance Sheet’ (OBS) as there seems to be many uses of the term.
Definition of Off-Balance Sheet: Outsourced/de-risked, the user doesn’t pay the capital cost for it OR financially engineered so it doesn’t sit on the balance sheet – but does the user still have sufficient control?
One of the main obstacles of taking advantage of OBS financing for energy efficiency improvements is that there are many ways of structuring the finance and this causes confusion for possible financiers and users. There isn’t much support from the Government in helping to clarify the subject or help companies take advantage of what could be mutually beneficial for manufacturers, users and financiers. (Most Government focus to date has been on the Green Deal which has finance based only on estimated savings and the debt is linked to the meter/building.)
Often the payback periods are longer and such lengthy contracts can put companies off. Few financiers want to take the performance risk, and not many manufacturers/suppliers are yet set up to provide fully guaranteed energy savings. If there is no risk taken on by the supplier then the financiers will invest less.
It was noted that accounting standards are due to change to bring all leases on balance sheet – which could mean that energy services contracts do then take off and/or other new ways of structuring will emerge.
The structuring should clarify with maturity. Despite the relative success in the USA, there seems to be a lot more reluctance (or lack of confidence) in the UK. This could be because there isn’t the advantage of such large economies of scale and precedents are less common. Another possibility for the slow uptake is that each project is different: different sites, different technologies, different requirements, and different finance structuring agreements, which mean it is difficult to standardise and aggregate across many sites.
Contracts need to be clarified, standardised and aggregated to attract institutional investors – who may be willing to accept longer paybacks and lower rates of return than most companies.
A very large corporate wanted to undertake OBS financing for energy efficiency measures in buildings a few years ago and the finance team saw it as a finance lease – on balance sheet according to international accounting standards. With even large corporations struggling to break in to this type of structuring it will be almost impossible for smaller companies with less access to expertise.
It was noted that the supply of 3rd party finance for wind and and especially solar generation projects is now a much more mature market, with risks and rewards more clearly understood within the 4 years that the UK FIT has been running. It may take a similar number of years and a few successful ‘Refit’ (GLA) schemes for the OBS energy efficiency market to mature – as more suppliers step forward to wrap the risk and more users become comfortable with the complex array of financing options.