Jochen Zeitz is someone we expect to hear a lot more of in the future. An admired CEO in his own right, having conceived the environmental profit & loss account (E P&L), he is now the principle energy behind the growing movement of EP&L accounting. He has recently co-founded the B Team with Richard Branson, a group of international business leaders who will champion concrete solutions to help make capitalism a driving force for social, environmental and economic benefit.
The interview by BBC Journalist Richard Anderson asked whether E P&L’s will change the way companies make decisions, as well as covering broader topics such as the role of governments and consumers and the next generation of capitalism.
History tells us that it is individuals and new ways have thinking that most impacts business strategy. Marginal Abatement Cost Curves, Life Cycle Analysis, and Closed Loop thinking have inspired a new generation of business models. Will E P&L’s have a similar, or even a greater impact?
A number of global companies are employing E P&L accounting, with results likely to emerge over the coming months. Puma developed the first-ever E P&L, and published their full E P&L accounts in 2011 before extending the analysis to the product level in 2012. The further down the journey it goes, the more Puma seems to believe.
Supply chain risk. By putting a value on environmental impacts, EP&L's focus the mind on commodity pricing, natural resource security and supply. What are 3 effective initiatives for companies who want to manage their sustainability risk in their supply chain?
Should carbon be a pre-competitive issue? Sharing data, publishing detailed investment returns, and collaboration to advocate policy could become commonplace if this was the case. What does the table think?
A pre-competitive issue is when business competitors collaborate with each other during the early stages of product development. Issues addressing general strategies should be pre-competitive, though disclosing all information removes the competitive edge. Cross industry toolkits for sustainable development simplify and encourage the practice. Already present in some sectors, the complexity of these toolkits depend on the industry. Overall the potential benefits are obvious, though lack of experience and the sensitivity of sharing information remains a challenge.
● measurement and management strategies should be pre-competitive.
● frameworks for sustainable operation should be public information, similar to how drafting a business plan is open source. Generalities can be disclosed, though not exact methods.
● businesses which share supply chains can approach the supply chain together to discuss sustainability. Collaboration here results in efficient use of time for all parties involved.
● cross industry standards and toolkits to harness the idea of compatibility.
● pre-competitive collaboration could assist developing countries towards sustainable development.
● Going green gives businesses a competitive edge. Why should better performing business give their competitors the same, and lose its first mover advantage?
● The ease of applying cross industry standards varies. For example, benchmarks for construction will be simpler to implement than for fast moving consumer goods. Are industry benchmarks always possible?
● Getting the sustainability data is a challenge.
● Lack of a framework for comparison on sustainability causes many companies to discard the issue completely.
● Business is sceptical about sharing cost base information.
● how much influence does the business have over sustainability in its operations, and how much can collaboration help it reduce its footprint?
● Chevron stresses the need for pre-competitive research and development into carbon mitigation technologies, through government support and private sector partnerships.
● Several construction industry forums for sustainability exist, for example the Construction Industry Environmental Forum.
● Influential players in a sector collaborating to drive its industry towards sustainability - the 14 biggest property owners in London have formed the Better Buildings Partnership to do just this.
● Sustainability Benchmarking Toolkit and Better Metering Toolkit from the Better Building Partnership offers advice to commercial property stakeholders
● An Environmental Product Declaration (EPD) provides relevant, verified and comparable information about the environmental impact from goods and services. This allows quantification of impact without having to investigate far down the supply chain.
● The Sigma Guidelines provides a guide for organisations to put sustainability into practice.
● BAA is turning cooking oil from Heathrow Airport into biofuel, and asking local business to add their own cooking oil to the scheme - a collaborative model for tangible outcomes.
● Does competitiveness or collaboration drive towards sustainability more effectively?
EP&L's provide a number of benefits: a strategic tool, a risk management tool and a way of building transparency for stakeholders. What does this table see as the biggest benefits of using EP&L's? (background reading to be supplied)
1. Benefits of eP&L
2. Benefits that eP&L brings to stakeholders
1.What are the benefits of using an eP&L?
o Positive positioning in the market
o Learning embedded within an organization during the reporting process
- Risk management and strategy development
- Improves visibility of corporate sustainability activity and impact at the board level
o Related with investment engagement
How is this different from environmental footprinting?
- Internalising externalities such as water, waste, energy etc. puts a monetary price on commodities which were previously unknown. Empowers business units to compare and contrast the make of supply chains in new ways e.g. geographical impact of business operations
- Use cost analysis to inform manufacturing investment and product development
Is this a tool that consumers are buying into?
- Not yet. More focused on giving investors a view of how a business is running and is being run. This said the table had a sceptical view of whether investors are interested in all of the information gathered
- The table also voiced concern around the lack of standardisation and the lack of an open source method to producing comparable reports between firms
Other points raised during the first half of the discussion:
- Whether eP&L’s drive change within service based industries
- What service based industries can realistically do to change their impact in the market
Is sustainability reporting worth it?
- Yes but needs to be integrated into the business model to drive forward looking adoption and change
- Yes as data gathering and reporting of heretofore uncovered information educates peoples within the business of the true operating cost
- The conversation expanded into the role of sustainability reporting in helping early adopters embed change and transparency within their reporting processes
2. Assessment of P&L’s to stakeholders
o UN GC
Geographical and industry preferences abound with investment analyst understanding and requiring different frameworks in different markets. When corporate leadership makes a commitment to invest in this process, the importance of tactical decision making comes to the fore which ensures that adequate resources are deployed to ensure their firms rank in the right place and the right information is prioritised.
Silent sustainability v's engaging customers? With some customers responding negatively to sustainability messaging, there is a case for choice editing & supplier deselection without engaging the customer. What does this table think of this strategy?
The 10 panelists represented diverse sectors such as financial services, insurance, fast food, consumer products, and hospitality amongst others and worked in both public and privately held companies.
After agreeing that it communications is not a binary choice, the discussion centred around when is it appropriate for companies to share actions they are taking to be sustainable/ responsible and when is it better to not communicate them. The group spent most of the time discussing the potential negative consequences of over communication. Key themes around when it is advisable to do so, with more objectivity surrounding the benefit of the communication, the type of communication, and the audience.
Summary of recommendations regarding communications:
1. Tailor your communications to the needs of the audience. Do they care? Are they a consumer, a customer, a non-governmental organization, or an investor?
2. Does it benefit your brand to communicate the sustainability actions?
3. Does your industry compete upon differentiators around sustainability?
4. Is there a compelling story about the good you’re doing or are you doing things you already should be doing?
Below are more detailed descriptions of the discussion:
Engaging customers is useful when:
1. Transparency is more important for the company than “silency”.
2. Companies want to elicit feedback from customers about their sustainability issues
3. There are significant positive impacts that are not clear to the customer.
Silent sustainability is useful when:
1. It harms the brand.
a. Customers associate the brand with luxury or quality, and communicating environmental actions conveys the opposite.
b. The brand is not associated with environmental or sustainable actions, the message is not only irrelevant, but it is less sexy.
c. There is “brand expectation”. Consumers already expect large companies to do that, e.g., large retailers are already expected to not hire child labors, so why share that? “There's no story if you're already doing something good. There IS a story when you're not doing it.”
2. There is a fear that over communication may lead to a “nanny state”. It’s seen as undesirable if companies are dictating choices for consumers that they may not want the company to make.
3. Communicating sustainable actions increases the company’s level of public scrutiny. For instance, if a company sustainably sources beef, but not fish, consumers may rail against the company.
1. It is necessary to distinguish between consumers and customers. For certain products, messages around sustainability will be relevant to end users, but not for customers, such as retailers of consumer goods. Communication may not be desirable for the end user, but may be in response to stakeholders, such as non-governmental organizations or investors.
2. Consumers may have difficulty distinguishing the various sustainability initiatives between competitors and changing this would require significant investments in marketing.
3. Short term vs. long term. Choosing sustainability initiatives implies a value on the long term benefits, while most businesses focus on driving short term profits.
4. Different communication is required for a global brand due to differing consumer preferences, and regulations. For instance, for certain products, European consumers are more sensitive to sustainability issues than North Americans or Asians.
Choice editing, a phrase used in discussions around sustainability to mean “…the active process of controlling or limiting the choices available to consumers so as to drive to an end goal” (Wikipedia) is necessary.
1. Example: For restaurants, it is necessary to source sustainable food products or invest in companies that adhere to environmental standards.
2. Example: For financial services, banks must carefully select who they will finance. Their customers must adhere to global standards as well as policies the financial service institution creates themselves. For example, banks may not want to finance certain types of mining companies or logging companies in rainforest protected areas.
In a recent EIU survey, CEO's favoured new business models over new products / services. What do we mean by new business models, and what are five examples of more sustainable business models that are emerging
What is value of building a stand-out component in your sustainability strategy, such as Puma's advocacy of EP&L's? What are other examples of companies who have a stand-out sustainability initiatives that have generated conversations, and does this table believe that this is an important strategic consideration?
The discussion centred on the question 'What is the benefit or value of a stand out sustainability strategy to businesses, shareholders and customers?' Participants attempted to answer the question by drawing upon examples (both successful and unsuccessful) as well as their own personal experiences.
OBSTACLES & OBSERVATIONS
• 'Is a stand out sustainability strategy a good thing' is still a live question in the public domain
• The table consensus was that is not necessary.
• A sustainability strategy that is separate from the business strategy is not ideal as it may not be integrated into the business. The objective is not to have a standout sustainability strategy but a sustainable business strategy.
• Businesses need to consider a range of stakeholders not just investors, some things that are good for the business do not result in a positive share price signal.
• Being ahead of the game, understanding what the benefits of the sustainability strategy are and to whom is critical.
SOLUTIONS & OPPORTUNITIES
• A sustainability strategy needs to be closely aligned to the core business and must be integrated within the main business strategy; externalising it will only lead to conflicts and an unclear message to investors and customers. 'Build a business strategy that is sustainable'.
• This should be encompassed within a 'standout strategy'; although this may not engage with investors in the City, it is still giving a self-analysis tool to companies.
• Recycling was widely adopted within 10 years, who would challenge that EP&L or a similar metric will not be the norm in 10 years from now?
• Puma could make a big impact through EP&L without even engaging the public or investors.
• The effect of CEOs on greater transparency around this agenda could be profound.
M&S Plan A:
• This was aimed purely at consumers and was marketed by telling them that is great and that they should care about these issues
• Stuart Rose took 150 senior staff to see An Inconvenient Truth to engender a sense that sustainability should be key in the business' future
• Conversely, there was a belief that whilst Plan A did have an impact upon consumers, it was not clear that consumers cared sufficiently about sustainability. Primark was recently exposed in the media, but this had little effect upon its sales. There are perhaps more complex consumer dynamics at play here...
• A new African beer was developed using cassava, this attracted a lower tax tariff, which enabled it to be sold at a lower price point so that it competed on price with the black market in drinks. Illegal alcoholic drinks has a major negative impact on the local economies because of the lack of controls around alcoholic content etc. and lost tax revenues. Ingredients are locally sourced and processing happens on site. This has created a new market which aligns with the government agenda.
• The supply chain can have a major influence on the importance and ambition of sustainability strategy to a company. One service provider mentioned that if the client runs a four minute mile – they have to run a 3.5 minute mile.
• A major retailer highlighted that their business had become more sustainable and ethical the last few years, which supported the core strategy and reinforced the brand's image.
A standout sustainability strategy properly targeted and communicated can improve business decision making and bring significant benefits to customers and employees while opening new markets.
Taking energy into the supply chain. As companies look to export the knowledge they have generated from their own operations to their suppliers, what tools are emerging to support collaboration on energy from procurement to reporting, generation to reduction?
Participants recognised that there is no single solution to tackling energy in the supply chain. Companies with a large number of suppliers may find it logistically difficult to gather all the information needed to understand their supply chain impacts. There is a need to balance collaboration with competitiveness in the supply chain. The difficulty lies in deciding when to collaborate and when to allow competition to drive innovation.
Critical to engaging with supplies is explaining mutual benefit of sustainability initiatives. Companies that have gained the trust of their suppliers will have a clear advantage.
The reporting of environmental data is logically no different to reporting financial data, but standardisation of reporting metrics is critical, and any data generated in the process must be used effectively. Policy is required to motivate such changes in reporting - to provide a legal minimum that companies must achieve. Policy changes should also be driven by customer demand and media pressure.
Feedback from reporting is essential for demonstrating benefits and driving further change. Sustainability strategy is often in limbo due to the absence of feedback from Government departments. Incentivising success in sustainability behaviour is noted to be complex, particularly where policy is involved.
Discussion Summary Points
• A rapidly widening supply chain can be problematic for gathering data.
• Some manufacturing companies have greater influence over suppliers than others – different approaches are needed in each instance.
• A huge amount of education on benefits of sustainability initiatives is necessary – must move beyond “it’s a hassle” and the sense that it’s box-ticking.
• Long delays in responding information requests, particularly from small/medium size businesses.
• The information requested can be seen as constantly changing, adding to delay.
• Insufficient feedback to reporting efforts – especially with Government published league tables.
• Marketing departments are not asking the right questions to initiate customer engagement on sustainability – should include “is sustainability important in your purchasing decision?”.
• There are a wide variety of tools and methodologies dealing with the entire spectrum of sustainability reporting, including energy. There is a lack of external verification of these however.
• Tools exist for supporting supply chain sustainability but engagement and understanding impact hot spots seems more critical at the moment.
• Climate change and energy policy frameworks remain uncertain, resulting in a loss of faith in policy-makers.
• Siemens, with ~30,000 Tier-1 suppliers, faces different reporting challenges compared to smaller firms with substantially less suppliers.
• Large electronics retailer – marketing department didn’t ask customers if sustainability was important to them, asked open-ended question instead. PR mistook this as no interest in sustainability. Framing the question correctly is crucial.
SOLUTIONS & OPPORTUNITES
• A balance between collaboration and competition in the supply chain, with mutual benefit for the company and its suppliers.
• There are already instances of mutual benefit between companies and their supply chain. Results delivered quickly are self-sustaining, clearly demonstrating the benefits of the strategy.
• Differentiation opportunity for suppliers with more sustainable practices – but this requires appreciation from higher-tier firms.
• Reporting can assist in identifying “hotspots”, where the greatest impacts can be achieved or where the greatest impacts are currently.
• A great deal of progress can be made on standardisation of reporting metrics and tools – a wide variety of methodologies exist.
• Scope for external verification of reporting results and additional legislation/ regulation governing sustainability.
What are the tools for building a resource efficient business model? This table will consider the effectiveness of EP&L's against other tools such as closed loop thinking, Life Cycle Analysis, Whole Life Costing etc
With the participants introduced we began by discussing how the required tools will vary by business sector. We considered the present state and likely future developments in relation to typical requirements in each sector. For example, within the field of technology we identified a significant challenge in that there is typically very little reuse as users don't tend to recycle. This can be extended across sectors with two significant challenges being identified: firstly, managing the reuse and recycling of resources, and secondly, the accurate measurement of consumption, including waste and fuel. At this stage it was concluded that any tools to solve these challenges are at the early stage of development and implementation, with work typically occurring at the operations level rather than across the whole value chain.
After sector variations the group then considered how the business model will vary based upon company size. Within the construction sector it was pointed out that owing to market constraints often there won't be much finance available in smaller organisations to look into environmental concerns. Furthermore, there exists major challenges in internationalising any tools that are development into emerging economies.
One prevailing theme throughout the discussion was the question of how much consumers are demanding the adoption of sustainable business models. In particular, the question of why an organisation should seek to be bold if consumers were not demanding it was considered. With considerations such as price volatility for raw materials in certain industries it becomes very challenging to design appropriate tools and as such adoption will be challenging. Some convergence in thinking was found with regards to a balance between government programmes, business initiatives and consumer action in terms of responsibility to drive through these tools. The types of signals consumers respond to was discussed, for example the price of ink and product longevity within the technology sector, and how these are necessarily aligned with resource efficiency. Legislation was deemed a crucial factor in accelerating the pace of adoption.
With the major challenges at a sectoral level covered, as well as individual challenges facing public sector and private sector organisations, the group began to discuss the specifics of EP&Ls versus Life Cycle Analysis (LCA) and how these vary in appropriateness. The need for targets was deemed crucial and for example, within the construction sector targets could include measuring embedded carbon. The approach that was used for health and safety policy could act as a blueprint for implementation within these industries but as before a hierarchy of usefulness exists for different corporates.
Finally, the group considered the utility of a LCA of products across industries. This would give consistency for competitor products and allow decisions to be made on product specifics. Alternatively analysis could be completed at a portfolio level to avoid the cost of looking at individual products.
In conclusion the discussion focused on the huge challenges that remain in developing tools that are suited to multiple industries and company structures. The question of consumer demand will always influence corporates and hence government action may be necessary to expedite change.
The BBC Life Cycle Analysis for programme making: what are the impacts in both the home and the office and what can the BBC do with this information? (Example)
Health and safety legislation tools have been adopted across the construction sector – this could serve as a blueprint for the adoption of resource efficient business models. (Example)
Develop Life Cycle Analysis tools across products. This will ensure consistency at this level and reduce individual analysis for each organisation. (Solution)
Sectors working together to avoid mitigate company risk and develop sector specific solutions. (Solution)
No universal standard on required sustainability data and how it is to presented. Sector specific frameworks could be developed. (Obstacle)
Measurement of data is fundamental. This will assist in companies developing better products but it is unclear at this stage how to develop tools for measurement across sectors and organisation size. (Obstacle)
Typically companies want to manage issues and drive new business, the data collection at present can be too much like “bean-counting” and as such is an unattractive proposition.(Obstacle)
These tools vary in utility for different corporates. For example for large sophisticated corporates it is useful, but for smaller corporates it can be extremely costly. (Red Flag)
we began by discussing how the data will necessarily vary be sector, for example performance regarding energy usage may be more significant for companies in the energy sector. However some particular areas in which metrics may be useful across all sectors were mentioned, such as health and safety. The table considered how exactly these metrics could de defined, with challenges existing across sectors and uncertainties regarding how the data can be acquired. It was also suggested that a score looking at carbon and water impact would be relatively fundamental for most sectors and a good indicator of a company's approach to the sustainability problem. It was concluded that substantial difficulties will be present if one wishes to look across all sectors and produce standardised metric systems.
After considering the type of data that may have an impact upon business strategy the group moved onto to how this data will be presented and analysed. With regards to annual reporting, it was considered whether this data should be explicitly stated or simply alluded to in the letter to shareholders. This led into an interesting discussion regarding research which demonstrates a strong link between the language used in the opening address and an organisation's seriousness regarding sustainability. For example, if a company uses both the words “money” and “future” within their report it was suggested that this indicates a better performance on both future sustainability and profit. A common feature was a focus on the idea that sustainability should not be considered a side-aspect of a company's reporting. In particular, in must be considered as core to the business and financial accounting – with research demonstrating that companies perform better over the long term when it is considered a fundamental aspect of their strategy.
The table also discussed the possibility of establishing independent panels to constructively criticise an organisation's performance with regards to these various metrics. This feedback and the ensuing discussion could be included in the annual report and will be used to allow companies to improve in their sustainability performance.
In conclusion the table found that there doesn't exist a simple magic bullet for all sectors and that tools need further development with communication between industry leaders being paramount. Furthermore, any data that is reported must be relevant. In this instance this implies that any data is useful for analysts and investors in enabling them to make better long-term investment decisions.
- ESG (environmental, social and governance) considerations have been shown to counter any short-term losses over the long-term. (Example)
- Implement independent panels to provide constructive criticism and feedback of a company's sustainability reporting. (Example)
- To encourage adoption of metrics, successful adoption can be linked to bonuses, with target setting designed in the same way as for profit driven motivation. (Solution)
- To encourage consumer engagement with a sustainable business strategy less reporting language should be used in communications. (Solution)
- No universal standard on required sustainability data and how it is to presented. Sector specific frameworks could be developed. (Obstacle)
- It is unclear at this stage how analysts can avoid being misled by good marketing and presentation standards as opposed to good data. (Obstacle)
- At present analysts often to read an entire financial statement before getting an understanding of a sustainability policy. How can this be amended? (Obstacle)
- Ideas regarding ESG are developed within the academic literature, however these concepts are not at the forefront of most investment strategies. How can the adoption of these ideas be encouraged? (Obstacle)
- How to encourage organisations to excel? Will people simply aim for the minimum standards required to pass their requirements? (Red Flag)
Identifying the game-changers. EP&L's cause companies to think differently, but what is the likelihood of widespread adoption? What are the other potential game-changers, and how would you rank them?
The table was tasked with identifying the other game changers (in addition to the EP&L). The table initially discussed the EP&L to confirm that this was indeed a game changer. There was widespread agreement that it was.
Discussion then turned to the other areas of where change would come from.
11 such areas were identified. These were:
1. The EP & L itself
2. The EP & L linking to other systems and change
3. Consumers - in particular the education of consumers which would lead to greater pressure on firms
4. Redefined business purpose / model - in essence, business may completely re-invent itself such that it discourages purchases of goods and instead focusses on shifting from products to services and/or buying less or better.
5. Decoupling agenda - the de-coupling of business growth from increasing negative impacts.
6. Science based targets - firms using science to set their targets, rather than their targets being based on what a firm can achieve
7. LCA / Cradle to Cradle thinking being applied constantly in all forms of a business
8. The B-Team itself - breakthrough leadership from Jochen and others inspiring fellow other business leaders
9. Regulation change via positive lobbying - e.g. making import duties based on environmental performance
10. Public private partnerships
11 Collective targets - e.g. a group of firms in an industry collectively agreeing to an environmental improvement target
Identifying the game-changers. EP&L's cause companies to think differently, but what is the likelihood of widespread adoption? What are the other potential game-changers, and how would you rank them?
The two main take-aways were:
1. The jury is still out as to whether E P&L is a game-changer – various issues around engaging supply chain and data assurance were raised
2. What’s the purpose? EP&L or similar approaches could have high adoption as an effective way to inform sustainability decision-making – it is only useful if it is acted on. But, use of E P&L as a way to communicate a business’ level of sustainability to consumers is complex and data needs to be highly accurate.
DETAILED CONVERSATION NOTES
1. What is the likelihood of E P&L becoming widespread?
- Major issues to be considered:
i. E P&L’s purpose – It’s a good means of identifying the areas for action within a company and its supply chain, but without highly accurate data, it may not be robust enough to be the basis of communication to e.g. consumers (when applied to specific products).
ii. E Loss Account – Where is the profit? Companies always going to be in the red without the benefit of products being taken into consideration.
iii. Social side – Do you need to consider the EP&L alongside an SP&L? Can you properly measure the relative impact of changes to your supply chain without both P&Ls? Very difficult to put a monetary value on social issues like child labor?
iv. Make it local – E P&Ls could be particularly useful when applied to a particular community/issue – setting out the situation for stakeholders
v. Is money the right measure? Should a more representative figure for ‘value’ be the metric?
- E P&L’s adoption will in part depend on:
i. A company’s ability to assess far into its supply chain
ii. Data assurance – large danger of ‘rubbish in, rubbish out’! Ideally, non-financial reporting should undergo the same scrutiny as financial reporting to be a game-changer, but the perfect cannot be the enemy of the good
iii. Industry consistency in data collection and monetary valuation of natural capital
2. What are examples of game-changers and is E P&L one of them? The group considered:
- Carbon footprinting – Rose then declined in popularity because of application challenges and lack of simplicity; however, it built up public awareness around the issue and more businesses competing based on carbon footprinting could re-generate interest
- LEED building standards – While it has made a name for itself, it’s not clear whether LEED increased the value of buildings built to its specifications
- Eco-labeling –
i. On the whole consumers don’t want to look at eco-labeling on top of everything else in their purchase decisions. They rely on trusted retailers to do the right thing on their behalf.
ii. That said, if product E P&L presented to consumers, can be a driver for suppliers even if relatively niche group of consumers will act on the information.
iii. Organic (cotton) – mixed reception from the apparel industry as to if it has affected consumer behavior. More likely to benefit smaller retailers that have built a brand around ethics.
iv. Fairtrade – Similar to ‘organic,’ Fairtrade is a social movement that has had momentum on both business and consumer sides.
- Mandatory reporting –has potential to be a game-changer.
Extending EP&L to the product level: how business can use environmental impact valuation to drive sustainable product and supply chain decision making. Does putting it in units of currency make the difference?
Onsite energy generation. What are the shared values for the economy, society and the environment? Does this table believe this represents the long term future for energy systems?
The round table discussion began with a brief introduction to the triple bottom line benefits of on-site generation, both in the UK and in the greater worldwide economy. This then prompted a broader discussion which sought to test the validity of the table topic and to present what the table perceived to be the barriers that limit the future adoption of on-site energy systems. The table recognised that technical, policy and price forecasting risks, coupled with a lack of senior management support and in some cases a general apathy toward energy reduction opportunities are all barriers to increased on-site generation project investments. These barriers were discussed by the table and solutions were presented where possible, a summary of which is given below:
• “Energy Reduction Projects are characterised by Complex Funding Models” – Funding models for energy and on-site generation projects are limited by their inherent complexity and uncertainty. The fundamental variables that constitute these models can vary considerably over the life time of the project and between different project types. For example, the energy usage patterns, the growth of the company, the availability of space, energy and fuel price forecasting, the potential for tax incentives and differing product payback periods are all difficult to quantify and create increased risk and uncertainty for investors.
• “What’s in it for me?” – Difficulties created by misplaced incentives arose in a number of different guises. Firstly, in particular under short term lease agreements, the benefits of an investment in energy reduction in a rented property is not realised by the landlord, nor the person or firm who is renting the premises or facility. And secondly, there are commonly multiple occupants, property owners and shareholders in a premises from whom it is difficult to get collective agreement and project buy-in.
• “Misinformation” – Low carbon generation and sustainability principles and projects are often misrepresented in popular media. This leads to a misinformed hysteria and lack of trust in what are profitable low carbon generation projects amongst the general public.
• “Capital Lock In” – The illiquidity of energy reduction investments makes them unattractive to investors. For example, investments in physical energy assets and infrastructure cannot easily be sold on should the investor want to re-invest their capital.
• “Invest in centralised energy reduction!” – A pragmatic view would suggest that greater economic and environmental returns are possible from centralised energy reduction and improvement investments?
• “An Energy Efficiency Hierarchy” – Of the broad spectrum of different energy reduction and low carbon generation opportunities that are available to investors the most profitable need to be identified and invested in first. Often, the “boring stuff” such as energy reduction investments are marginalised and subsequently overlooked by people who tend to focus on the “sexy”, topical investment opportunities, irrespective of the success and profitability of these investments.
• “Correct the Financial Modelling and Investment Appraisal Processes” – Energy efficiency projects in particular need to be presented correctly to senior decision makers. The current preference towards using simple payback period metrics to appraise energy efficiency projects immediately demands more onerous returns on these projects over others assessed by more robust appraisal processes, irrespective of the risk that is associated with the project.
• “Heat makes sense!” – District heating systems show great results if operated correctly and the required infrastructure can be easily put in place. Countries such as Denmark already have extensive district heating schemes and successfully use their waste industrial heat for domestic hot water and heating.
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