Financing energy efficiency programmes: Why and how sustainability leaders must ensure that their company competes in efficiency

Monday, October 11, 2010

18:00 - 21:15

In the 2009 McKinsey Global CO2 abatement curve, they identify 42 initiatives that reduce carbon whilst having a negative cost associated with them, i.e. you save money whilst saving carbon, what some would call the “low hanging fruit”, the “no-brainer”.

Together these initiatives would account for an estimated 12 gigatonnes of CO2 annually, more than the IPCC are estimating we need to reduce our global emissions by in 2050 to avoid dangerous climate change. Around 2 gigatonnes of these are energy efficiency initiatives controlled by the corporate sector, or 1/5th of the estimated carbon savings needed by 2050.

As we all know, however, we are making  slow progress in this area despite it not being dependent on a policy framework. There are a number of reasons why this is not happening as;

    These initiatives are competing for capital against core business activities, which will often have  a higher ROI and which add to the top line.
    The business case is not being made correctly.

Finance wouldn’t normally be a “sexy” theme for Green Mondays, but in this context we think it’s important. We are going to devote October’s session to methods that you can employ to unlock your financing problems  and present your main board with win-win solutions.

Speakers

Benjamin Kott Google

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Peter Cunningham Rio Tinto

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Peter Hobson EBRD

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Round Tables

Built Environment

Are we seeing value in green buildings?

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Round table Representatives:

Property and Environmental consultants, Occupiers, Investors, Developers, Trade Associations, Local Government Officers and Academics.

Summary of discussion categorized by questions as follows:

What is a Green Building?

No standard definition or classification for commercial buildings although BREEAM seems to be preferred. Definition isn’t just about energy performance/carbon emissions but a holistic view including financial, social and environmental factors. Building Research Establishment very reluctant to share data on BREEAM to assist in benchmarking between building types. ACTION: The Property Industry needs to work together to agree a standard method of measurement for the environmental performance and responsiveness of all buildings to facilitate comparative assessments. (Could be BREEAM but better engagement/transparency required by the Building Research Establishment)

EPC’s becoming more common as a measure of designed Energy Performance but quality of output varies enormously depending upon the depth of analysis. Seen as a commodity product (hence lowest cost tends to prevail with little in depth research/analysis) All agreed that move toward Display Energy Certificates (as required for Public Buildings) which measure actual performance is essential to provide a more accurate measure. ACTION: Limitations of EPC’s need to be better understood and benefits of more expensive, but ultimately valuable DEC’s expressed.

Are there examples of best practice?

All agreed that the opportunities and requirements for new buildings were understood by developers and designers, but the major issue is existing buildings. It was quoted that over 80% of the buildings that will exist in 2050 are already built! Various working groups including Arup, UK Green Building Council and the Carbon Trust are working on guides to assist developers/occupiers. ACTION: Communicate best practice via awards, trade press etc including detailed financial and technical analysis to assist others with developing their own solutions and associated business cases.


What is Value?

Value needs to be expressed and measured in Economic, Social and Environmental terms. Current focus and business cases tend to be purely focused around economic evaluation such as energy cost reduction, carbon compliance cost reduction, enhanced capital allowances etc as opposed to image, improved occupier productivity and reducing consumption of resources. ACTION: More sophisticated models for assessing value in a holistic way need to be developed

Current commercial building valuation methods for accounting purposes are governed by the RICS Red Book. At present no guidance included on how to assess Green features. ACTION: Greater transparency required regarding asset values and sale prices, asset attributes and a standard asset environmental rating to inform valuers who follow, not lead the market.

What evidence is there linking value and sustainability?

Some limited studies in the US and Australia indicate higher rents are achievable for more energy efficient buildings. In the UK this doesn’t seem to be borne out. The link is intuitively right and argued strongly in theory, but no one was able to offer any empirical evidence in support. Feeling was that occupiers wouldn’t pay more for a ‘Greener’ building but rather pay less for a poorly performing building i.e. the bar of what is expected as standard is being/will be raised. Some evidence is emerging that EPC and BREEAM/LEED ratings are being used in price negotiations on acquisition of buildings and rent reviews. ACTION: Once again more transparency/data required to justify theoretical proposition.

So if there isn’t a proven link yet between value and sustainability what is the current value of Green Buildings?

There is evidence that some occupiers (Large corporates, central and local government) demand minimum standards i.e. BREEAM very good or higher otherwise they won’t consider leasing a building. Also better buildings (of which green features form a part of the picture) let easier with lower void periods as they appeal to a wider range of occupiers. ACTION: More information/research required into the demand for Greener buildings and the importance of different environmental attributes to occupiers.

Are Feed in Tariffs (FIT) having any affect on values?

Yes. Examples emerging that large scale photovoltaic (PV) arrays on roofs (Sainsbury were quoted as trialing on a new building for evaluation prior to wider roll out if successful) can produce a secure income stream for 20 year life (in theory at least !) which can be capitalized. Payback for PV installation thought to vary between 5-10 years but with government backed guarantee of 20 years looks like a sound financial proposition. Some concern expressed from a technical perspective that PV installations could be seen as risk, unproven long term, limiting future access for maintenance of the underlying roof. Seen more of a benefit to the building owner who enjoys the financial returns unless owner prepared to share power generated with the tenant to offset tenant consumption. ACTION: Early adopters need to be encouraged to share experience.

Is there value in landlords and tenants working closer together on sustainability to enhance value?

Yes and agreed a subject in itself for the future! Many buildings fail to perform to their full potential due to lack of understanding of how to run efficiently. Green leases mentioned as a way of creating a legal framework for landlord/tenant to work more effectively together to improve environmental performance. ACTION: topic for future discussion at Green Monday?

Supply Chain

Packaging. What practical steps can be taken to reduce and minimise impact?

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The discussion was lively and centred initially around what is the purpose of packaging and how can you define the most Sustainable options.

It was agreed that packaging is not a “bad” in itself. No company wants to waste money on excess packaging but it has a purpose - to protect the packaged goods and to provide customer information and branding. Clearly it is far better if the packaging can be re-used rather than thrown away but this presents practical problems, including having to have stronger more expensive forms of packaging compared to disposal types, and a system to handle the returns.

The area of returnable glass bottles was a good example – these are heavier and have now nearly disappeared from the UK due to customer resistance but are retained in other countries thanks to taxes on one-way containers or other incentives. Carbon footprinting research has shown that a returnable bottle only needs to make 2-3 return trips to have a lower footprint than a disposable bottle (Weir-tscs) However, it was agreed that they will only return in the UK if legislation was brought in – despite the fact that <80% of one-way bottles actually end up being recycled (the rest go to landfill).

On recycling, there was a discussion about the merits of pre-segregation vs passing mixed recyclates to waste recovery companies for processing. New technology and investment in this area means that this may now be the most economic and effective way of dealing with packaging waste.

Further discussion on what is the most sustainable system threw up some unexpected examples. One example was that investigation by the music industry (Julie’s Bicycle) has shown that music downloads with resultant file sharing can use more energy than CD manufacture and distribution. Another is the use of compostable, starch based containers which actually reduce the efficiency of plastic recycling plants. So each system needs separate evaluation and needs to take account of total energy, use of sustainable resources, and lower impact alternatives.

Overall it was agree that the key principles to consider are:
• Reduce
• Re-use
• Recycle
• Use more sustainable materials

The key is to build in Sustainability principles at the design stage, taking account of end-to-end supply chain impacts.

Stakeholder Engagement

Convincing the board

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For a business to become more sustainable and reduce its social and environmental impacts, to become resilient in a resource and carbon restrained world, the issues need to be taken seriously at the very highest level of the business. This integration of sustainability into the company and its brand is not only necessary for a healthier society but also provides the company with a competitive advantage and creates opportunities for long-term sustainable value. Often it is the sustainability specialists who find themselves in the position of trying to engage and advise the board on how this should be done.

Discussions in the group revealed that often it isn’t just the board that needs convincing and our discussion expanded to include engaging with middle management, procurement employees and others. Recognising that the approach will vary according to the individual type of business and the corporate culture, the following points were made:

• The focus shouldn’t be solely on carbon and needs to include wider environmental issues and risks to the supply chain /resource availability.
• Boards usually understand the risks of climate change but are less aware of the urgency with which it needs to be addressed. Nevertheless, the feeling was that the focus should remain on positive messages and changes that can be made rather than the ‘doom and gloom’ of climate change.
• Climate science is very complicated and it is difficult to communicate effectively around degrees of certainty and predictability over the impacts of climate change but climate scientists are increasingly emphasising the importance of adaptation over mitigation. The more fixed the business model the harder to create change and less resilient the business. Exploring a range of future scenarios is helpful in helping to incorporate these degrees of uncertainty and visualise the kinds of outcomes that might occur and possible adaptation strategies necessary.
• It is often easier to convince the board than middle management who take a shorter-term and less strategic view of the business. The board have a more direct relationship with compliance costs, understanding brand risk and longer term strategy. Convincing middle management should not be forgotten in trying to imbed sustainability into the business.
• Once on board, Supply chain / business networks are pretty good at coming up with the necessary solutions

Carbon Strategies

How do you secure finance to implement organisational energy efficiency programmes?

Finance & Corporate Sustainability

How do you define the right thing to finance when you have competing environmental and social needs?

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We were without our designated chair, and we interpreted the theme as being a competition for internal capital between sustainability initiatives and more CR based initiatives. We also naturally found ourselves discussing the more conventional challenge of how to get sustainability initiatives past the FD. We had a good mixture of senior people round the table, mainly from well-know UK oganisations.

Some of the key points that were discussed;
• The FD is increasingly becoming the “numbers director”, and one of the major challenges for CR or social initiatives is the difficulty of measurement. With carbon being more measurable, it has an edge over more socially based initiatives.
• CR budgets tend to be considerably smaller than sustainability budgets. Sustainability budgetary influence is growing as it starts to include other functions such as IT and property
• A FTSE 100 retailer was illuminating in his discussion of how they attribute scores to CR initiatives, with many others feeling this is something
• High Net Worth
• A major global company with a UK base noted that they are starting ask themselves whether they should be favouring investment in countries with lower grid electricity such as France (nuclear) or Italy (hydro), or Russia where it is easier to develop onsite renewables.
• In the UK, the FD may be a greater barrier than the CFO in the US, where decisions on sustainability tend to be more led by the CEO. Many discussed their experiences in the UK that the CEO was welcoming of initiatives, but when passed on to the FD enthusiasm. Leadership remains a very important issue.
• The example of GE was discussed in the context of a company where the CEO has driven the agenda, with great apparent success. GE’s Ecomagination programme generated $18bn in revenues in 2009, or 12% of its total revenues.

The main take-away from this discussion was that putting a value on social initiatives will help in getting it through the FD, and many felt this will be a part of the journey for their companies.

Communications

Delivering Measurable Value through CSR Reporting

CSR Reporting Best Practices

Great CSR Reporting: What do Investors need to know?

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- Outcome of Discussion – Points for Action
CSR reports should be a Strategic Planning Document – informing the business and its investors of the Direction being taken, and the achievements made on a journey to Sustainability in all aspects. We should encourage our businesses and business leaders, to adopt this approach.

The table noted with dismay the fact that some large organisations refuse to make their CO2 emissions public – we believe this only further adds to distrust.

Investors need to know that the firm has a plan to sustain, including being robustly profitable

- Thrust of discussions
We ranged around continuing themes:

CSR reports are not standardised and not therefore comparable by anyone – let alone stakeholders and investors.

There is little quantified, nothing Verified – and a feeling that organisations skirt around issues rather than pin performance to their mast – in fear of being attacked.
- Solutions
Make the CSR report simple – cover less topics, but in depth, building out as more quantitative data is gathered. Get it Verified

It should focus on sustainability and should not try to hide the fact that part of being sustainable is being profitable.

Take the responsibility reports away from marketing departments – keep them clear of “Greenwash” – and put them in the hands of the Governance functions.

Technology

Performance contract mechanisms for sustainable technologies

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The table debated ESCOs and performance related contracts. ESCOs were identified as very popular in the USA, but not so in UK. Characteristics or types of ESCOs were described as no capital investment required by client, savings guarantees, volume guarantees but exposure to price variation, other profit share mechanisms.

A series of issues around trust were then discussed identifying why ESCOs were not more popular and that would need to be addressed to encourage greater uptake. These included concerns about how initial benchmark levels were set, lack of transparency on levels of return for ESCO, lack of transparency on how savings verified, uncertainty on who is responsible for what, complexity of terms becomes bewildering, investing the time to understand the detail is a hassle, nervousness around long term contracts. There was also concern that there was too much focus on technology elements – ‘sexy’ technology such as renewables are often overweighted, or projects limiting to like for like replacements (eg boiler) but not assessing whole building requirements, concerns around whether technology will deliver promised savings.

Views were sought on where should thought leadership come from. It was felt that whoever provides thought leadership ought to tackle the issues of trust, credibility and evidence. There is a template for ESCO’s in USA – a federal government set of standards. UK government backed schemes would be welcome. There are banks that back ESCOs

The debate then moved to future trends and aspirations for performance related energy efficiency contracts.
• The importance of measuring, monitoring and controlling data was discussed. The view was that there isn’t yet robust software models for calculating energy saving and monitoring results.
• However it was also noted that there was interest from the VC sector in IS developments in the energy sector and that could be a stronger future growth area than traditional technologies.
• Whole building, or even whole community approaches are much better, and set so standards or incentives should work towards this
• Standards should be simplified – we have too many, and BREEAM standards incentivise the wrong behaviours (technology not solution focused). It was agreed that an outcome focus was needed.

The discussion then finished on with the view that in order to achieve step change widespread education on energy efficiency is needed from an early age. Also we need as a society to get really excited about energy efficiency, or have blunt instruments imposed by government.

Sustainability through ICT

Ecolabelling IT products : Identifying the major components of an eco-label for IT products

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Ecolabelling of IT products is in the dark ages. Even to the extent it exists, it is inconsistent across jurisdictions and doesn't cover many areas of relevance. The result is complete opacity for purchasers, both consumers and businesses. The key areas any effective labelling must cover are : Energy consumption in operation CO2 generated in manufacture Percentage of re-usable material (i.e. re-use before recycling) Percentage of recyclable material Toxins O2 has started its own ecolabelling of Mobile phones derived in a project with Cleantech. Many North American IT companies do not want or see the need for ecolabelling because their customers are not demanding it inspite of the global demand for more sustainable products. A good example in the corporate area is Servers e.g. from Dell and HP which can be made cheaper with less efficient power supplies and other components. In the consumer area, how many consumers at the point of purchase know that a Sony PS3 consumes hundreds of Watts, much more than the Nintendo Wii. In conclusion, ecolabelling of IT products has barely begun

Energy Effeciency

Coordinating various parts of the business to deliver successful energy efficiency investment

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1. Purpose
The tangible outputs from this topic discussion will capture What has Worked Well (WWWs) and what Could Be Better (CBBs) in developing business cases for investment and in delivering projects that show returns on investment, to help target and execute efficiency gains across business operations.

2. Main Discussion
A number of issues to consider related to enabling businesses to invest in energy efficiency were identified during a contextual discussion. This encouraged comments on:
• Which parts of the business need to get involved?
• Timescales for agreeing investment
• Energy Investment Principles
• Different financing models used
• Measuring and reporting success

Picking up on these issues, participants identified a series of issues related to energy efficiency investment. These included:

The limited strategic direction and tactical coordination of energy policy was considered to be an issue that must be addressed if businesses were to develop consistent approaches in line with shareholder expectations and operational requirements. One aspect was the opportunity for Government action to improve the regulatory position for energy efficiency in terms of carrot and stick – incentives to encourage renewable energy generation were mentioned (FIT and RHI) and their relationship to CRC Energy Efficiency Scheme, and for non-commercial operations, the potential for the Green Deal anticipated in the Energy Bill. Examples of other countries approaches were discussed including those that were more carrot/incentive (Japan) and those that were more stick/penalty (China). The role of OFGEM in the UK was mentioned.

The uneven and limited engagement in this issue across businesses was considered to reflect the relative importance of the bottom line energy budget, and that in most cases, the price of energy remained low enough not to encourage joined-up thinking on investment.

Mechanisms such as CRC-EES were agreed to offer a potential way to reinforce good invest to save behaviours, but the complex nature of this system and the apparently limited sign up by affected businesses suggest this has yet to be demonstrated. Some felt that many would not be concerned with the league table issue, attention only being given to this in the larger corporates where corporate responsibility and sustainability issues were already taken into consideration.

It was not considered that there were currently models of finance available from business lenders that put energy efficiency to the fore, and that at the moment, financial instruments still encouraged choices of higher shorter-term returns on investment than whole life sustainability approaches.

A fairly detailed discussion on where the SME sector sat within the energy efficiency profile identified key limitations in terms of time, skills and priorities, noting that CRC-EES will not affect such businesses, and that it was not easy to see how such companies could emulate the plenary speakers in using balance sheet finance to deliver energy efficiency improvements without further incentivisation / support. Schemes such as the carbon trust Enhanced Capital Allowances and zero interest loans exist, but capacity and capability in the sector itself may represent the key barriers. It was however pointed out that SMEs are relative small consumers of power across the commercial sector as a whole and that concentrating on the ‘big hitters’ would be more cost effective at delivering carbon savings. This does not address the potential benefits of energy efficiency on SME cashflow and turnover.

If investment in energy efficiency was to be forthcoming and sustainable, it was felt that it should be through balance sheet finance rather than debt models, and the attractiveness of locally ringfenced budgets reinforced by savings was mentioned. It was felt that EE investment must be ‘owned’ by individuals at board level. This has proven difficult sometimes, as ready made, transferable and proven business cases are not always available – this contrasts with a number of good practice studies. As part of this issue, the aspect of suitable business specific and financially robust metrics was raised – an example of data centre metrics was given. A further aspect regarding the ease and transferability of business cases was identified – the challenge between genuine sharing of best practice and intellectual property and commercial confidentiality. No immediate solution was indicated.

3. Main Tangible Learning Points
• Government energy policy does not give clear, unambiguous signals for carbon reduction and energy efficiency. This includes incentive schemes and the role of the regulator.
• As energy prices and costed externalities (e.g. CRC EES) increase, more business will take energy efficiency investment seriously, but capacity and capability may remain concerns.
• The role of the CRC EES in driving energy efficiency investment remains uncertain, and was even considered a possible diversion.
• It was not felt that commercial lending mechanisms that would ensure / enable better energy efficiency through investments were particularly strong, nor possibly practical.
• Although some models for encouraging EE investment in SMEs exist, there was no clear view on how this sector was performing in the light of such investment availability, or indeed whether this sector should actually be the primary focus.
• The lack of robust, transferable and easily understood business cases for EE investment was felt to be a limitation to ensuring successful delivery of EE finance within companies. This was felt to relate strongly to the challenge of sharing good practice whilst retauining competitive advantage.

Sustainable Transport

Road transport and sustainability. How should the roads sector contribute to sustainable economic growth and GHG reduction?

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Phillip Hammond recently said ‘I have become increasingly convinced of the critical role that sustainable transport must play in helping to deliver this coalition’s core agenda’. He outlined the agenda as:

• Restoring fiscal responsibility
• Securing sustainable economic growth
• Achieving carbon reduction goals
• Establishing social justice

Mr Hammond continued ‘we cannot ignore the fact that 84% of all journeys in the UK are made by car…roads represent our most important network and the overwhelming bulk of our total network assets…we must look carefully at where investment in our road infrastructure will make sense in a future of decarbonised surface transport’.

The group initially found it challenging to focus exclusively on the road sector given the systemic nature of sustainable travel. It was felt that looking at roads alone would not be very productive although it was acknowledged that certain improvements could deliver results:

Technology
• Improved technology / improved traffic management tools – keeping roads flowing to avoid congestion would reduce emissions
• Adhering to speed limits – again through technology – would reduce emissions and possibly accidents (we acknowledged the impact of road accidents on the economy not just in terms of delays and congestion but in the many other associated costs to individuals, businesses and society)
• Technology to allow greater flexibility in how the road network is used – eg: limiting certain types of vehicles at certain times such as M11 no lorry over-taking on the 2 lane section Monday – Friday 0700 – 1900 hours. Technology would also monitor and ensure adherence to the flexible arrangements
• Lower emissions vehicles using the road network
• Road freight was acknowledged to be very carbon intensive and a great deal could be done to improve the logistics and freight sectors contribution to emissions / congestion

Infrastructure
• Improved road infrastructure (not road building!) to create safer roads for cyclists and indeed all road users
• We need to look at both national network solutions (of which roads are an important part) as well as local network solutions. Motorways are important but so are urban and rural roads
• Prioritising public transport and shared vehicles and thereby encouraging their use – such as car sharing lanes/bus lanes (though Mr Hammond had recently announced the M4 bus lane was to cease temporarily in the near future and then permanently after the Olympics)
• The lack of freight carried by rail was discussed – as was the figure of 8 idea

Pricing/Taxation
• Road pricing – pay for use, though there are social equality issues to consider
• More road tolls
• Greater incentives to purchase low emissions vehicles

Behavioural Change
• The Highways Agency Travel Behavioural Team were mentioned for their innovative approach of working with businesses close to motorway pinch points to reduce car use at peak times for mutual benefit. The success of the Highways Agency work with the Cambridge Science Park and others close to the junction with the M11, which has delivered good result, was discussed.
• Peak time congestion should be tackled partially through behavioural change – such as challenging and changing traditional working patterns. Businesses have an important role to play given the high proportion of car travel that relates to commuting and business travel
• Behavioural change for the individual road user – could also be done through technology and reward (rather than technology and a fine)

Planning
• Out of town business and commercial centres were considered to encourage car and road use and increase emissions
• Freight adds to this problem
• Planning policy generally over the past few decades has not been conducive to sustainable growth and more changes need to be made

ACTIONS
No immediate actions – a big issue with our car dominated society and 4 out of every 5 miles travelled in the UK being by car. The lack of ownership of the commute by businesses remains an issue – very few businesses are actively engaged in reducing work-related travel impacts

Corporate Strategies

Case study: GE ecomagination

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October’s roundtable was a case study discussion on GE Ecomagination. The discussion was started with a question asking the group to name leading companies with sustainability strategies and the following were mentioned: Kingfisher, M&S, Google, Interface, Unilever, Co-Op, Bovis, innocent, Body Shop, Lush, Nokia and Stoneyfield were all mentioned.

The group were asked if any of them knew about GE Ecomagination and interestingly none had heard of Ecomagination before. Using SecondNature’s Steering Wheel, a discussion was facilitated to explore what GE has been doing to integrate sustainability into their DNA. The initial 4 targets that GE set in 2004 for 2010 were reviewed against actual performance reported this year. Clearly GE has done very well and has gone on to set ambitious new targets for 2015. The group agreed that Strategy, Leadership, Business Model, Operational Efficiency and Sustainable Growth are the wedges of SecondNature’s Steering Wheel where GE has delivered. However, they questioned Brand Story, Culture Change and Stakeholder Engagement and suggested possible areas for GE to improve. The group were then asked to reflect on their organisations and discussed areas for improvement.

Venue Detail

Bank of America Merrill Lynch: King Edward Hall

King Edward Hall | 2 King Edward Street | London | EC1A 1HQ

Directions

Bank of America's offices are a very short walk from St Paul's tube station (Central Line). Exit the station at Cheapside/Newgate Street. Go past the BT centre, with it on your right-hand side and take the first available right down Edward Street. Continue down this road for 80m and the entrance to the venue is on your left-hand side.

Do not go to the main reception desk at their offices when you arrive. You are looking for an entrance that leads you directly into the King Edward Hall.