Finance directors at large businesses in the UK are undervaluing the financial returns from investments in energy efficiency by more than half, research by Carbon Trust Advisory has revealed.
This undervaluation is one factor leading big businesses to waste at least £1.6bn every year on energy they could easily save through measures including upgrades to heating and lighting, energy-saving policies and staff training.
The research is contained in a paper The Business of Energy Efficiency published today by Carbon Trust Advisory, the business advisory arm of the body that developed the well-known ‘Footprint’ carbon label. It shows that:
- Energy efficiency projects deliver an average return on investment (Internal Rate of Return) of 48% - some four times the minimum level demanded by most senior finance officers.
- Yet most finance directors estimate the average return (IRR) to be less than 20%.
- Business investments in energy efficiency pay back within three years on average, satisfying the investment requirements of eight out of ten finance directors.
“The business case for energy efficiency is clear and compelling. Few other investments get anywhere near that rate of return,’ said Hugh Jones, managing director of Carbon Trust Advisory.
“Yet our data suggests big businesses are leaving around half the investment opportunities on the table and continuing to waste billions of pounds on unnecessary energy use every year.”
Carbon Trust Advisory has identified three key reasons why businesses are not taking up all opportunities to cut their energy use:
- The investment case for energy efficiency needs to be made more convincingly within some businesses, to improve access to capital, resources and expertise.
- Energy efficiency is still regarded as a low priority in many organisations, despite its potential to boost the company’s bottom line. Changing company culture and staff behaviour is seen as too hard.
- Misaligned incentives scupper efforts to cut energy use. For example the ‘landlord-tenant divide’ means that landlords lack the incentive to make buildings more energy efficient because tenant companies get the benefit through lower energy bills.
But, according to Carbon Trust Advisory, many leading companies are findings ways around these challenges in order to fully exploit the potential for energy efficiency to deliver to the bottom line. They include:
B&Q: the business takes a holistic approach to cutting its energy usage which involves staff as well as customers. A high importance is placed on staff education with an environmental champion at each store. Last year B&Q launched a new e-learning module called One Planet Living and more than 5,000 employees have completed it so far. Whilst continuing to grow as a business, the company has saved 12 per cent in its CO2 emissions from electricity and 7 per cent in emissions from gas. The brand has introduced an eco champion in every store to maximise energy efficiency and reduce each store’s footprint as well as introducing the high street’s only qualified Eco Advisers to offer customers advice on how to make their own homes more energy efficient. Altogether the measures that the company is taking will put B&Q on target to reduce its carbon emissions by 90% by 2023.
Ian Cheshire, Group CEO Kingfisher plc and Chairman of B&Q, said:
“Greening our business has made good economic sense. We are transforming ourselves into a low carbon business; which has not only enabled us to improve efficiencies but also create clear opportunities in growing sales of energy saving products.”
Ladbrokes: the betting and gaming firm aims to cut its energy use by more than a fifth over the next three years and has invested £2m to install new light fitting controllers across its betting shops, expected to save over £800,000 per year. Further controls ensure air conditioning is on only during opening hours. Shop managers are given energy saving targets: a “green dashboard” which shows them how they are doing and gives hints and advice to help them achieve their goal.
David Bowen, Development Services Director at Ladbrokes commented:
“With the ultimate prize of saving 21% on our annual energy bills by 2013, committing to our Capex programme was an easy decision to take. Admittedly we had a substantial amount of work to do up front, but a payback of less than 3 years on the equipment installed made all that worthwhile.”
Whitbread: has committed £7m this year into energy efficiency across its hotels and restaurants that include Premier Inns and Costa coffee shops. £2.5m of this is earmarked for energy efficient LED lighting with bulbs that last up to five years. The company has used flagship green hotels to demonstrate state of the art energy efficiency measures and make the case for a wider roll-out across its estate. The company believes that it can cut its energy use by over 3% within a year simply by changing staff behaviour and has created a list of ten energy efficiency tips for housekeepers to follow when cleaning hotel rooms.
Mark Anderson, Commercial & Property Director for Whitbread Hotels & Restaurants (WHR), said:
“As a major owner and occupier of UK property, we want to operate these as efficiently as possible. Investment into energy efficiency technologies can deliver attractive pay backs within a relatively short period of time. We are embedding energy efficiency into our new build and we also committed £7m earlier this year for investment into reducing our CO2 emissions across the existing estate. We have already saved 7% relative energy consumption within the last 12 months and have a target to reduce our CO2 emissions by 26% by 2020.”
Heinz: has cut energy use at factories producing Heinz Beanz, Soups and Pasta as well as many other varieties. Heinz’s energy managers working with Carbon Trust experts found that a great deal of energy was needed to heat cold water to rehydrate dried beans and create the steam that cooks the beans in their cans. The company now captures and recycles the waste heat from these processes, meaning that less energy is needed to heat the water leading to lower energy bills. Heinz has saved over 13% of its annual energy costs in its main UK factory over the last two years.
Nigel Dickie, Director of UK Corporate and Government Affairs at Heinz said:
“This work from Carbon Trust Advisory provides useful insight and makes the business case for investment into energy efficiency even more compelling. At Heinz, our experience is that the right investments in energy reduction do indeed deliver significant returns to our bottom line through substantially lower energy costs. We have also taken advantage of government tax allowances for investing in energy saving equipment which has enabled us to claim back £700,000 in a single financial year.”
Toyota: Toyota is aiming to reduce energy usage in its retail network by at least 15 per cent by extending a successful pilot scheme that has already led to a reduction of 20 per cent in energy usage across sixteen of its Toyota and Lexus Centres. The company managed to make the savings with very little outlay and its experience of the pilot scheme has led it to upscale its ambitions to its nationwide network.
Thomas Rosselle, Toyota Manager for Corporate Social Responsibility said:
“We have been very pleased with the success of the pilot scheme that has seen energy usage reduced by up to a fifth across those centres involved in the pilot. Given the significant environmental and financial benefits achievable, especially given the range of incentives and help available, we are now committed to rolling the plan out to all of our centres to save, we estimate, at least 15 per cent of their energy bills.”
Commenting on the paper from Carbon Trust Advisory, Sandra Rapacioli, Research and Development Specialist at the Chartered Institute of Management Accountants (CIMA), commented:
“As an advocate of sustainable business practices, CIMA is heartened to see the emphasis the Carbon Trust Advisory is placing on this important issue. Organisations around the world must wake up to the fact that sustainable business makes good business sense and that accountants are critical when it comes to driving such projects forwards. With their considerable skill-sets, accountants are able to apply the necessary financial and commercial rigour to develop clear and measurable carbon reduction goals, facilitate effective implementation and provide credible business reporting.”