Financial Benefits

Monetizing Sustainability Investments for Business Decision Making

Posted on by abrahamwien18

Tod Christenson, John Platko, Antea Group, 5/27/2014

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Today’s sustainability investment options are extensive and broad ranging, including relatively straightforward efforts (e.g., energy conservation projects) to multi-year/multi-stakeholder initiatives (like those that target social and environmental improvements deep within an organization’s supply-chain). While doing any or all of these could yield significant benefits, it is often unclear which will generate the greatest, most enduring value. Faced with this dilemma, leaders often struggle to understand which choices are best and how they should evaluate the many alternatives to ensure the most effective, efficient and sustainable decisions are made.

One way to improve would be to encourage better, more quantitative analyses that examine the full costs and benefits associated each investment in sustainability, combined with an analysis of which could make the greatest contribution for the business, the environment and society simultaneously.

While most understand that “when the economics work, the social and environmental benefits last,” many barriers remain for those wishing to accelerate the pace and effectiveness at which sustainability initiatives are funded and implemented, including:

  • the lack of a demonstrated link between sustainability and business value;
  • failure to communicate the strategic potential of such efforts in a way investment decision-makers can understand and appreciate; and
  • not leveraging proven, familiar processes (that other company functions have applied) to accelerate decision-making and scale solution implementation.

Accenture’s 2013 CEO survey (UN-Global Compact – Accenture CEO Study 2013: Sustainable business and the pace of change) seems to agree, reporting that 37% of 1,000 top executives feel that the lack of a clear link to business value is a critical factor in deterring them from taking faster action on sustainability. It should be noted that this percentage is increasing: in 2007, just 18% reported a failure to trace such a link and in 2010, this figure rose to 30%.

Our experience confirms this trend, as we regularly note good projects that do not receive sufficient (or any) investment as these initiatives are perceived as failing to deliver competitive business value.

From our vantage point, there are two principal challenges that need to be overcome for sustainability to be viewed as a more critical contributor:

First, the “equations” for presenting business cases do not sufficiently include all the benefits of investing in sustainability – specifically, these efforts should include an accounting of potential contributions such investments could make in terms of:

  • Offsetting of risk (brand risk, reputation risk, supply/commodity risk, regulatory risk, etc.);
  • Delivering efficiency gains; and/or
  • Adding revenue/market share (via innovation and/or building brand/reputational equity).

Without accounting for and quantifying all these dimensions, sustainability investments risk appearing less important than other business investments and hence are perceived as not carrying as much “strategic weight.”

Second, sustainability departments are generally not equipped to build and pitch multi-dimensional business cases – this requires a combination of strategic, financial and political skills rarely found among these practitioners. Challenging questions are being posed, and few confident answers are being provided:

  • Are we realizing value expected from existing, funded sustainability initiatives?
  • We have many sustainability investment choices, but which ones are the best for our business?
  • How confident are we that our actions will yield the tangible and intangible benefits promised by the business case?
  • Do we understand the true business impact and cost of doing nothing?
  • How do we increase the reliability and credibility of our business case analyses, and therein, how can we increase the confidence of our sustainability investment decision-making?

Value Creation: Business & Sustainability

Linking sustainability to value creation is becoming a new imperative for business leaders. As such, investments in sustainability must be more connected to both business and societal benefits, improving management of risks/costs and stimulating growth and/or innovation, while simultaneously helping companies better meet societal and environmental expectations and obligations. When building the case, leading organizations are increasingly articulating associated sustainability benefits within a clear and simple framework, one that illustrates how these investments can better protect, strengthen, and/or advance the business.

Frequently, benefits of this sort are intangible, uncertain and generally difficult to quantify in ways that are credible and agreeable to all decision-makers. Determining the appropriate level of analysis, who must be engaged, what input is required, etc., is often a challenge requiring innovative, clever leadership, clear process and strong cross functional engagement to ensure success. Commonly, those that pursue such efforts ensure they always ask:

  • Am I using the right vernacular, do I understand, and more importantly, use terminology and methods familiar to financial and other decision-makers, or am I only talking in “sustainability speak?”
  • Have I considered all relevant costs or benefits (tangible or intangible) in my analysis?
  • Have I engaged the appropriate internal domain or functional experts to gather data, experience and methods needed to build a credible, monetized investment analysis?
  • Have I accommodated and considered future variability and other possibilities that could impact decisions or outcomes?

Innovators Are Creating the Case for Sustainability Today

Ultimately, value-adding sustainability investments protect, strengthen and/or advance business endeavors while simultaneously improving the environment and society’s well-being. Clearer demonstration of such value creation capability is becoming more common as innovative organizations repurpose standard management and strategic tools to deliver a more compelling case for sustainable investment and action.

As a consultant to private industry for more than 30 years, Tod Christenson partners with clients to develop and implement fit-for-purpose and innovative solutions to drive sustainability across the entire value chain. He has unique skills and expertise in the areas of strategic thinking and planning methods, sustainability, corporate social responsibility, organizational diagnosis and coaching, and benchmarking.

John Platko has nearly 30 years of business, sustainability, environmental, health and safety leadership experience. His client engagements involve the development and implementation of strategies, plans and programs that emphasize simultaneous creation of business, environmental and social value for private sector clients operating domestically and internationally. John has led projects in more than 40 countries in North America, Latin America, Europe and the Pacific Rim. He is a founding member of the company’s sustainability practice; a leader in Antea Group’s Accounting For Sustainability – AA4S decision-support service; and the primary architect of iEHS, the company’s web-based environmental, health, safety and sustainability information management platform.

‘Green’ Federal Facilities Save $42M

Posted on by abrahamwien18

Environmental Leader, 05/27/2014

More than 400 federal facilities achieved $42 million in cost savings and environmental benefits last year as part of the Federal Green Challenge (FGC).

A national effort under the EPA’s Sustainable Materials Management Program, the FGC allows federal offices or facilities to pledge participation in reducing the federal government’s environmental impact and recognizes outstanding efforts that go beyond regulatory compliance and strive for annual improvements in selected target areas (waste, electronics, purchasing, water, energy and/or transportation).

Within these areas, additional accomplishments by participants included: diverting more than 500,000 tons of municipal solid waste and construction and demolition waste from landfills, and reducing fleet distance traveled by 16.5 million miles.

Data collected from the challenge show that FGC participants sent 1,765 tons of end-of-life electronics to third-party certified recyclers, minimizing environmental impacts — including water and energy use, releases to air and water, greenhouse gas emissions, and land use impacts.

The US General Services Administration’s new standards for its federal buildings, published in March, focuses more on outcomes, or performance, and less on technology.

The Facilities Standards for the Public Buildings Service, also known as the P100, is a mandatory standard that outlines how facilities will be managed, designed and built to achieve higher performance levels and save energy in the 9,200 buildings the GSA owns and leases across the country. The P100 applies to all new construction projects including additions to existing facilities.

Incentives Aim to Green Up New York, Reduce Operating Costs for Building Owners

Posted on by abrahamwien18

By Joshua Ayers, Senior Editor, 5/20/2014
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New York—A recent study found that 75 percent of greenhouse gasses in New York City are being generated by buildings, a majority of which are multifamily residential buildings. The alarming figures have prompted an assortment of companies and organizations, ranging from major utility companies to the mayor’s office, to develop programs that incentivize green upgrades in an effort to entice multifamily building owners to curb emissions.

A panel of industry experts explored the fiscal perks of these programs at FirstService Residential’s Third Annual Green Expo & Symposium May 15 in New York, stressing the importance of participating in the programs before they are no longer available.

“What’s packaged inside of this is not only trying to operate your building more efficiently, cleaner, greener, but also as a major opportunity to save money,” said FirstService Residential President Dan Wurtzel as he opened up the discussion. “Ultimately if at the end of the day that’s where we end up then we’re all in a better place. We save money, we’re contributing to a greener environment and probably our property values are going to go up because of the reputation of the building. So it’s a win-win all the way around.”

One of the largest incentive programs currently available to New York building owners is NYSERDA’s flagship program, the Multifamily Performance Program (MPP), which allots building owners $500 to $1000 per unit to help reduce energy usage by 15 percent. To qualify, owners must work with one of about 90 NYSERDA-approved partners, which include engineering firms, energy consultants and non-profit organizations. That chosen partner then assess and recommend improvements that will help them achieve the reduction. Owners become eligible for an additional $300 per-unit bonus if they are able to meet the criteria.

“The good news is that the way that all this is calculated and the way that electricity rates work, 15 percent energy reduction is about a 15 percent cost reduction,” says Michael Colgrove, director of NYSERDA’s New York City office, who directly oversees the multifamily programs. “If you know how much you spend annually on energy usage, you take 15 percent off of that, and that’s about what the program [can do to] assist you.”

Colgrove said that most buildings in the program end up reducing usage by 20 to 25 percent and that there have been some buildings that have cut energy use by as much as 40 percent. In addition to the initial incentives, owners can qualify for an additional $300 per unit if they are able to reduce usage.

But the panelists stressed the importance of taking advantage of these programs, as most of them do have set term limits.

For example, Con Edison has created a new program aimed at curbing peak summer demand energy uses. The program, called the Demand Management Program, provides a certain amount of money for every kilowatt of energy saved via a variety of methods such as lighting upgrades, While owners can potentially save thousands of dollars through these incentives, the program will end promptly in June 2016.

Con Edison also has other programs that reward energy reduction such as the four-year Commercial and Industrial Program, which features components that provides rebates for energy efficient equipment and other incentives that can help fund up to 50 percent of a green capital improvement project.

“Some programs have quadrupled the amount of programs and funding available,” said panelist John Skipper, business development for Energy Efficiency & demand response, Con Edison

While these incentive programs allow for building owners to save thousands of dollars in operating costs and give buildings a greener footprint, proper research in rare cases can lead to an additional source of income.

Panelist William C. Ragals, Jr., board president of The Strand Condominium in Manhattan says his board took advantage of now-expired NYSERDA and Con Edison oil-to-gas conversion incentives to help fund the installation of a Combined Heat and Power (CHP) that has allows the building to produce energy at below Con Edison rates.

“With the money that they gave us and the efficiencies that we received in operating expenses by switching from oil to gas, the balance of our out-of-pocket was recovered by us in about five months,” Ragals said.

Despite all of the available programs, qualifying for incentives does not come without a set of challenges. Ragals says that researching the program and educating board members or property managers is the first step to addressing these challenges.

“I had to educate my board and that is something you have to face,” he says.

Another key step to reeling in incentive money is to identify what upgrades need to made and which ones will have the best effect on operating costs.

This can be determined several ways. One way is to utilize information collected through annual benchmarking reports (a requirement of Local Law 84) to identify how much energy a building uses and how that figure compares to other similar buildings in order to determine whether an upgrade is warranted. The second involves conducting an Energy Efficiency Report, something that is already required every 10 years for larger building thanks in part to Greener, Greater Buildings Plan efforts, specifically Local Law 87, which that mandates such an inspection for “covered buildings” with 50,000 or more gross square feet.

“Basically you have a qualified contractor come in and analyze the system that’s in your building and tell you where you can save energy,” said Jenna Tatum, NYC Carbon Challenge Director, New York City Mayor’s Office of Long-Term Planning and Sustainability.

Tatum says that the building owners can get credit for the audits up to four years in advance of the 10 year deadline, and that while the audit does cost money, there are no requirements necessary to commit to any projects.
Colgrove clarified, however, that work has to already have started before NYSERDA incentives will be paid out.
“NYSERDA won’t actually give you an incentive until you’ve installed at least 50 percent of that work,” he said, adding that “NYSERDA’s MPP program has a clause in it that says ‘we will recognize any work that a building has done up to a year of applying to the program,’ and that can qualify toward your 15 percent target.”

Change Your Perception of Financing and Reap the Energy Savings

Posted on by abrahamwien18

An overview of funding options for your next project
By Eric Woodroof, Ph.D., CEM, CRM
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Psychologically, when most people hear the word “financing,” they have a quick and negative reaction about cost. I understand the perception. If you look at the total financing cost on your home, you pay an amount over 30 years that can be twice the purchase price!

But most energy projects are different from your home mortgage. The savings is greater than the finance cost (especially with today’s low interest rates). Yet lack of capital and financing cost are the most common reasons why good energy projects are delayed or cancelled.

An energy project can have a rate of return over 30% – higher than most investment opportunities and many companies’ profit margins. Even with a 10% financing cost, you are still 20% ahead compared to doing nothing.

Lack of capital is solvable for many projects. I will outline solutions, some old and some new. I hope this article inspires you to challenge anyone who tries to block a good project based on the premise that money is not available and the financing cost too high. The truth is, you are probably throwing bags of money out the window – and that money cannot be recovered, even if you do a conservation project at a later date.

Innovative Options

Among recent financing innovations are Utility Energy Service Contracts (UESC), Power Purchase Agreements, on-bill financing, and Property Assessed Clean Energy (PACE) financing.

Utility Energy Service Contracts are basically performance contracts that are developed and implemented by utilities. The contracts offer some streamlining because utilities can provide the project funds and make deals with neutral cash flow.
Power Purchase Agreements (PPAs) are commonly used for solar PV and wind generation. In a PPA, solar is put on the roof at no upfront cost to the building owner, who agrees to purchase the kWh produced over a long-term contract. The PPA is typically structured so that the building owner is paying about the same price for the solar kWhs as they would for power from the grid. This works well when the grid price is high, the utility is cooperative, and local incentives are available.

On-bill financing is offered by some progressive utilities, typically as part of a Demand Side Management Strategy that benefits the utility. As the name implies, building owners repay the installation costs with an extra charge on their future utility bills. The deal is structured so that the monthly savings is larger than the extra charge. The improvement can be linked to the meter, so that if the owner sells the building, the savings and the repayment are taken over by the new owner.

PACE is very similar to the on-bill financing concept except that the savings and repayment are linked to the property tax, so that if an owner sells a property, the new owner would assume the property tax amendment (i.e. extra payment). However, any new owner also reaps the savings cash flow. In recent years, PACE has become very popular. This financing vehicle has now been enabled by legislation in 31 states.

Traditional Financing

There are also many traditional financing options available to facility managers. If you decide to finance a project with a loan, bond, true lease, capital lease, or other leasing variation, you may have some new vocabulary to learn. You may also need an accountant to evaluate such things as depreciation. (And note that there are some new tax regulations for depreciation in 2014.) Take a little time to understand this information as well as the view from the CFO (or whoever signs the contract). To get approved, the CFO has to say “yes.” Try to make it easy – or even irresistible – for him.

Performance contracting has been around for decades and allows projects to be developed by an Energy Service Company (ESCO) that offers a performance guarantee on the savings in which the savings are greater than the finance payment, which is usually handled by a third-party financier. This approach can be attractive because, in theory, the savings are risk free due to the guarantee.

Performance contracting is more common with government, institutional, and educational facilities because financiers are more comfortable lending money to organizations that are likely to survive a recession and other difficult business cycles. Contracts can become complex (for both the ESCO and the facility) and it takes time to understand them as well as get legal endorsement, which adds time and cost.

Local incentives and rebates from utilities can be substantial and improve the return on investment if you are willing to do some before/after documentation. For example, my utility will give a $10 rebate on LED lamps that cost $20. A list of free rebates, tax credits, and other incentives is available at www.dsireusa.org. Also ask your local government, chamber of commerce, and economic development office because they may have special grant money. Because the local community benefits, I have seen funding available to help pay for solar, energy efficiency, and water conservation projects.

Additional Resources

It is clear that energy financing options have increased, leaving more choices for the facility manager – a great situation if you know where to look and how to leverage your options.

If you want some basic information about financing and performance contracting, I have a free webinar entitled Financing for Engineers that is available here. There is also information on the energy.gov and EPA websites.
For career-focused individuals that want to earn accreditation, you can look at a new certification program from the Association of Energy Engineers, the Certified Performance Contracting & Project Funding Professional. I think this type of training will help many facility managers and ESCO professionals navigate their options and accelerate project approvals.

Eric A. Woodroof, Ph.D., is the Chairman of the Board for the Certified Carbon Reduction Manager (CRM) program and he has been a board member of the Certified Energy Manager (CEM) Program since 1999. His clients include government agencies, airports, utilities, cities, universities and foreign governments. Private clients include IBM, Pepsi, GM, Verizon, Hertz, Visteon, JP Morgan-Chase, and Lockheed Martin.