By Lana Zaman, graduate student at UC Berkeley
Companies today are increasingly investing in energy efficiency upgrades, both to conserve energy and to reduce operating costs. By lowering greenhouse gas emissions and fuel expenses, energy efficiency benefits the economy as well as the environment in the face of climate change. Being from Bangladesh, a country that is on a trajectory to become completely submerged as sea levels rise, climate change is an important issue to me and is largely the reason why I joined EDF Climate Corps.
Before I began my fellowship, I asked myself: When there exists a seemingly obvious solution to current energy challenges, why aren’t more companies investing in these solutions? What is holding the private sector back from pursuing initiatives that not only save the company money, but can also contribute to mitigating climate change?
I have since learned about many of the complex financial, social or structural barriers facing energy efficiency implementation – and, perhaps more importantly, ways to address them. Working with KKR, I have been exposed to a wealth of innovative solutions. From my summer fellowship, I have seen firsthand how private equity firms are uniquely positioned to affect change on this front. By leveraging relationships with portfolio companies across a broad spectrum of industries, private equity firms magnify the impact of an energy strategy implemented at a single company; they benefit from feedback and collaboration across companies to build stronger recommendations and support going forward. This is key to investing responsibly.
There are two major aspects of responsible investment:
- Incorporating Environmental, Social, and Governance (ESG) issues into investment decisions during the diligence process
- Creating sustainable value by offering customized programs, tools, and resources to portfolio companies during the management process
My work on energy efficiency opportunities has been primarily focused in the second category. Many companies see business value in making some preliminary efficiency upgrades; however, after the light bulbs have been switched to LEDs and the computers replaced with Energy Star machines, it can be difficult to find and capitalize on additional opportunities. Below are some recommendations to help companies that may have capitalized on the low-hanging fruit and need innovative ways to continue their efficiency efforts.
Energy Efficiency Beyond the Basics: Lessons from Companies
1. Financials: Many companies hesitate to support initiatives with long payback periods. This eliminates a lot of profitable opportunities. One innovative solution is to create an internal fund that serves as a “revolving loan” within the organization for energy efficiency projects. By financing new initiatives with the savings from previous initiatives, companies can open up the door to many opportunities that would otherwise be disregarded.
2. Principle-Agent Problem: Simply put, the principal-agent problem occurs when there is a conflict of interest between a person or entity (the principal) and an “agent” it hires to provide a product or service. In energy, this is a common problem between tenants who would benefit from lower utility bills and building owners who have low incentive to invest in energy efficient upgrades since they do not receive the savings. A lot of recent developments have led to solutions to this long-standing problem, especially in the space of green leasing. Of particular interest, the New York City Mayor’s Office of Long-term Planning and Sustainability has developed an Energy Aligned Clause for inclusion in lease agreements, which make energy efficiency opportunities profitable for both building owners and tenants. Additional resources are available on the Green Lease Library.
3. Innovation in Metrics: Although they are essential to tracking success, lack of metrics should not block action on sustainability. Where standard data such as annual energy usage or gas consumption are unavailable, companies should identify substitutes. For example, they can ask providers of office supplies, car services, or catering to retroactively sum the company’s annual spend on these products and use back-of-the-envelope calculations to track energy use or greenhouse gas emissions in these categories. Another idea is to track employee engagement levels based on participation in environmentally focused initiatives or events.
Ultimately, many of these solutions come down to management. The value of sustainability in business is quickly escalating, and the companies that recognize this trend are taking action. These companies build strong energy management teams, implement good energy practices before government policies enforce them, allocate funding specifically for greening initiatives or conduct research in entirely new fields of energy efficiency. The companies that are truly leaders do not wait to stumble upon opportunities, but instead actively seek them. The returns benefit the company’s bottom line, and ultimately the safety of the planet.
This post originally appeared on our Climate Corps blog.