Finance directors at large businesses in the UK are undervaluing the financial returns from investments in energy efficiency by up to £1.6bn according to research by Carbon Trust Advisory.
This undervaluation is one factor meaning big businesses are missing considerable savings they could easily make 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.
