Some executives believe the myth that going green is expensive—and I don’t blame them. When Conservative MP John Baird was Environment Minister, he told a 2007 Canadian Senate hearing that meeting our Kyoto goals would manufacture a recession. I ran into John in Toronto shortly thereafter and asked if he’d seen the just-released McKinsey & Company study showing that 40 per cent of the CO2 we have to cut in North America to meet our Kyoto goals would be highly profitable, and if society invested those profits in the next lowest-cost solutions, we’d get all the way to achieving the Kyoto targets at no cost to society.
He hadn’t seen the study and wasn’t interested when I offered to send it to him.
There are a couple of important points in this story. First, the study wasn’t from an environmental group; this was one of the preeminent management consulting firms worldwide, the kind of people you’d expect Conservatives to trust. And second, McKinsey was alerting business leaders to the fact that going green is highly profitable.
Sustainability is profitable because it cuts costs, raises revenue and mitigates risks. And I can prove it.
Carpet maker Interface has been on an aggressive sustainability journey for the last 15 years, driving US$450 million to the bottom line in cost savings, equal to 28 per cent of the company’s cumulative operating profit over the period, and helping it double profitability.
General Electric’s Ecomagination initiative, launched in 2005, has seen GE grow revenues from green products and services by US$85 billion over the period. And GE’s green revenues are growing at twice the rate of the rest of the company, so the initiative is great for the top line, not just the bottom line.
And finally, going green mitigates risk. When oil rose to US$147 a barrel, General Motors, once the most mighty and powerful U.S. company, went bankrupt as consumers turned away from buying fuel-inefficient cars. Is your business and value chain prepared for oil to spike to US$225 a barrel, as predicted by Jeff Rubin, former chief economist of CIBC World Markets?
Energy and fuel efficiency are not only a strategy for mitigating risk against rising energy prices, they’re also a critical strategy for attracting and retaining the best and brightest employees. In North America, we are about to experience the largest number of retirements ever, as baby boomers head for the golf course. Younger employees are more idealistic, so if your company, organization or industry is not aggressively pursuing sustainability, then recruitment and retention will prove to be both costly and challenging.
Radical fuel efficiency
But wait, there’s more.
The financial benefit of going green is far beyond what most people realize. The fuel efficiency of the average North American mid-size car is 21 miles per gallon (mpg) in the city and 27 mpg on the highway. Shell sponsors the annual fuel efficiency Eco-Marathon competition, and the current record is 12,665 miles on a single gallon. As a caveat, what teams submit to the competition really aren’t cars, they are ultra-light, aerodynamically designed vehicles. Nonetheless, the competition highlights just how little innovation on fuel efficiency there has been among North American car companies. In this competition, even mass-produced cars have been modified to achieve almost 400 miles on a single gallon.
But it’s not just our transportation system that’s grossly inefficient: so is the way we produce electricity in North America. Co-generation is a simple technology that would triple the efficiency of our electric grid. Two thirds of the energy from burning coal, gas or uranium to generate electricity in North America is wasted as heat that’s vented from the process. By contrast, Denmark is the global leader in co-generation—also known as combined heat and power (CHP), which makes use of “waste” heat to heat buildings and even whole cities. The Danish also use very high temperature storage to store heat when energy isn’t needed.
And there are practical and proven existing technologies we could use to dramatically cut energy use. Take, for instance, lighting. The majority of North Americans still use a 100-year-old technology: Thomas Edison’s incandescent light bulb. This is a grossly inefficient device: 80 per cent of the electricity it burns generates heat, not light. In fact, incandescent light bulbs are misnamed; they should be called heat bulbs. And lighting accounts for 24 per cent of the electricity consumed in North America, and 18 per cent worldwide.
Shifting from incandescent lighting to LEDs (light emitting diodes) cuts electricity use by 80 per cent. According to the US Department of Energy, the adoption of LEDs will save Americans the equivalent of 334 million barrels of oil a year. We are at the start of a lighting revolution: the price-performance ratio of LED lights is currently improving 200-fold every decade, so by 2020 it will be the dominant form of lighting in Western developed nations.
And the revolution is already underway. Sears Canada has just completed a US$4.5 million LED lighting retrofit that has a 13-month payback. Sears replaced 130,000 incandescent 60-watt spotlights with 15-watt LEDs in 170 stores across Canada. The change is saving Sears more than 20 million kilowatt hours (kWh) of electricity per year, making it the largest-ever LED lighting retrofit in Canada.
Because LEDs last for 50,000 hours compared to 4,000 hours for incandescent lights, there’s a significant labour saving in not having to replace burnt out bulbs: $800,000 a year, a 94 per cent reduction in maintenance costs over the lifetime of the bulbs. But these savings were not even included in the payback calculations, as no maintenance staff is going to be laid off because of the changeover. Instead, their time will be redeployed to other work.
The impact of energy efficiency on profitability is significant. Sears Canada reported a loss for its most recent fiscal year, but if the company was operating on three per cent net profits—as Walmart does—saving US$4.5 million in a year due to energy efficiency would be equal to generating US$150 million of additional top-line sales. In a challenging market, energy efficiency is a powerful profit driver.
With a payback of 13 months, shouldn’t every company be aggressively pursuing energy efficiency retrofits?
And Sears’ payback accelerates as electricity rates rise. And rise they will: Ontario’s electricity prices are predicted to rise 30 per cent from 2010 to 2015. Therefore, investing in energy efficiency pays financial returns that will increase over time.
Sustainability offers companies fantastic financial returns by cutting costs, raising revenue and mitigating risk. And members of corporate boards who are not ensuring their companies are doing so are failing in their fiscal duty.
Jim Harris is a #1 international bestselling author who speaks at conferences and seminars on leadership, change and technology. You can follow him on twitter @JimHarris
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