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Energy Management and Shareholder Value
Joel Makower, 10 Apr 05

Joel Makower is a widely respected writer and consultant on issues of sustainable business, clean technology and green markets. His essays on environmental business and technology are a regular feature of Sustainability Sundays. Take it away, Joel:

In the wake of growing concern in the corporate set about energy prices, climate change, and shareholder activism, my GreenBiz.com team this week will publish a timely briefing paper: Energy Management and Shareholder Value. This free, downloadable paper shows how companies that take a systematic and strategic approach to energy management can enjoy a broad array of tangible and intangible benefits of increasing interest to investors.

For years, companies have touted the benefits of energy efficiency at the facility level. Countless stories have told the relatively attractive returns on investment for such things as replacing older fluorescent light bulbs and ballasts with newer, more efficient ones; or upgrading inefficient motors, compressors, and boilers.

Indeed, the financial opportunities are ripe: The Rocky Mountain Institute points out that in industrial settings, "there are abundant opportunities to save 70% to 90% of the energy and cost for lighting, fan, and pump systems; 50% for electric motors; and 60% in areas such as heating, cooling, office equipment, and appliances."

But it’s more than merely reducing energy use and costs. Increasingly, a body of evidence suggests that companies that address energy mangement as a strategic corporate activity are better-run companies with potentially higher value to shareholders. And as financial analysts and institutional investors come to understand this energy-value connection, energy management is becoming another measure by which they assess company performance.The elevation of energy management in investors’ eyes is the result of a confluence of forces. Among them:

  • An increasingly complex and volatile energy marketplace has placed a new emphasis on measuring and maximizing “energy productivity,” the product output or business value of every dollar of energy expenditure and use. As a result, companywide energy management has become an indicator of overall management quality and corporate performance.
  • Societal concerns about the links between electricity production and climate change are leading some investors to press companies to improve their energy performance. For example, the Carbon Disclosure Project, representing more than $10 trillion in investor assets, aims to serve as “a wake-up call for those companies that fail to adequately address the potential liabilities associated with climate change and for financial analysts who ignore the financial risks that these companies face.”
  • The financial disclosure and reporting requirements of Sarbanes-Oxley require that systems be in place to monitor operational risks that could materially affect a company’s financial performance. These are requiring companies to do a better job of tracking and managing financially relevant governance, environmental, and social issues typically not addressed in conventional financial analyses. For example, information about a company’s climate change impacts resulting from energy use is now being considered with a seriousness rivaling financial information.
  • A recognition by investors of the increasing importance of intangibles in calculating market value is leading some analysts to search more closely for sources of intangible value. Research shows that energy management, as an indicator of overall management quality, reputation, and other factors, can be a marker for superior intangible value potential.
  • The growth of international programs to restrict the carbon footprint of companies participating in the Kyoto Protocol, as well as the emergence of a carbon trading market in the EU, affect U.S. companies with operations in countries bound by the treaty’s requirements.
These forces have combined with a substantial body of research that show that strategic energy management isn’t just a nice thing -- it’s a competitiveness issue. For example, a series of studies by Innovest Strategic Value Advisors, a financial research firm, compared the relative stock price performance of energy management leaders and laggards in three sectors. The results in brief:
  • In the grocery sector, energy management leaders outperformed laggards by 17% over a three-year period. Leaders also outperformed laggards on price to earnings, price to book, return on assets, return on equity, return on invested capital, and Tobin’s Q, a measure of intangible value.
  • Similarly, in the commercial real estate sector, leaders outperformed laggards by 34% over a two-year period.
  • And for large retailers, leaders outperformed laggards by 71% over a five-year period.
The briefing paper describes “the path to superior energy management,” including the barriers many companies face in trying to address energy at the strategic level, and how to overcome them.

Also: I’ll be moderating panel discussions throughout the year on this topic at various business conferences. The first will be this week at the CERES 2005 Conference in Boston, featuring representatives of leadership companies and financial analysts. Another panel will take place at a Conference Board conference on Winning Strategies for Profitability and Sustainability on June 13 in New York.

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