Energy

Unlocking the benefits of energy efficiency

February 22, 2011

Global

February 22, 2011

Global
Our Editors

The Economist Intelligence Unit

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Energy efficiency offers many commercial benefits. But many companies are still struggling to make the business case for it. Unlocking the benefits of energy efficiency: An executive dilemma is an Economist Intelligence Unit research paper, sponsored by Ingersoll Rand. It reviews the importance of energy efficiency within business today and executive attitudes towards this issue. For the purposes of this report, energy efficiency is defined as: "implementing initiatives that reduce energy consumption or use energy more efficiently".

Executive summary

Climate change negotiators found cause for cautious celebration in December 2010, when talks at Cancún, Mexico, ended in agreement on limited steps to mitigate greenhouse gas emissions. International climate treaties may play only a modest role in promoting global energy efficiency, but at a local and regional level, legislative carrots and sticks are likely to prove stronger tools in the coming years. As sustainability and corporate social responsibility initiatives become more important to companies, climate and energy efficiency issues are growing concerns for senior executives.

As with most big business trends, from globalisation to e-commerce, this has put two questions into the minds of corporate leaders: what risks does the climate agenda bring and what opportunities might it generate? In response, companies are weighing the risk of doing nothing against the competitive advantage to be gained by embracing a key carbon-reduction tool—energy efficiency.

While leading multinationals are taking aggressive steps to cut energy consumption, the Economist Intelligence Unit's survey reveals that many companies have not fully embraced the energy efficiency agenda, with respondents ranking their performance in this area as poor. Part of this is because regulation remains fragmentary. Operational, managerial, and behavioural barriers persist, as do technical difficulties. While installing energy-efficient lighting is one thing, it is quite another to reconfigure industrial systems that have been in place for decades. Legislation aside, energy efficiency offers many potential commercial benefits, financial, Reputational and operational. Yet, according to our survey, many companies are still struggling to make the business case for energy efficiency.

To explore these issues, we carried out a wide-ranging survey in October 2010 of more than 278 executives worldwide, along with in-depth interviews with business leaders and energy experts. Based on their responses, the following paper assesses what companies could be gaining from increased energy efficiency and investigates why many are not taking up the opportunity to implement it. Some of the key findings of this report are as follows.

Almost half of respondents (49%) say that in the past three years, energy efficiency programmes have improved their company's bottom line. When seeking to identify energy savings in industrial operations, cost savings are uppermost in the minds of companies. The vast majority of our survey respondents (82%) pointed to cost savings as the biggest benefit of energy efficiency investment and 69% cited it as the number one driver.

While the cost-cutting angle is easily measurable, the intangible benefits to be gained from energy efficiency, while less easy to quantify, could be a significant source of business advantage. These include an enhanced ability to hire and retain skilled and environmentally conscious employees or to increase sales through new energy-efficient goods and services.

There are risks, too, in holding back from implementing energy-efficiency initiatives. Increasingly, companies are under pressure from a range of stakeholders to reduce their carbon emissions. And while only 7% of survey respondents cite such pressure as driving them towards energy efficiency and few see shareholders as a strong force, in fact institutional investors and pension funds are pushing the firms they invest in to address their carbon footprint.

Most businesses see energy efficiency becoming increasingly important, but are struggling with implementation. Certainly, when looking ahead, most survey respondents believe energy efficiency will play a more important role in their business in the future, with 78% saying this will be the case in five years' time (only 4% see it as becoming less important). However, while companies appear to be embracing the concept of energy efficiency and acknowledging some of the benefits associated with it, they are still grappling with how to implement enterprise-wide energy saving measures.

Few businesses are looking to their suppliers in evaluating policies. Our survey results show that most firms meet only minimum requirements of existing legislation, and tend to focus internally, rather than conducting comprehensive energy assessments (also known as audits) verified by external organisations. Few look outside their direct operations to their supply chain.

Not only do companies not rate their own performance highly, but there appears to be a notable disconnect between the perspective of the C-suite and less senior managers. Nearly three-quarters of business executives in our survey believe their company's energy efficiency initiatives, while effective, should go further and over half feel these initiatives are not effectively integrated into business strategy. Respondents at below C-level were significantly more likely (60.8%) to say that their organisation does not do enough to integrate energy efficiency initiatives into business strategy (compared with 49.3% of C-level respondents). Looked at another way, whereas 44.7% of respondents at C-level and 46.6% at CEO-level thought energy efficiency initiatives were well integrated into their business strategy, only one-third of managers below C-level thought so.

This gap between a company's actual performance on energy efficiency and how C-level leaders view that performance is significant, as without senior-level support for energy efficiency efforts, as well as the funding they require, these measures may not be implemented. This may also reveal that non-senior executives see the C-suite as being complacent on energy efficiency. This raises an important question. While external pressures to become more energy efficient are mounting and a compelling business case exists for energy savings, why are companies not doing more to capitalise on the business benefits and hedge against future threats?

 

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