Businesses can increase their earnings by around 2-10% each year by reducing energy consumption. That’s only one of the conclusions in ClimateWorks’ Energy Productivity Index, the first attempt in the world to measure the efficiency of businesses’ energy use and assist investors in making better choices.
Investors are more and more collaborating with companies in order to mitigate the risk of climate change. Extreme weather events, carbon-intensive assets, as well as carbon dioxide emissions from greenhouse gases are now part of a regular risk assessment that focuses on the effect of a company’s performance.
The energy usage of a business can have a profound effect on the bottom line, and sustainability, energy productivity, and efficiency have been difficult for investors to determine. This is mostly because of a lack of instruments to assess and measure the energy consumption of a company and the lack of disclosure from firms.
My coworkers, as well as I, have crafted an investment guide that can help investors understand how their potential investments are doing. We evaluated 70 companies across six industries, including automobiles, airlines, steel, paper, chemicals, and construction.
Energy conservation …
A lot of industrial firms invest a large portion of their operating expenses in energy, usually greater than 15 percent.
Energy efficiency is generally the measure of income for each unit of energy; therefore, the improvement in energy efficiency could greatly enhance the value of a company’s investment.
We discovered that more than 70% of companies studied have potential for improvement in their energy consumption. What’s more surprising is the vast variance among companies operating in the same industry.
In certain sectors, leade, rs are reaching energy efficiency levels that are up to five times that of the less productive.
For instance, in the auto industry, Toyota produces eight times more vehicles per gigajoule of energy than the most productive firm, Daimler.
… earning money
Additionally, we found that enhancing efficiency in energy use (by making use of less energy) can dramatically increase the company’s profits. Of all the industries we studied, air transport companies had the most savings.
United Continental reported annual savings of $343 million in 2014. This was made possible by initiatives that reduced the use of fuel, including improved planes of flight, replacement of outdated planes, washing engines, and installing winglets.
Even though it operates in an energy-intensive sector, steel giant Arcelor Mittal achieved almost US$200 million in energy savings in 2014.
The study also suggests that one-third of the companies analyzed could increase their profit margins to more than five percent a year if they were able to match the success of their leaders in their field.
In spite of the upfront capital expenditures required to attain the best practices, energy efficiency could boost profits by about 1 to 2 percent each year. Many energy initiatives can be completed in fewer than three years.
Just a 2% increase in the profits of companies operating in the automotive industry could be equivalent to 100 million dollars. In order to achieve the same increase in profit from the growth of revenue, companies would need to sell an additional 90,000 cars per year.
Ranking companies
A variety of factors can affect an organization’s energy efficiency. Three of them were examined:
- Resilience to energy prices is measured by the amount a business is spending on energy and the profitability of its operations. A company that uses less energy and enjoys greater profit margins is more able to adapt to fluctuations in energy prices.
- Efficiency of energy is measured by a business’s current capacity to earn revenue or increase production per unit of energy consumed.
- Efficiency in energy is measured by an organization’s efforts in identifying and implementing energy efficiency. We also included the economic benefit of a business that matches its energy performance to top companies.
While we were able to evaluate a number of firms, we discovered that a lot of others aren’t divulging enough information about the use of energy to make an assessment. Out of 181 companies that reported in the six sectors we examined, 73 of them had insufficient or no data that could be used to benchmark. A lot of improvement is required in the availability of data and data quality.
The ultimate goal
While improving the performance of energy systems can be beneficial to the overall bottom line, there’s a major reason why energy usage is vital. As per the International Energy Agency, energy efficiency gains could result in 40 percent of emission reductions that are required by 2050 in order to keep global warming at less than 2degC.
Engaging with businesses in their portfolios to boost their energy efficiency is a quantifiable and lucrative approach to reduce emissions and avoid the risk of dangerous climate changes.
Improved energy efficiency has many benefits not only for those who invest and the companies that are involved in the process but also for all of us.
