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Reducing energy use is a big winner for business and the climate

Airlines have saved energy by changing flight routes and modifying wings for better fuel use. Plane image from www.shutterstock.com

Reducing energy use is a big winner for business and the climate

Companies could improve their profits by 2-10% each year by saving energy. That’s just one of the findings of ClimateWorks Australia’s Energy Productivity Index, a world-first attempt to assess companies’ energy performance and help investors make better decisions.

Investors are increasingly engaging with companies to address the risks associated with climate change. Extreme weather events, carbon-intensive assets and greenhouse gas emissions are becoming part of a routine risk assessment on the impact of a company’s profitability.

While a company’s energy use can have a significant impact on its bottom line and environmental credentials, energy productivity and efficiency have traditionally been difficult for investors to assess. This is mainly due to a lack of tools to measure and assess energy use and poor levels of disclosure by companies.

My colleagues and I have developed a guide to help investors figure out how potential investments are performing. We assessed 70 companies across six industrial sectors: airlines, automobiles, paper, steel, chemicals and construction.

Saving energy …

Many industrial companies spend a huge part of their operating expenditure on energy – typically more than 15%.

Energy productivity generally refers to the amount of revenue per unit of energy, so improving energy productivity can greatly improve a business’s investment value.

We found that more than 70% of the companies analysed have significant room for improvement in their energy use. Even more startling is the wide variation between companies in the same sector.

In some sectors, the leaders are achieving energy productivity levels up to five times the levels of poorer performers.

For example, in the automobile sector, Toyota produces eight times more vehicles per gigajoule of energy used than the least productive company, Daimler.

… making money

We also found that improving energy efficiency (by using less energy) could significantly boost a company’s profit. Of all the sectors analysed, airline companies reported the largest savings.

United Continental reported annual savings of US$343 million in 2014. This was achieved through initiatives that reduce fuel use, such as improved flight planning, replacing old planes, washing engines and installing winglets.

And despite operating in an energy-intensive sector, steel company Arcelor Mittal achieved almost US$200 million in energy savings in 2014.

The analysis also shows that one-third of the companies analysed could boost their profit margins by more than 5% a year if they matched the performance of leaders in their sector.

Even accounting for upfront capital costs needed to achieve best practice, energy efficiency can still increase profits by 2-10% each year. Most energy initiatives could be paid off in less than three years.

Even a 2% improvement in profits for companies in the automobile sector would be equal to about US$100 million. To achieve an equivalent increase in profits from revenue growth, a company would need to sell an extra 90,000 cars each year.

Ranking companies

Several factors affect a company’s energy performance. We looked at three:

  • Resilience to energy costs measured through how much a company spends on energy and its profitability. A company that spends less on energy and has greater profitability is more resilient to changes in energy prices.

  • Energy productivity measured by a company’s current ability to generate revenue or increase its production per unit of energy used.

  • Energy efficiency measured by a company’s efforts in identifying and implementing energy savings. We included the extra financial gain of a company matching the energy efficiency of leading performers.

While we were able to rank many companies, we found that many others are not disclosing sufficient data on energy use to be assessed. Of 181 companies that reported in the six sectors analysed, 73 had incomplete or insufficient data for benchmarking. Much improvement is needed on data availability and data quality.

The global goal

While improving energy performance may be great for the bottom line, there’s another big reason energy use is so important. According to the International Energy Agency, energy-efficiency gains could achieve about 40% of the emissions reductions required by 2050 to limit global warming to less than 2℃.

Engaging with companies in their portfolios to improve their energy productivity is a measurable and profitable way to reduce emissions and avoid dangerous climate change.

Improving energy productivity has benefits not just for those investors and companies directly involved, but for all of us.