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Finding the Money: How Businesses Can Fund Environmental Sustainability Projects

This post also appears on Greenbiz.com

This is Part Two of a five-part blog series, Aligning Profit and Environmental Sustainability. Each installment explores solutions to help businesses overcome barriers that prevent them from integrating environmental sustainability into their everyday operations. Look for these posts every Thursday for the next four weeks.

As companies tackle environmental sustainability initiatives—such as developing a climate change strategy—early steps involve getting the CEO on board and committing to public goals. But the process doesn’t stop there. In fact, that’s only the beginning. Companies also need to find the money to implement projects and make good on the promised goals—all while delivering financial results.

Finding the Money: A Case Study from Johnson & Johnson

Finding the funds for environmental sustainability initiatives can be a tall order, especially since many companies’ sustainability decisions are made separately from its financial ones. Johnson & Johnson experienced this conundrum firsthand. Back in 2004, the company had a public greenhouse gas reduction target, but was not on track to reach it. Although the emission-reduction projects it identified could save energy and operating costs, managers were having difficulty getting approval for the capital they needed. Core business priorities like new product development were competing with the money the company had earmarked for its sustainability efforts.

Managers, therefore, decided to re-think the way the company allocates internal capital. Johnson & Johnson started putting aside $40 million each year for “win-win” projects—greenhouse gas (GHG)-reduction initiatives that also reduce operating expenses, such as solar photovoltaics. Projects like these sometimes require more upfront capital, but benefit from more predictable returns and lower operating costs than conventional energy systems. The strategy reduces the company’s risk exposure over time and lowers its operating budget.

Fast forward to today and this approach has enabled Johnson & Johnson to reduce its GHG emissions by more than 138,000 metric tons through projects that have an average return of 19 percent. This emissions-reduction is equivalent to the electricity use of approximately 21,000 homes. The company met its initial GHG-reduction target in 2010 and renewed its commitment with a new 20 percent absolute reduction target by 2015.

Overcoming the Financial Challenges

Johnson & Johnson faced a challenge that countless other corporations experience every day. Aligning financial practices with plans to reduce environmental impacts remains difficult, as these decisions are often made separately rather than in tandem.

As noted in a new report from the World Resources Institute, Aligning Profit and Environmental Sustainability: Stories from Industry, several other companies are already emerging as leaders in solving this dilemma. Some examples include:

  • Diversey (now called Sealed Air) bundles projects with a high return on investment (ROI) and moderate GHG-reduction potential with those that have a lower ROI but high GHG-reduction potential. This portfolio generates an overall ROI that the Chief Financial Officer can approve while achieving important emissions reductions that the sustainability team is happy with. The company balances capital expenses and operating expenses by reinvesting operational cost savings from GHG-reduction projects—such as lighting retrofits and heating, ventilation, and air conditioning efficiency upgrades—into capital-intensive projects, such as wind turbines and a combined heat and power fuel cell.

  • UPS relaxes the company’s minimum rate of return on vehicles that have the potential to reduce fuel use and costs. By doing so, the company helps ensure that its long-term environmental performance is a consideration during its capital allocation process.

  • Citi tests promising energy efficiency finance solutions at its own facilities, such as using an energy services agreement (ESA) to finance a highly efficient “tri-gen” plant that will generate electricity, heating, and cooling for a Citi facility in Europe. The company is reducing its own energy consumption while improving its understanding of how energy service agreements can be taken to market.

  • Dupont set a goal to double investment in R&D programs that provide environmental benefits to customers, such as energy and water efficiency or reduced waste. R&D programs included must provide improved performance in one or more of 10 benefit areas, ensuring that the company is continually developing products that improve environmental performance for customers. The company also has a goal to increase revenue from products that reduce emissions by $2 billion by 2015.

A handful of forward-looking companies have already demonstrated success in ways to find the money to fund environmental sustainability projects. Now, to really make a big impact, other companies must get on board and scale these approaches so that financial practices and environmental goals are better aligned.

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