Investing in the future - making your business case

10th June 2011


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  • Pollution & Waste Management ,
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IEMA

Helen Woolston on how to make the business case for spending money on environment projects or programmes

Many environment managers will have a tale to tell about how they have delivered initiatives, improvements or campaigns with little or no budget, using only ingenuity, enthusiasm and sticky-back plastic.

The ability to bring results at low or no cost is one of the key attributes of the profession. However, it is also important to be able to make a strong business case to secure funding for environmental projects or programmes that bring cost savings for the organisation.

While organisations may want to follow such initiatives for reputational or other strategic reasons, traditionally most business cases have been made for programmes focusing on delivering cost efficiencies.

These come from energy efficiency or waste minimisation that deliver reduced energy or water bills or lower waste-disposal costs.

In the current financially straitened times, when a “spend to save” mindset can be prevalent, these business cases can be very attractive. As well as these “traditional” business cases, environmentalists should be maximising (and monetising) the value of environmental benefits in all investment decisions being taken by organisations today.

Spend to save

The most straightforward environmental business cases are those where the proposed initiatives will result in paying for less, or paying to dispose of less.

There are many energy- or water-efficiency examples, where the purchase of more efficient equipment, building management systems, more efficient fleet or a new process can be shown to deliver reduced bills over a particular period of time. The shorter this payback period, the more attractive the business case that can be made.

Also common are waste-minimisation programmes that involve changing processes or design to reduce the amount of materials and resources used and cut the volume of waste that needs to be disposed of.

There is increasing use of whole-life-cost tools to create a fully rounded picture of investments. These encompass the costs of maintenance, repair, replacement, disposal and embodied carbon, as well as just the initial purchase outlay. One example is the EU-funded tool for calculating life-cycle costs and CO2 emissions associated with different procurement options.

Methods for investment appraisal

Finance functions use a range of appraisal techniques to assess the merits of a proposed investment and show a transparent means of deciding which programmes to fund.

These involve placing a value on the full range of benefits that a project proposes to deliver and determining how long it will take to realise the worth of the full investment.

Business Link offers a summary of investment appraisal techniques including:

  • payback period – takes financial returns and costs over the project period, and calculates how long the project takes to pay for itself;
  • average rate of return – looks at the average returns over the years of the project, and divides by cost to give a percentage return; and
  • discounted cashflow – takes into account that a return of £100, for example, in several years’ time is worth less than a return of £100 now, so it discounts the estimate of returns.

The public sector uses the investment appraisal approach as well, and has guidelines, such as the Treasury’s Green book or the Department for Transport’s “Transport analysis guidance”, which includes Defra’s “Social cost of carbon” – that is, the damage done by a tonne of carbon when it is emitted, because of its effect on the climate.

These appraisal techniques place a financial value on the range of benefits the project will deliver – “monetised benefits”. In a transport capital investment example, the financial value can be assigned to benefits such as CO2 emission reductions, noise reductions and air-quality improvements alongside other benefits including journey time or congestion reduction, and improvements in access and safety.

So the overall weighting of the monetised benefits in the final appraisal is key and the assessment will also test how well the initiative meets with organisational strategic goals and priorities.

New approaches to financing options

There are some emerging examples where environment managers are seeking different financing options, especially where the traditional funding streams may currently be limited.

Examples include London’s Green Fund, which is worth £100 million – comprising £50 million from the London European Regional Development Fund, £32 million from the London Development Agency and £18 million from the London Waste and Recycling Board.

The fund will support waste infrastructure development and energy-efficiency projects. Repayments to the fund will be effectively recycled to support more projects. The fund managers will be required to leverage an additional amount of at least £55 million.

London is also developing programmes with performance-guarantee contracts for delivering energy-efficiency initiatives. The Re:fit programme – operated by the London Development Agency – has been designed to help public sector organisations in the capital to retro-fit energy-efficiency measures into buildings using a framework contract for energy services companies (EsCos), which will guarantee a set level of energy savings over an agreed payback period. Re:fit aims to help the capital achieve its overall target of cutting carbon emissions by 60% by 2025.

Influencing, communicating and dealing with the challenges

One of the key challenges is how to make the business case for investing for longer-term benefits against the pressure to deliver shorter-term savings. An example here could be some investments that bring adaptation to climate-change benefits. There can be pressure to postpone such investment until the need is more imminent, but a good case will show that investment in a capital programme now would miss real benefits if it does not include such measures from the start.

Financial business-case benefits can be overshadowed by other factors such as reputational or political priorities. The investment proposal will be more successful if it meets the strategic issues for the organisation.

Finally ...

The best time to make a business case can be when the organisation is already planning a change and the opportunity to stretch this transition a little more can bring added environmental benefits.

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