Can profits be made on eco investments?

The Sunday Times
April 26, 2009

Tricia Holly-Davis

SCEPTICS rolled their eyes two years ago when Sir Stuart Rose, chief executive of Marks & Spencer, announced its Plan A environmental scheme. Some thought it was greenwash, while others teased him by asking if he had a Plan B.
Today, Rose’s plan has translated into huge savings that have made the initial £200m investment pay for itself.
Marks & Spencer is in the minority. Most firms have yet to realise that there is a link between spending on green initiatives and profits. As a result, investment in environmentally friendly products and services has suffered as the recession has deepened. The only exception is energy efficiency.
There may be some sound reasons for the scepticism about green initiatives. A report on the telecoms industry by the research firm Frost & Sullivan, to be published next month, will show there is no measurable link between a company’s share price and investment in green initiatives. “Investing in green initiatives improves companies’ brand value and helps them to attract employees interested in working for a company with an environmental focus, but there is no correlation to higher share prices,” said Sharifah Amirah, its author.
Most financial analysts who track high-polluting industries, such as energy, telecoms and manufacturing, say climate change-related products and services do not factor into the value of a company. Only 8% and 6% of analysts, respectively, have upgraded profit forecasts after a firm’s pledge to reduce carbon emissions and buy renewable energy, said the environmental consultancy Verdantix.
“Stock-market analysts are divided into believers, sceptics and cynics,” said David Metcalfe, Verdantix’s director. “The believers – those who already link climate change and profitability – represent a small proportion of the analyst community and tend to be those who track energy companies, which are subject to emissions caps and financial penalties for exceeding their limits. Mostly, analysts have a wait-and-see approach to climate change’s impact on profitability. Half of stock-market analysts don’t believe climate change will affect company profitability for at least five years.”
The clearest link between profitability and climate-change investments is the savings that can realised through energy efficiency. For instance, the mobile-phone operator O2 invested £1.4m in smart metering last year and shaved £700,000 from its annual energy bill. It is now forecasting additional savings of £1m a year, so the project will pay for itself within two years.
The return on investment from broader initiatives, such as committing to carbon neutrality, is more difficult to quantify. However, preparing businesses for the impact of climate change is part of protecting profit margins and increasing future performance, said Steve Burt at EQ2, an environmental risk-management firm.
Robin Cohen, a partner in Deloitte’s Economic consulting practice, said: “Market risk has deterred green investment, but the carbon measures announced in last week’s budget make it clear the government will stick to its plan and provide stability in the investment environment, so we will see more companies increasing investment on green products and services.”