J&J, Adidas share 10 best practices for corporate energy funds
If your business approves carbon emissions reduction projects or on-site renewable energy installations on a case-by-case basis, it may be time to create a "fund" dedicated to evaluating and approving them holistically.
A centralized approach can drive higher, more consistent internal rates of return, plus it can help organizations find ways to invest in facility upgrades or retrofits that otherwise might not get the green light, according to energy managers experienced with this approach.
"Capital competition in a supply chain environment is hard. Budgets at local sites are generally for the products being made, and energy projects tend to get deprioritized," said Jed Richardson, global energy director at pharmaceutical giant Johnson&Johnson. “Our fund was created to deal with that.”
J&J’s CO2 Capital Funding Process is one of the oldest, most disciplined (and richest) programs around. Established in August 2004, it offers $40 million annually in “capital relief” against new equipment, technology or processes that curb carbon dioxide emissions in a “meaningful” way. “The idea is that we have carved out money that can be deployed actively,” Richardson said.
Speaking during a workshop at last week’s GreenBiz Forum, he said J&J has approved 185 projects over the program’s lifetime — ranging from chiller plant efficiency improvements to on-site solar, wind and geothermal generation capacity. While the approval process requires that a project earn an internal rate of return (IRR) of 15 percent annually, the average actually has been higher, 19.4 percent. So far, these projects collectively have eliminated 216,000 metric tons of C02. A side benefit since 2012 has been 25 million gallons in annual water savings, he said.
For perspective, J&J’s sustainability goals call for a 20 percent absolute reduction in CO2 emissions by 2020. The company is also striving (among other things) to increase its onsite renewables capacity to 50 megawatts. (It already has 55 megawatts installed or in progress, with 30 more megawatts in the pipeline.)
The adidas Group used J&J’s model to shape a similar initiative launched two years ago, dubbed greenEnergy Fund. Its program has two stated missions: to create business value for individual facilities and to accelerate carbon reduction.
“Our facilities managers lacked the technical capacity and bandwidth to be bundling up these business cases,” said Elizabeth Turnbull Henry, senior manager for environmental affairs at adidas Group, during the workshop. “It also seemed like they were fighting for budget. … Even though trapped within the walls and the ceiling were these two-, three and four-year payback projects that you and I know were better for the business.”
The annual amount adidas Group uses is much smaller than J&J’s (because the company is one-tenth of the pharma giant’s size): this year the number it’s using is $3 million. But the greenEnergy Fund’s suggested IRR is higher, currently 20 percent. “If it was below that level, these projects would be forced to compete on other metrics,” she said. From July 2012 through December 2014, her team managed 34 projects.
Based on Richardson’s and Henry’s collective wisdom, here are 10 things to consider if your organization is considering its own corporate energy fund — or is looking to improve an existing process:
1. Make the fund some reasonable percentage of annual energy spending
Both J&J and adidas Group used about 10 percent of their respective energy budgets as the funding level. J&J’s CO2 fund actually uses slightly more. Its level has remained constant over the past decade, although project approvals slowed dramatically in 2008, when the company restructured. Almost all of J&J’s fund for 2015 has been spoken for, and his team is considering proposals for 2016.
2. Present upgrades or retrofits as investments (don’t use the word “spend”)
That will help justify your company’s selected IRR. Plus, your team will be able to make the business case by comparing projects with other programs focused on capital generation. “It makes things utterly uncontroversial,” Henry said.
3. Consider pooling projects to balance rates of return
Adidas Group regularly cross-finances higher return projects (such as LED retrofits for a retail space or distribution center) with ones that take longer to pay off (such as boiler upgrades). “It gives you more leverage to get work done that may be beyond three-year or four-year payback thresholds,” Henry said.
4. Don’t ignore low-hanging fruit (it hasn’t all been plucked, plus it will grow back)
Just because a facility already has invested in LED or building automation doesn’t mean there isn’t more opportunity. J&J wants managers to regularly review previous investments, especially as technology evolves. “Our fund is the best governance tool we have to drive continuous improvements,” Richardson said.
5. Set project minimums to weed out weaker proposals
J&J generally doesn’t encourage proposals below $500,000 in size; adidas Group’s threshold is $25,000. J&J uses a one-page document to collect information for proposal; Richardson’s team works with facilities managers to build the case. Proposals are considered by Richardson, along with managers from finance and engineering.
6. Offer guidance on appropriate initiatives
J&J created a series of internal programs to help facilities understand which improvements (and technologies) might have the most positive impact. Project Relight, for example, encourages managers to seek lighting upgrade opportunities while Project Hot focuses on heating optimization technology.
7. Carefully consider accounting impacts
Technically speaking, neither J&J nor adidas Group transfers money to the divisions investing in an improvement. Their funding comes in the form of budget relief. “You have to get buy-in from finance,” Richardson said, which means speaking the language of accountants.
8. Make sure the “benefit” stays with the facility
Likewise, the project needs to be structured in a way that doesn’t have a negative impact on a particular facility’s books. “We’re modeling in depreciation, local tax impacts, and everything so that it looks and smells like the kinds of business cases that our partners are used to,” Henry said.
9. Monitor progress closely and specifically
Over the past two years, J&J has invested in mobile apps that help Richardson regularly verify the impact that projects are having. It helps that J&J uses software to track energy consumption and emissions reductions across all its facilities. This is important, because many projects are multiyear in nature. That means the manager in charge of a particular facility might change midstream, requiring work to be rejustified.
10. Don’t forget to talk up the societal impact
J&J’s corporate energy fund aligns closely with the company’s Healthy Future mantra. Alongside the financial argument for each energy efficiency upgrade or clean energy investment, Richardson’s team ties the project back to the “Healthy Planet” component of that philosophy — which simultaneously calls for reducing environmental impact while increasing J&J’s sustainable design credentials. “Market the value beyond the cost savings,” Richardson said.