Energy efficiency economics: Beyond 101

At first blush, the economics of energy efficiency seem straightforward.

A business installs lighting controls or some other improvement. The business then sees its energy costs drop. From the savings, the business repays the investment over weeks, months or years, and then turns a profit on the asset.

While that equation holds true, analysts increasingly value the worth of energy efficiency in other more complex ways as well. The energy efficiency industry, for example, is creating new jobs. Energy efficiency also improves US energy intensity, the amount of energy it takes to support each dollar of economic activity.

And now a report by PwC links a business’ sustainability story with its success undertaking an initial public offering (IPO) before the US Securities and Exchange Commission (SEC).

“It literally can pay to ask: if the company files its registration statement with the SEC tomorrow, what sustainability and corporate responsibility story would it tell to prospective shareholders?” says ‘Factoring Sustainability into IPO Planning: Disclosure trends reveal a changing landscape,’ by PwC Transaction Services.

The report looked at 120 IPO-related filings before the SEC from 2010 and early 2011 across eight industries sectors. PwC found that companies are increasingly addressing energy efficiency and other sustainability issues as part of a larger corporate accountability trend.  

In fact, over 84% of IPO filings had some level of disclosure related to sustainability – and not just because they were required to do so by regulators. About 68% of sustainability disclosures came about for other reasons, such as in discussions about weather-related risk or to showcase corporate accomplishment.  A full one-third of companies in the consumer sector reported either energy efficiency or emissions reductions programs. 

Moreover, the report found public companies, in general, now focus more dollars on sustainability efforts. Roughly $1 of $8 under professional management in the U.S. today involves a strategy of socially responsible investing. In addition, such investments are trending upward. While the universe of professionally managed assets rose only 1% during 2007-2010, assets related to sustainable and socially responsible investing grew 13%.

The report says that companies can increase value when going public by capitalizing on sustainability efforts. PwC recommends that before undertaking an IPO companies develop a clear understanding of how their sustainability story positions them against competition and enhances their appeal to investors. Companies also should consider how sustainability programs can increase revenue and decrease expenses for their goods and services.

This advice comes at a time when IPOs appear to be on the rise after losing steam following the 2008 collapse in financial markets.  While there has been some recent volatility, a “robust pipeline” of companies remains in the process of going public as of third quarter 2011, according to a separate PwC report. And as they do so, their energy efficiency becomes an increasingly important part of the economic story they present to the investment world.

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