Sustainable Business

Transcription

1 Presents Sustainable Business and the Bottom Line By Anh H. Phan Special to RegScan

2 By Anh H. Phan Special to RegScan Sustainable Business and the Bottom Line Since the Industrial revolution, the business community has been contributing significant benefits to enhance quality of life. Technological advancements have increased output more than ever before, in terms of both production and of carbon footprint. Despite their best efforts to the contrary, business operations can directly or indirectly damage the environment, and the natural resources they need to operate are not unlimited. Natural resources such as oil, gas and water will eventually face shortages. Increased environmental awareness has prompted many organizations to start investing in sustainable business practices, but many firms are wondering whether they will retain any benefits, specifically profits, from these sustainable investments. This paper will examine the relationship between corporate profits and sustainable business practices. What is sustainability anyway? According to Our Common Future, a UN published by the World Commission on Environment and Development (WCED) in 1987, sustainable development is defined as development which meets the needs of the present without compromising the ability of future generations to meet their own needs (UN, 2010). The U.S. Environmental Protection Agency also defined sustainability as an act to create and maintain a condition in which human and nature can exist in productive harmony that will fulfill requirements for both present and future generations (EPA, 2013).

3 Sustainability is based on the three pillars: economic, social, and environmental. The economic pillar reflects the Profit aspect, which highlights the efficiency of resources utilization for the best advantage (Truist, 2013). The economic pillar ensures that business will generate long term profits through resource allocation without creating social and environmental issues. The social pillar focuses on People aspect in balancing between individual needs and majority needs (Truist, 2013). The environmental pillar focuses on Planet aspect that aims to reduce environmental impacts from human activities. In other words, environmental protection will be implemented through improving business operations and using resources efficiently. Therefore, sustainable development is believed to be the confluence of these three constituencies. For the purpose of this paper, we will only focus on the economic pillar, which is the profit aspect of sustainable development. Measuring the Economic Benefits Business success, according to the UN report, is usually defined as economic growth (UN, 2010). Under the classical economic view, the main goal of a business is profit maximization. Profit will be used as a financial resource for future business activities and investments. If revenue is held constant, then costs must be reduced to increase overall profits. To save costs, it is important for businesses to utilize its materials, energy, and utilities in an efficient way to produce the best advantages (Woods, 2011). The economic sustainable pillar emphasizes this matter as the most fundamental foundation for sustainable development. Turning off light bulbs and water before leaving the room is an excellent example of sustainable development practice. There are many ways to increase energy efficiency. Instead of completely buying electricity from a power plant, part of the electricity needed for business operations can be self-generated by installing solar panels or wind turbines. With well-organized sustainable strategies, businesses will be able to save money because small costs can add up to a considerable amount over time. Economic benefits can be calculated numerically, producing accurate results of how much can be saved from implementing these practices. Options According to Peter Graf, the Chief Sustainability Officer for German software company SAP, there are three options for the actively managing ongoing environmental impacts and rigid regulatory implementations (Woods, 2011). First, businesses can use more human resources in resolving environmental issues, resulting in increased personnel costs. Those costs don t include the demand for other resources to clean up a toxic substance spill or compensate for health and environmental damages. A second option for businesses, Graf acknowledged, is to ignore the problem completely (Woods, 2011). This increases legal risk. Governments around the world are imposing more rigid environmental laws and regulations, resulting in higher minimum requirements for compliance and higher fines for violations.

4 According to the EPA annual result for Fiscal Year 2000, there were $224.6 million in fines for both criminal and civil environmental legal cases that year (EPA, 2011). In 2013, the total penalties for criminal cases were $4.5 billion, with an additional $1.1 billion for civil cases (EPA, 2014a). Moreover, the fines have recently been increased. In December 2013, EPA raised the maximum fine for violating the Clean Air Act (CAA) to $320,000, up from $295,000 (Mc- Lernon, 2013). For spilling hazardous substances, the fine has elevated form $1,100/barrel to $2,100/barrel (McLernon, 2013). A formidable example was AVX Corporation, an electronic corporation, which committed to pay over $366 million in the case at Massachusetts New Bedford Harbor for toxic pollution in 2013 (EPA, 2014a). This was the largest settlement in the history of the Superfund dedicated to cleaning up a single polluted site. The significant increase in fines and penalties creates more legal risk for corporations. Higher legal risk means higher costs associated with noncompliance if they are caught. Additionally, profits are not the only loss associated with noncompliance. A single incident can negatively impact a business brand. Recommended Practices The most effective option is to actively develop a system to oversee environmental impacts, and implement new technologies to improve environmental performance, said Ned Ertel, president and C.E.O. of RegScan. Preventing a problem from happening is cheaper than finding a solution to fix it. The first step, Ertel said, is to closely supervise how carbon, electrical, and water resources are being utilized, and the amount of waste produced, on a daily basis. With updated information, businesses will be able to access environmental impacts and the costs and benefits associated with them. Understanding the situation will give businesses options when it comes to planning sustainability strategies and optimizing resources for saving costs and increasing productivity. The added benefit of an effective environmental management system is the assistance it can provide in terms of compliance with operational standards, such as ISO and OSHAS 18001, and global government regulations. The best way to improve environmental performance is through accurate monitoring and reporting in every jurisdiction in which you operate. Using an online environmental management system definitely streamlines this process, said Ertel. Not only does it improve the efficiency of your operations; it also has the added benefit of keeping you compliant with government regulations and operational standards. Ertel s company publishes legal registers and audit protocols for more than 140 jurisdictions around the globe. Integrating current regulatory content into existing EMIS systems is a key component to achieving sustainable outcomes. In the U.S. especially, staying current with ever-changing regulations is vital to any large operation, said Ertel. In fact, the Obama administration set a new record last year with 26,417 pages of regulations published in the Federal Register (WSJ, 2014). RegScan s products and services help environmental managers keep up with all the changes.

5 Nova Chemical, a client of both RegScan and SAP, serves as a good example. Chemical firms are responsible for many types of measurements that must be reported. With the environmental software solutions, the company saved $2 million because it could now report monthly data faster. By improving environmental performance and avoiding unnecessary costs, the business saw a significant financial benefit (Woods, 2011). Robust monitoring systems are a key component to understanding how a business energy resources are used. The information gathered can help managers in nearly every industry outline strategies to user their resources most efficiently, thereby increasing sustainability and reducing costs. Sustainable Carbon Resources Electricity is the most important source of energy used in daily basis. Fossil fuels such as coal, oil, and natural gas are three types of resources that are used for power generation. Fossil fuels have many advantages over other types of energy resources because of high availability and relatively low cost. According to the U.S. Energy Information Administration (EIA) report, 90% of coal use will be for power generation at electrical power plants (EIA, 2014a). Oil will be refined into many types of fuels, 72% of which are for transportation purposes (EIA, 2014a). Additionally, natural gas is gaining traction as a viable source of power generation. Despite the fact that natural gas is only accounted for 26% of total US energy consumption, according to World Energy Outlook (WEO), suggests that gas will be a major resource used for power generation. It is seen as the bridge fuel to a more sustainable energy future, and it is cleaner and cheaper than other fossil fuels (Kirkland, 2010). Additionally, the Obama administration s recent release of tougher emission standards for coal-fired power plants offers an additional incentive to switch to natural gas (RegScan Federal Register database, 2014). In terms of carbon dioxide (CO2) emissions, natural gas comes out far ahead of other fossil fuels. According to International Energy Agency, in 2010 oil contributed 10.9 GtCO2, which was 36% of total CO2 emissions around the world, compared with 46% for coal and 20% for natural gas (IEA, 2012). The emission level of bituminous coal bituminous is units of CO2, diesel fuels and heating oil emit units. Gasoline emits units of CO2, while natural gas emits 117 units (EIA, 2014b). In the US, the average CO2 emission rate of natural gas is 1,135 lbs/mwh, while oil is at 1,672 lbs/mwh (EPA, 2014b). For coal, that number jumps to 2,249 lbs/mwh (EPA, 2014c). Higher emissions rates mean higher legal risk for businesses. According to the BBC, one major petroleum producer was fined 2.8 million for misreporting the amount of carbon dioxide emitted in 2012 (BBC, 2012). For every tone of misreported greenhouse gas emissions, businesses will be fined 100, or 83. Replacing oil consumption equipment with some natural gas-powered counterparts will eventually reduce the total amount of CO2 emissions, hence avoiding unnecessary legal costs.

6 Additionally, the price of oil is on an upward slope. Rapid industrial expansion demands a large amount of energy. Emerging countries such as China, which surpassed the US as the largest petroleum and fuels importer in 2013, raise the world overall demand for energy (Associated Press, 2013). The more demand, the higher the oil price. Moreover, the oil supply can be highly vulnerable to geopolitical crises such as conflict, sanctions and embargoes. When OPEC placed an embargo against the United States in 1973, the price of oil had increased from $3/barrel to $12/barrel (History, 2014). The price of natural gas, however, is declining. The US market is enjoying a boom in domestic natural gas production, especially shale gas. In 2008, a price of natural gas was $8.39/ gallon (PPI Energy and Chemicals Team, 2014). Yet, in 2012, the price plummeted to $3.47/gallon (PPI Energy and Chemicals Team, 2014). It is predicted that natural gas production will grow 56% from 2014 to 2040 (EIA, 2013). Increased supply will keep natural gas prices down in the coming decades.

7 Natural gas also has a financial advantage over coal. Wright-Patterson Air Force Base is implementing a $25 million project to covert two coal power plants into natural gas (Barber, 2013). The change will save $2.3 million annually and significantly reduce emissions (Barber, 2013). After 15 years, Wright-Patterson Air Force Base will actually see positive cash flow using gas. Self-Generated Power While fossil fuels will continue to be a primary source of power generation for the foreseeable future, sustainable alternatives such as solar and wind are gaining significant traction in the marketplace. Many businesses are skeptical about the effectiveness of installing renewable energy devices, believing that costs will outweigh benefits. However, the facts can be very different from their perspective. Solar energy installment might be costly, but evidence suggests they can actually save energy costs in long term. According to the U.S. Department of Energy research, the funding investment of long term financial and technical investments for Photovoltaic devices (PV), more commonly referred to as solar panels, reaped $18.8 million in total economic benefit between 1975 and 2008 (O Connor, A., Loomis, R., & Braun, F, 2010). That is a 17% return on investment. The total investment in 2008 value was $3.7 million. For every $1 invested, $1.83 in benefits accrued. It is estimated that $237.2 million in environmental health costs were saved because adverse incidents were avoided (O Connor, A., Loomis, R., & Braun, F, 2010).

8 The per-watt cost of solar energy is declining as the panels and installation costs are cheaper. The cost of installation had dropped to $3 per watt produced, which is equal to the cost of constructing a coal-fired power plant. The price of solar panels has also fallen from $76.67 per watt, to $0.74 today (Mearian, 2013). A California farm installed a solar electrical system at an initial cost of $615,000 (Wampler, 2011). With a net present value of $360,000 and a 30-year shelf life, payback period is 11 years (Wampler, 2011). In the future, the cost of PV panel will likely decline further and the life span will increase, ensuring that the economic benefits of solar energy will continue to increase. DOE also pointed out that the investment in solar energy between 1975 and 2008 avoided 6.8 million tons of CO2 emissions (O Connor, A., Loomis, R., & Braun, F, 2010). If the European Union were find that even 10 percent of those emissions were improperly reported, the financial liability to EU businesses would be 68 million. Reducing CO2 emissions decreases legal risk, hence avoiding unnecessary costs.

9 Conclusion In a recent interview with Environmental Business Journal, Ertel pointed out that he is seeing the global harmonization or operational standards, and a real move toward sustainability at the corporate level (Environmental Business Journal 2014). Businesses are starting to come around to the fact that sustainable business is good business, and evidence presented here has shown that it is also cost effective. Responsible energy use and investing in sustainable development are cost-effective ways to increase profitability by reducing energy costs and mitigating legal risks. Furthermore, integrating regulatory content into existing EMIS systems is a key component to achieving sustainable and compliant - outcomes. Effective monitoring and reporting systems can help save even more money by increasing efficiency and ensuring compliance with government regulations, as well as operational standards such as ISO and OSHAS Heidi Ruckno, Marketing Communications Specialist at RegScan, contributed to this report. About the Author: Anh H. Phan, 21, is entering his senior year at Lycoming College in Willismaport, PA. He is an international student from Hanoi, the capital city of Vietnam. He has a double major in Communications and Business Administration, with a concentration in Finance. Anh has studied at Westminster University in London, and has interned at RegScan and HSBC Bank in Hanoi.

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