The role of the finance team in climate change projects
Asda is Britain s second largest supermarket with 368 stores. It has successfully embedded sustainability in its strategy and has implemented many initiatives to save energy, reduce packaging and remove unnecessary waste from its stores. Asda s finance team plays an intrinsic role in the decision making process including planning, testing and roll out of all of their sustainability programmes. These include: zero waste to landfill; reducing harmful emissions from stores; depots and transport; responsible store development (e.g. Asda s low carbon flagship store in Bootle, Liverpool); minimising packaging on own-label products; continually improving waste management practices at store level; encouraging customer and associate recycling through bring back facilities and green transport. Below are examples of the finance team s specific contribution to some recent projects at ASDA, which we later describe in detail. Projects Bio/bakery recycling projects ASDA project management process Evaluation of the potential impact of carbon reduction commitment regulations on Asda New initiative store testing Finance team s contribution Cost benefit analysis Stewardship, progress, responsibility and performance reporting Financial evaluation, interpretation and presentation to senior executive team Investment appraisal 1
Asda case study one Recycling, general waste and bio bakery An Asda mantra, religiously repeated across all of its stores and head office, is We hate waste of any kind. With 369 stores stocking over 40,000 products, it is inevitable that waste is generated. But Asda has a number of action plans to ensure that this material is disposed of in a sustainable way. For example, the supermarket is running a trial with a charity called FareShare where unsold food nearing its sell by date is distributed to those in need. But the company has also made it clear that landfill is no longer a long-term option for any additional waste. It is not a sustainable solution and with the rapid escalation of landfill tax, the finance team has demonstrated that it doesn t make business sense either. Therefore Asda has a firm commitment to send zero waste to landfill by the end of 2010. As part of that strategy it has recently introduced a process whereby food that can t be sold is bulked up at its recycling centres and sent for reprocessing into bio fuels or pet food. This is now live in over 190 of its stores and will be rolled out to all stores after Christmas 2009. Asda s finance staff are key members of the team running this project, providing actual and forecast cost benefit analysis on a month by month basis which helps refine the non profitable elements and directs the successful roll out. The table below shows the model the finance team use to monitor the project. Within this model they estimate input variables and the committed store roll out numbers to derive a forecast cost benefit analysis. Not all trials are immediately successful, but Asda has a tried and tested way of perfecting a concept and, once viable, rolling it out. The finance team s part in this is to challenge an otherwise feasible project where process costs, for example, are too high. The core project team then review the process and seek ways to make the results stack up financially. This iterative approach ensures that good ideas are not wasted, and progress can still be made to deliver on the business s longer-term goals. Re-processing model used by the finance team Variables Bio bakery Recycling General waste Disposal Cost/Tonne Diversion Cost/ Tonne Consummables Recycling bins/labels avg/store Bio bakery Recycling Number of stores 21 21 21 21 294 Number of stores 2 7 7 7 294 Consumables Recycling bins/labels Number of stores General waste 2 7 7 7 294 Consummables/bins Total 2
Asda case study two Project management Asda operates a Change Steering Committee (CSC) for all projects including those concerning sustainability which meets once a month. Finance plays a significant role in the organisation and running of these meetings and in the execution of the trials and roll outs that this forum approves (for example recycling, carrier bag reduction and energy saving programmes). The finance team pull together project summaries under the programme umbrella title of WO4L (We Operate For Less). Each project has an executive owner, a programme leader and a project leader. The finance representative then captures the measures of success, the full year financial forecasts and reports the year to date actuals, along with performance against target. Finance also assigns a traffic light status to the project for each meeting. Alongside the financial measures, they also engage with members of the project team, update narratives on milestone actions that have been agreed and assign individual traffic light status to ensure delivery. This information is then presented at project meetings to discuss issues, successes and challenges. It is at this meeting that further actions to address outstanding issues might be agreed, which are then also added to the project summary document. An example of this can be seen below. Project summary document (prepared by a finance representative) PCG Project Update Executive Owner: Programme Leader: Project Leader: Project Update: July Programme: WO4L Project Name: Utilities Project Status Project Description Measures of Success Full Year Forecast YTD Actual Target Performance Electricity capital projects: Implementation of capital works enabling store energy savings. Divisional energy managers drive energy savings through improving store awareness of energy efficiencies and energy saving measures Infrastructure projects: Implement central/auto-control of temperature and light settings enabled by deployment of submetering. Store change: to challenge increase in energy costs with store extensions Gas and water: reduce through increased visibility and monitoring of storage usage through data loggers. Additional challenge - deep dive conducted in February to identify and prioritise initiatives to meet this additional challenge. Electricity capital projects Divisional energy managers Infrastructure projects savings Store change savings Gas savings Water savings Additional challenge Consultancy costs Store engagement Monthly Commentary Project Issues/Risks Summary Description Action to Address Project health Scope Schedule Benefits Risk Resource What we said we d do Who When Status Comments Capital projects: PIRs for split AC units - start Powerline dimming system trial - start Filter and prioritise deep dive outputs Store Change: produce and issue new DIS DEEMs - fly killer replacements - start Additional sales floor lighting replacement - start Store change: monitor and report on performance ongoing Submetering - completion DEEMs - Q2 implementation of plan/store revisits 3
Asda case study three Implications of the Carbon Reduction Commitment (CRC) The finance team advised Asda s senior executive team on the implications of the impending regulation associated with the Carbon Reduction Commitment. After analysing, interpreting and presenting the data, finance walked them through the significance of this legislation for Asda. They started by explaining the timeframe, the capture criteria and the mechanism (see diagram below). April July October April OUT League table issued IN OUT Purchase CO 2 Allowances Report Actual CO 2 Emissions CRC League table League table position Recycling payment Recycling Payment Refund Purchase CO 2 Allowances 1 High Refund+ bonus Medium Refund only 6,000 Low Refund penalty Impact of the purchase of allowances Members of the finance team presented a five year table showing date of payment, estimates of CO 2 emissions, pricing methodology, price per tonne, consequential cash out and the associated risk level. The risks they identified included the auction price from April 2013, the accuracy of forecasting (avoiding over or under purchasing of allowances) and the fact that the secondary market pricing mechanism is, as yet, unknown. Recycling payment metrics relative weightings Date of payment Period covered 2011 2012 2013 2014 2015 1 April 2011 1 April 2012 1 April 2013 1 April 2014 1 April 2015 04/10-03/12 04/12-03/13 04/13-03/14 04/14-03/15 04/15-03/16 Est. emissions (tco 2 ) Pricing methodology Price per tco 2 Fixed Fixed Auction Auction Auction 12 12 12 12 12 Cash out Risk LOW LOW MED MED HIGH 4
They also explained the recycling payment mechanics, which are dependant on Asda s league table position relative to the other 6,000 affected organisations. They designed a table showing the three metrics on which the calculation is based, their relative and changing weightings over the first three years, plus the increasing bonus/penalty rates each year. Then they explained the definitions of the three metrics. Absolute reduction is the percentage fall in total emissions compared to a five year rolling average; growth reduction is the fall in total emissions compared to a five year rolling average per turnover; and early action metric represents 50% from Carbon Trust accreditation (which Asda achieved in June 2009) and 50% from sub-metering. Metric Absolute reduction Growth reduction Early action Bonus/penalty rates 2011 2012 2013 2014 2015 0% 60% 60% 75% 75% 0% 20% 20% 25% 25% 100% 20% 20% 0% 0% 10% 20% 30% 40% 50% The finance team also translated the rules into the likely cash flow and P&L impacts for Asda, dependant on whether their position was high, medium or low in the league table. The team finally considered political risks - risks associated with complexity, the unknown impact of auction on allowance rates, the relativity of performance (a reduction in emissions does not guarantee good performance, particularly against comparable organisations), and the fact there s no experience to learn from. All of this work demonstrates a high degree of engagement with finance from across the business and a strong demand within the organisation for robust analytics and concise messaging. The next step for the finance team is to reflect these forecasts within their investment appraisal modelling. 5
Asda case study four Investment appraisal Asda s methodology for many projects is to seek capex for a small trial initially, which the finance team assist in preparing and presenting. Part of the return of these trial projects is insights that help the team assess the viability for roll out across all stores, refining the solution and maximising the final returns. This methodology is being used for a trial at the Abbey Park store investigating the use of full glass door cabinets for chilled and frozen produce; and the relative success of LED and fluorescent lighting. The team sought 1.2m to run the trial, including provision for exit costs should the ideas prove unviable. The main return was a reduction in running costs. However there were also concerns about the risk to sales, any associated possible increase in waste, extra staff costs due to more time consuming shelf replenishment and, ultimately, the possibility of customers being turned off. There was therefore a commitment to providing monthly go live reporting of both quantitative pre and post trial performance data and objective colleague and customer feedback. The monthly trial report included sales participation, wages, waste, store energy performance, case energy performance, alongside feedback from customers and colleagues. The finance team is responsible for pulling together all this information and playing an active part in decisions regarding further roll out. One day it s likely that it will be something we will have to do, through legislation or because the costs of not doing so will get too high, says Hemant Patel ACMA, Retail Finance Director Asda. However where there is an operator saying, This is losing me money..., part of the role that finance has to play is to mediate. Initial results and figures that might drive a short-term decision to remove the trial were not taking into consideration the longer-term need to fix the issue. Part of our remit, then, was to mediate and to recommend that instead of ripping it out, it s worth having a small sales impact on one store to be able to measure the effect over time. If it s something we will have to do eventually, we should continue to monitor and learn. Having said that, we are also proposing that we shouldn t roll it out any further we shouldn t put it into the model until we can prove it works. Finance s role there was to be an independent advisor. Read CIMA s latest report Accounting for Climate Change at www.cimaglobal.com/sustainability The report includes case studies from other organisations and looks at how management accountants, their skills and their tools can provide business intelligence to support strategy and influence decision making, driving their organisations to mitigate and adapt to climate change. If you are interested in sharing your own insights and experiences in this area, we would be delighted to hear from you. Please email us at research@cimaglobal.com 978-1-85971-639-7 (pdf) December 2009 Chartered Institute of Management Accountants 26 Chapter Street London SW1P 4NP United Kingdom T. +44 (0)20 8849 2275 F. +44 (0)20 8849 2468 E. research@cimaglobal.com www.cimaglobal.com 6