Today’s economic climate requires organizations to assess their financial fitness and scrutinize operating expenses. Although ripe opportunities for resource efficiency upgrades exist, capital expense projects face tough budgetary obstacles.
Innovative financing methods have emerged to help organizations secure internal capital for high investment, quality sustainability initiatives.
Green revolving funds are one such innovation; they seek to solve capital expense constraints by structuring a shared investment/shared savings perspective. Over the past decade, green revolving funds have seen great success and adoption in public and private enterprises. Revolving funds work by investing in energy and resource productivity projects, thereby reducing operating expenses. Cost savings benefit the bottom line and replenish the fund for future rounds of investment. With an average fund size of $1 million to $2 million and a median annual return on investment of 28 percent, green revolving funds are a powerful part of an internal investment portfolio. In this context, successfully using revolving funds to finance energy, resource and sustainability initiatives has emerged as a major strategic opportunity for many organizations.
Point B’s Perspective
Sustainable financial health is an important part of the sustainability story. Successful businesses seek to optimize their capital investments and resource allocations. We believe that internal revolving funds can accelerate implementation of resource productivity investments and be a source of operational finance excellence.
Point B works with clients to identify innovative financing mechanisms that fit with their enterprise plan, align with organizational culture, and facilitate cost recovery opportunities. Based on our experience with many leading companies on the front lines of green financing, here are a few things to think about as you go forward.
Take this opportunity to boost productivity
Your organization’s ability to prioritize investments that reduce operating expenses will support strategic flexibility and long-term financial health. You’ll find many benefits will emerge in the process:
- New mindset. Revolving funds overcome the common obstacles of budgeting capital for efficiency projects as expenses, rather than as low-risk/high yield investments. A shared investment, shared/savings model incentivizes capital and resource efficiency within the organization.
- Achieve short payback periods. Selecting efficiency investments with a short payback period enables the fund to be replenished quickly to redeploy capital for future rounds. The average payback period for organizations with revolving funds is fewer than four years.
- Hedge the risk of volatile resource costs. Revolving funds are an effective strategy to hedge against rising energy, water and resource costs without incurring losses if prices unexpectedly flatten or decline.
- Accelerate progress. Many organizations already have goals to improve resource productivity and reduce operating costs. Innovative financing mechanisms, such as a revolving fund, accelerate progress by preserving a source of capital and harnessing program momentum.
Right structure; highest return
Although savings from resource efficiency opportunities can be enormous, it is critical to properly structure investment and financing mechanisms for the greatest return.
We often help organizations identify the best fund structure and manage implementation to achieve desired investment objectives. A few tips about structure and incentives:
- Seeding the fund. As part of setting up the fund, take the time to identify best practices for standing up the new investment vehicle. Successful funds start small and grow through reinvestment. Capital can be committed or found through energy rebate programs, depending on the opportunity.
- Capturing the savings. Accounting for the savings is critical for a self-sustaining fund. Establish a baseline and strong forecasting analysis to capture and redistribute the cost avoidance. Loan structured investment funds simplify the mechanics and allow for reliable returns, while supporting financial planning.
- Incentivizing resource conservation. Innovative financing for energy, resources and sustainability is most powerful when the right incentives are in place. It’s important to tie efficiency investments to business unit financial outcomes through mechanisms such as an internal carbon fee, which can be used to replenish revolving funds and change behavior.
The Bottom Line
Over the last decade, many organizations have launched green revolving funds as a strategic opportunity to finance energy, resource and sustainability initiatives. These funds can accelerate the implementation of resource productivity investments and serve as an excellent source of operational finance. Overall, they help build the business case for sustainability—creating a new mindset in line with the value of sustainability initiatives, achieving short payback periods, hedging the risk of volatile resource costs, and accelerating progress.
Getting off to the right start, with the right structure, is key to garnering major savings from these resource- efficiency opportunities. Start small and build the structure on best practices. Establish the accounting, analytical and forecasting practices you’ll need to identify returns and support financial planning. And put the right incentives in place by tying efficiency investments to business unit financial outcomes.