Financial Analysis Essentials to Implementing Green Business Strategy

Do you want to implement strategic initiatives to make your business greener?  If so, you’re in good company, and for good reason, as there has never been a more compelling time to improve the environmental friendliness of your firm than now.  Thousands of large companies across the US are at once taking advantage of financial incentives intended to effect cleaner business practices while also making long term plans to avoid potential future costs associated with carbon emissions.  

The uptick in demand for corporate greening has spawned a glut of solutions, which include producing clean energy, installing automated energy controls systems, retrofitting, and onsite energy storage to name just a few.  In reality, there are hundreds of ways to reduce your environmental footprint; the challenge is how to decide on which solutions to go with.  

How does one evaluate, for example, whether it would be optimal to produce cheap, clean power, improve HVAC efficiency, or install onsite energy storage solutions as a way of reducing power costs while maximizing environmental benefits?  As it turns out, specialized financial analysis is essential in this process, as it helps you understand what your financing options are, which capital expenditures make sense in the context of your financial condition, and which projects will yield the biggest payoff.

What Are Your Financing Options?

Increased abundance in available financing has been an essential component of the cleantech revolution.  In 2005, Congress enacted a 30% investment tax credit (ITC) for solar and other renewable energy projects, allowing system owners to reduce their capital costs.  The IRS has also made a special allowance to allow solar power producers to claim maximum depreciation in just five years, further reducing financing costs and paving the way for today’s solar revolution.  

Additionally, many other forms of financing have emerged from federal, state, and local sources, and they include a wide array grants, rebates, production incentives, financing through property taxes, and low-interest loans.  Whether you need outside financing (even if you don’t, it is often cheaper than self-funding), it is important to understand how each type of financing works, how its benefits can be quantified and realized, and which forms your firm is eligible for.  
Understanding the answers to these questions can help you narrow down which technological options are available to you.  This exercise alone can greatly narrow down the field of projects you should consider and lead us to the next level of analysis.

What Projects Make Sense?

The financial condition of your business also matters when selecting one or more green initiatives to undertake.  Obviously, you want to make sure you can support the capital expenditures associated with your green initiatives, but there are less obvious – and perhaps more important – reasons to consult your firm’s financial condition before deciding which projects to undertake.  

As an example, tax equity financing – the type of financing that unlocks benefits realized by the ITC and IRS allowance – is essential for reducing the cost of large scale solar installations, but tax equity financing makes sense only if you have significant scale. PACE financing, which supports both renewable energy and building efficiency upgrades, can be more difficult to obtain for properties that are leveraged than those which are owned outright.  In other instances, the payoff of some projects may be too long to be acceptable.  Therefore, it can be extremely helpful when evaluating competing clean initiatives to first see how they fit into the context of your financials. 

Which Projects Yield the Best Payoff?

Finally, how do you know which projects will provide the greatest payoff?  Cost-benefit analysis is essential and oftentimes the first step taken by financial analysts, but it should be the last. This is because you can’t truly understand the cost-benefit of individual projects until you understand the specific financing available for each initiative and how it relates to your firm’s current position and future objectives.  

Once you have determined which types of financing you’re eligible for and which initiatives make sense in the context of your financial condition, you can narrow down to a selection of potential projects and then evaluate their unique characteristics as your final step in the project selection process.

Conclusions

Whether you’re trying to lower your energy costs, take advantage of cheap financing, improve investor relations, or otherwise align with more environmentally friendly business practices, green solutions – and corresponding financing options – abound.

It is not challenging to find available solutions, but it can be daunting to sift through the enormous array of green initiatives and settle on the ones that make the most sense for you. Most firms seeking to implement green initiatives do not operate in cleantech and understandably lack the time and expertise to correctly evaluate their options.  Proper financial analysis will help you to correctly evaluate your options and compare projects so you can be confident your returns are maximized.