Spend now to save later on the green agenda

WITH THE double-whammy of budget reductions and general cost escalation looming, it would be tempting for the public sector finance boss to dismiss the green agenda as an unaffordable luxury, better suited to more affluent times. In fact, the business case for sustainability has never been stronger.

Effective energy management represents one of the best options CFOs in the public sector have for making direct and immediate savings, particularly as energy costs are set to rise and rise. However, these can only be realised if finance directors in the sector are willing to adopt new ways of working, make some tough investment decisions and bring in new skills.

The Carbon Reduction Commitment (CRC) scheme is the most high-profile and widely recognised scheme to monitor energy use, and its £12 per tonne of CO2 levy will contribute to cost escalation. While the allowance auctions were delayed until April 2012 in the 2010 Spending Review, those public sector organisations caught by the CRC scheme should have begun accruing this cost from 1 April 2011.

Alongside the CRC, there are a variety of emissions measurement frameworks, many of which have mandatory compliance requirements. For example, the dry run sustainability reporting required in central government for 2010/11 is likely to be an annual report and accounts requirement of the Financial Reporting Manual from 2011/12. Schemes such as these not only directly affect some public sector bodies, but will also impact them via their supply chain.

Alongside the cost implications, there are also reputational risks associated with failure to move quickly on the green agenda. Will public sector organisations want to be leading or propping up league tables on environmental performance? We suspect most will want to be on the front foot, both on credentials and compliance.

So what can the public sector finance chief do to prepare for these cost increases and minimise their impact? To start, they need to make sure they are closely liaising with sustainability, commercial, property and HR colleagues and stakeholders. They would need to get heavily involved in collecting, assuring and reporting on environmental information and formulating a cohesive environmental strategy. This should cover not just the organisation’s own performance but consider the environmental impacts of the organisation’s policy reach.

The variety of measurement frameworks, the cash flow and cost attached to CRC, and the importance of sustainability reporting, mean that public sector bodies need to have a strategy to measure performance and robust governance arrangements around green agenda responsibilities. It is possible that some organisations will need new information systems with sufficient capability to capture non-financial data and feed into the performance monitoring process. Compliance will be subject to a variety of external audit and assurance reviews.

There are a number of ways in which to boost environmental performance and, as improvements around the green agenda often lead to cost reduction, they really can be a ‘win:win’. Improvement in energy consumption can come from changes in staff behaviour, action through the supply chain, greening of ICT (indeed, the government’s own ICT strategy is to be carbon-neutral by 2020), property, waste handling, energy generation – and so on.

Some of the cost reductions necessitated by spending cuts, property disposals and headcount reductions, for example, may well lead to automatic improvements around the green agenda. Irrespective, we would still recommend a strategic approach to responding more actively to the green agenda in order to maximise any green agenda benefits.

A number of improvements in this area may well require upfront expenditure and, in the current fiscal environment, ‘spend-to-save’ schemes are difficult to progress. For this reason, partnerships and private financing solutions may have a role. The coalition government is already exploring partnership and private financing solutions through specific initiatives such as Green Deal Finance and the Green Investment Bank so CFOs in the sector need to be aware of the opportunities open to them beyond their own organisation.

Given the potential use of partnerships and private financing solutions, public sector CFOs will have a key role in supporting colleagues’ designing and implementing these arrangements. Alongside this, finance capabilities in cost management, reporting, business case development and sustainability accounting are central to achieving these savings.

So, as a public sector CFO reading this, what should you be asking yourself as you consider how best to make savings, safeguard your reputation and take a lead on the green agenda? An obvious starting point would be to ask if your budgets are geared up for the CRC scheme. Are you accruing for this and do your budgets reflect this charge? Consider how integral the environmental agenda is to your business plan. Do you understand your current energy costs and, perhaps more importantly, do you know what they might be in 2020? What could they be if you have an effective improvement strategy in place?

When investment through a spend-to-save scheme is called for, how geared up is your team and the wider organisation for this? Do you have a firm grasp on the options open to you and do you know finance schemes could work best for you?

Asking these questions will be key to ensuring that sustainability is both at the heart of your business and delivering real, financial benefits. The days of environmental policy being led by a marketing or PR department are long gone. It should be the board driving the sustainability agenda forward, with the CFO or finance director playing a key role.

Mark Williams is a partner at Deloitte