You Are Better Off Investing in Sustainability Than Stocks

09/25/2012 11:00 EDT | Updated 11/25/2012 05:12 EST

It is surprising just how big is the "sustainability" opportunity is.

In just the energy efficiency (EE) field McKinsey & Company estimates that $2 trillion can be invested in EE by 2020 with an internal rate of return (IRR) of 17 per cent. To put that into perspective: that rate of return is better than investing in the stock market or in real estate over the long-term -- the two investments we're always told give the best long-term returns.

The net effect would be equivalent to cutting the need for 64 million barrels of oil a day -- about one and a half times today's entire U.S. consumption.

In a separate McKinsey study, "Reducing US greenhouse gas emissions: How much at what cost?"shows that 40 per cent of the CO2 emissions reduction strategies are highly profitable. Jon Creyts, the US McKinsey partner in charge of the study, notes that if these profits were re-invested in the next least-cost solutions, the U.S. would achieve all of its Kyoto reductions at no cost to society!

It's important to note that these two studies come from one of the pre-eminent management consulting firms worldwide -- so business leaders should pay attention.

Amory Lovins, the founder of the Rocky Mountain Institute, and one of the world's leading energy efficiency experts, has documented how North American firms could cut their energy use by 70-90 per cent using existing, proven, practical technology -- all in a way that profitable.

Multitude of Simple Solutions

One of the insights from these studies is that there is no single silver bullet -- what we need is silver buckshot. There are a multitude of strategies that can profitably cut energy and fuel costs. And solutions in many cases are simple:

If every car in North America got the same fuel efficiency as Jim's Toyota Prius, there would be no need for any oil imports to this continent. Similarly, there'd be no need to drill for oil in the Arctic or the Gulf of Mexico. When oil was $147 a barrel in 2008, the U.S. was paying $700 billion a year to Middle Eastern countries. This wealth transfer was entirely unnecessary. Aggressive fuel efficiency standards would have eliminated that transfer of wealth.

Here's another surprising one: if every roof worldwide was white, it would eliminate $2 trillion of carbon emissions. Black roofs are the industry standard. Because black surfaces retain the sun's heat, on a hot 32°C day a black roof will be 88°C while a white roof will be 43°C -- a staggering 45°C cooler. And where do engineers put the air handling equipment? Yes, on the roof! So fresh air is being drawn in at 88°C and having to be cooled to a comfortable temperature. On installation there's no difference in capital cost between a black and a white roof, and on resurfacing there is no cost difference. So imagine being able to save $2 trillion for free!

We could triple the efficiency of Ontario's electric grid by using combined heat and power (CHP). Conventional power plants, whether coal, gas or nuclear vent two-thirds of the energy as waste heat. By contrast CHP -- also known as co-generation or district heat -- uses this "waste" heat to heat buildings. This increases the efficiency up to 90 per cent. Denmark generates a staggering 54 per cent of it's power from co-gen.

And so this leaves us with the question of why aren't we executing some of these simple, economically viable -- in fact hugely profitable solutions?

Well, some are. Canadian Tire, for example, has increased its energy productivity significantly since 2008 when it first began implementing its business sustainability strategy. During that time the company has taken the "silver buckshot" analogy to heart, implementing more than a thousand individual projects that collectively add up to some big numbers.

Energy use in its supply chain has been reduced by approximately 350,000 Gigajoules a year -- that's enough energy to power more than 4,000 Canadian homes -- and all the while earning a financial return for the company in excess of its' cost of capital.

Indeed, while the sustainability opportunity is big, it's about time that we got on with it. We'd rather it be considered old news than surprising.