A United Nations Environmental Programme (UNEP) report last week found that the biggest obstacle to corporate sustainability is “financial short-termism”. Of the 642 experts surveyed, 88 percent see the pressure for achieving short-term financial results as a barrier to companies taking stronger action on sustainability.
The slow pace of solar installations illustrates this phenomenon. Let’s suppose that a solar power system that costs $600,000 after incentives and such results in energy savings of $100,000 per year. Given that the system is likely to be in place for 25 years, the installation would result in a 400+ percent total return, or about 17 percent annualized ROI. The yield could be effectively higher if energy costs rise, but it’s virtually guaranteed to hit that 17 percent.
Because of short-termism, however, most companies don’t view solar in terms of life-cycle ROI. Most corporate owners want a three-year payback on capital investment, and in our hypothetical example it takes six years to recoup the initial cost of an installation. In practice, some properties can achieve simple payback in less than six years, but three years is impossible without really strong incentives. That, in a nutshell, is why you don’t see solar panels on many buildings.
The irony is that so many companies talk about sustainable earnings growth as earnestly as they talk about environmental sustainability. Maximizing short-term gains often undercuts both goals. The same dynamics apply to energy retrofits, another strategy with tremendous long-term benefit.