How Adi­das cashes in on lu­cra­tive en­ergy sav­ings and why so many other com­pa­nies don’t

▶ The German com­pany funds en­ergy sav­ings with a VC model ▶ “The high-re­turn projects sub­si­dize the low-re­turn ones”

Bloomberg Businessweek (Asia) - - CONTENTS - Chris Martin

Re­plac­ing flu­o­res­cent lights or sodium out­door lamps with LEDs makes sense from both a con­ser­va­tion and an eco­nomic stand­point. While LEDs cost more up­front, their longer life span and en­ergy ef­fi­ciency mean the ini­tial in­vest­ment can be re­cov­ered in just a few years. Af­ter that, LEDs gen­er­ate a pos­i­tive rate of re­turn, free­ing up cash for other ex­penses. Such cal­cu­la­tions, how­ever, don’t usu­ally sway chief fi­nan­cial of­fi­cers, who of­ten view cap­i­tal in­vest­ments out­side their core business as dis­trac­tions. To help make the business case for sus­tain­abil­ity, the En­vi­ron­men­tal De­fense Fund be­gan a pro­gram in 2008 that re­cruits MBA stu­dents and puts them through a week of train­ing in which they learn to talk about en­ergy ef­fi­ciency in ways that bean coun­ters can re­late to. The

non­profit then places its Cli­mate Corps fel­lows at com­pa­nies for 10- to 12-week in­tern­ships. “They come in with a sense of hu­mil­ity and open ears,” says Liz De­laney, who runs the pro­gram. “A fresh per­spec­tive un­cov­ers real so­lu­tions.”

El­iz­a­beth Turn­bull was one of 125 who com­pleted the Cli­mate Corps train­ing in 2010. She was as­signed to work at Adi­das’s of­fices in Can­ton, Mass., the global head­quar­ters for the Ree­bok brand. Progress was slow at first, partly be­cause her man­agers didn’t give her any money to in­vest. So Turn­bull spent her sum­mer read­ing white pa­pers on en­ergy ef­fi­ciency and talk­ing to build­ing man­agers and IT tech­ni­cians to gain in­sight into op­er­a­tions. When she grad­u­ated from Yale the fol­low­ing year, she was hired full time by the German maker of sports footwear and ap­parel to find the best ways to re­duce en­ergy con­sump­tion across its many of­fices and 2,700 stores world­wide.

Turn­bull pre­sented her boss with seven projects in­volv­ing mostly light­ing retrofits and cool­ing sys­tems. She got $750,000 to spend on the ones that could gen­er­ate 20 per­cent re­turns. Us­ing this ven­ture cap­i­tal model, Adi­das has since funded 49 en­ergy ef­fi­ciency projects at a cost of about $5.5 mil­lion. The com­pany now sets aside $2 mil­lion to $3 mil­lion a year for this pur­pose.

Ac­cord­ing to Turn­bull, the in­ter­nal rate of re­turn has av­er­aged 33 per­cent across the port­fo­lio. The re­sult­ing re­duc­tions in car­bon emis­sions are equiv­a­lent to tak­ing a thou­sand cars off the road, she says. Not all projects meet the bench­mark of a 20 per­cent re­turn. “The high-re­turn projects sub­si­dize the low-re­turn ones,” she says. “That’s a key in­no­va­tion that we did. Be­fore, some­one said, ‘It’s more than a three-year pay­back, so I’m not gonna touch it.’ ”

In 2013, Adi­das in­stalled a fuel cell at its Tay­lorMade golf club fit­ting and test­ing cam­pus in Carls­bad, Calif., which also houses an en­ergy-in­ten­sive data cen­ter. The in­vest­ment would have taken years to pay off had the com­pany not used a leas­ing ar­range­ment. A fix Adi­das made at one of its largest server farms in Ger­many re­couped its cost in just five months. There, the chillers that keep the servers from over­heat­ing weren’t nearly as ef­fi­cient as they could be, so Adi­das put in glass par­ti­tions to sep­a­rate the ex­haust heat from the in­com­ing cool air.

The U.S. Depart­ment of En­ergy has been work­ing with the Re­tail In­dus­try Lead­ers As­so­ci­a­tion (RILA) to get com­pa­nies to curb their en­ergy con­sump­tion. Sev­eral, in­clud­ing Best Buy and

Sprint, have al­ready met the DOE’s pre­scribed goal of cut­ting en­ergy use 20 per­cent by 2020, says Holly Carr, an en­ergy tech­nol­ogy spe­cial­ist at the En­ergy Depart­ment. Al­though Adi­das isn’t there yet, RILA and the DOE have been tout­ing its VC-like ap­proach to gen­er­at­ing sav­ings as a model for the in­dus­try. “We knew fi­nanc­ing was a big chal­lenge for many of our mem­bers,” says Erin Hi­att, se­nior man­ager of sus­tain­abil­ity and com­pli­ance at RILA. “Now we can show CFOs that these in­vest­ments are mea­sur­able op­por­tu­ni­ties.”

The bot­tom line Adi­das sets aside as much as $3 mil­lion a year to fund a port­fo­lio of en­ergy con­ser­va­tion projects that de­liver high re­turns.

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