Green for Green

  • May 11th, 2018

Companies using renewable energy see better bottom lines

By Jamon Smith

Renewable energy is clean, ecologically responsible and sustainable, unlike energy dependent on fossil fuels. But, for companies in the United States, renewable energy needs to also be a viable business venture.

Fortunately, it is, according to a study by Dr. Alexander Ellinger, a business professor at The University of Alabama.

“The big picture is sustainability,” Ellinger said. “There’s something called the triple bottom line, which has three aspects of how sustainability can benefit society. Those are economic, environmental and social.”

In some countries, using renewable energy is easier for businesses. In Norway, for example, renewable energy, mostly hydropower but also wind and thermal power, is used almost exclusively to generate electricity. In fact, 98 percent of electricity production comes from renewable sources, according to a report from the Norwegian government.

Dr. Alexander Ellinger

In the U.S., though, renewable energy only accounted for between 10 and 15 percent of total energy consumption and electricity generation in 2016. Fossil fuels, such as coal, petroleum and natural gas, accounted for the rest, according to the U.S. Energy Information Administration.

Despite the limited supply of renewable energy, companies not already in the green energy market should consider it, based on research by Ellinger and his colleagues.

They examined the financial performances of large U.S. corporations purchasing the most renewable energy using three different outcome metrics: annual return on investment, operating margin and the ratio between a company’s assets and its market value, an economic theory called Tobin’s q.

Upon looking at their performance versus their industry average performance over a seven-year period, the study found these companies consistently outperformed their industry competitors financially during that time.

“This suggests that doing right environmentally, which renewable energy does, can also be beneficial economically,” Ellinger said. “That was the biggest takeaway that we found, this consistent evidence that using renewable energy pays off.”

Some of the American companies examined in the study at the forefront of using renewable energy include Wal-Mart, General Motors, Home Depot, T-Mobile, Goldman Sacs, General Mills, Target, Google and Amazon.

For example, Wal-Mart, which announced a goal of using 100 percent renewable energy, saw a return on investment, or ROI, greater than its industry average from 2007 to 2009, according to the study. In 2007, Wal-Mart’s ROI was 12.74 percent compared to the industry average that year of 11.14. In 2008, Wal-Mart’s ROI was 13.13 percent compared to the industry average of 12.96, and in 2009, Wal-Mart’s ROI was 13.07 compared to the industry median of 10.06.

In the past four years, American corporations contracted to use about 7 gigawatts of renewable energy, according to the Edison Foundation Institute for Electric Innovation. By 2025, usage is expected to jump to 60 gigawatts.

With incentives such as tax breaks and the costs of wind and solar energy dropping by 66 to 70 percent, respectively, because of advances in technology and increased global production, U.S. corporations are finding renewable energy is competitive with purchasing traditional, nonrenewable energy sources, according to the American Wind Energy Association.

“The problem with coal and oil and these resources is they’re going to get depleted,” Ellinger said. “The price of harnessing renewable energy – wind, geothermal, biomass – is that if they can be harnessed they do the same job in providing power. More and more technologies are being delivered to inexpensively harness them, and more incentives are coming in from governments to encourage businesses to use renewable energy.”

But converting to renewable energy is not all smooth sailing for U.S. companies.

“Some other problems are that the wind doesn’t blow the same every day, the sun doesn’t shine the same every day. And so you have to have some kind of backup system,” he said. Despite the challenges associated with getting into the renewable energy business, Ellinger said their research proves the “juice is worth the squeeze.”

“We hope that people will use this research as evidence that there is a business case to use it,” he said. “It’s a rigorously conducted academic study showing that there is a business case for renewable energy.”

Dr. Ellinger is the Frank Schultz Professor of Business Administration, professor of marketing and supply chain management and co-director of the Supply Chain Institute. He is one of the co-authors of a paper on this research published in The Journal of Business Ethics.

The University of Alabama, the state’s oldest and largest public institution of higher education, is a student-centered research university that draws the best and brightest to an academic community committed to providing a premier undergraduate and graduate education. UA is dedicated to achieving excellence in scholarship, collaboration and intellectual engagement; providing public outreach and service to the state of Alabama and the nation; and nurturing a campus environment that fosters collegiality, respect and inclusivity.