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Feb 132012
 

Andrew Winston

At the recent GreenBiz Forum in New York, I was surprised by an on-stage interview with Fred Bedore, an executive from Walmart. I’ve followed the greening of the retail giant fairly closely for years, so I wasn’t expecting a lot of new information from Bedore, Walmart’s Senior Director of Business Strategy and Sustainability.

But amidst a seemingly scripted set of responses on Walmart’s supply chain and operational greening efforts, the discussion took an interesting turn. When addressing the company’s aspirational goal of using 100% renewable energy, Bedore said two noteworthy things.

First, 75 percent of Walmart’s California stores now have “some kind of renewable energy system.” Renewables are still providing only a tiny percentage of the company’s total electricity demand, but it’s definite progress. And the commitment to green energy has helped Walmart take third place on the U.S. EPA’s latest list of the top 50 renewable energy buyers.

Second, Bedore spoke about how Walmart thinks about its investments in green power:

“There is an ROI calculation on all sustainability investments like on all projects, but…we look at where the investment gets us. [For example] the longer term payback on solar helps us get to scale down the road.”

In essence, Bedore was saying that Walmart recognizes that it can help take the solar market to scale, thus lowering its costs in the future. It also recognizes that, in the meantime, operational managers will gain valuable experience and knowledge about how to optimize the new power systems. The company can also reap the immediate variable cost benefits of free power.

In short, Walmart has tweaked its ROI requirements for green power initiatives to reflect more of the big picture.

Of course, investing in projects with a hard-to-measure payback — such as a new marketing campaign or entry into new geographic or customer markets — is a normal part of business strategy. And making choices that do have measurable, but longer-term, strategic value should be par for the course as well. So it shouldn’t be a surprise that Walmart is doing this.

But in my experience, this larger view of a company’s goals has in recent years taken a back seat to a relentless pursuit of quarterly earnings. We worship internal rates of return (IRR) to our detriment.

When it comes to green projects, this narrowly-defined measure of “payback” is particularly destructive. The typical (but evolving) view is that all sustainability initiatives are either an expense and/or should only happen if they meet the strictest hurdle rate. For years I’ve made the case that companies should shift their decision-making and investment criteria to take into account intangible and longer-term benefits that are missed in normal IRR calculations. But only a handful of leaders do this consistently.

For their part, Walmart execs have said repeatedly (and justifiably proudly) that all their sustainability projects thus far — such as dramatically improving the energy efficiency of stores and the fuel efficiency of the distribution fleet — have met normal ROI requirements. Bedore said as much…until he added the critical caveat that in the case of green power, Walmart bean counters were looking beyond the near-term payback.

Investments in renewables are an important case where this kind of flexibility of thinking is required. The actual cash payback periods are getting shorter, but they rarely meet the typical 2-year (or so) ROI required by most large companies.

But green power initiatives yield other important benefits, from reducing risk by lowering reliance on volatilely priced resources to enhancing brand value by putting visible symbols of green commitment on stores. These paybacks are real, even if they’re hard to measure, and they need to be accounted for strategically when considering the ROI on green projects.

We need a lot more flexible thinking going forward. Hurdle rates are important to provide some means of comparison between projects competing for capital. But an internal rate of return cannot be a straitjacket.

If the lords of low cost recognize the strategic value of green investments, so can the rest of us.

(Andrew Winston is a business sustainability consultant and co-author of Green to Gold. Read more at his website.)