MHI Solutions Improving Supply Chain Performance
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With record-breaking hot temperatures this summer, the focus on climate change, emissions reduction and sustainability will likely face renewed pressure. This focus could engender increasingly stringent environmental regulations for the supply chain, material handling and logistics industries. We expect these regulations will increasingly promote emissions transparency, the adoption of renewable energy and the transition to zero-emission vehicles. Mandates to improve non-renewable resource utilization and transform facilities, fleets and entire corporate entities will also cost money.
Long-term financial opportunities of sustainability
In the long run, many sustainability initiatives can help generate significant cost savings. For example, zero-emission vehicles offer potential long-term cost savings because they generally have lower operational and maintenance expenses than conventional vehicles. Reduced fuel costs, potential government incentives and decreased maintenance requirements contribute to overall cost reduction. As technology advances and economies of scale improve, the costs associated with zero-emission vehicles are expected to fall further, making them more financially feasible.
Another example of long-term cost savings would be the installation of renewable energy assets. Solar, wind and other renewables usually require significant upfront investments. Fortunately, there may be opportunities to seek partnerships, government incentives or pools of capital dedicated to green energy that you can access to defray some of those upfront costs.
While long-term benefits are great, companies seeking to significantly “green up” their operations need to ensure they can handle the near-term financial outflows associated with the upfront project commitments. If companies are unprepared to absorb the negative impact on cash flows, they risk failing as a corporate entity. The key thing to consider here is that to have sustainability, your business needs to survive and, ideally, thrive. It’s important that your company reaches its destination as a sustainable entity—and that it does not die on the way.
Short-term financial challenges
The negative short-term cash flow risks associated with sustainability initiatives or other capital projects requiring upfront outlays have become significant. This is particularly sensitive because interest rates are relatively high, and companies face increased OpEx costs, including relatively high labor and facilities costs. Because the current cost environment threatens cash flows significantly, I have included three recommendations below that companies should consider when engaging in sustainability, emissions or other green transformation projects.
1. Set the right sustainability priorities
Review and prioritize your company’s sustainability goals. This means you should evaluate the sustainability initiatives in progress and prioritize them based on their potential impact and alignment with the company’s long-term objectives. Identify which goals are critical to maintain the company’s reputation and fulfill legal, regulatory or business obligations.
Given current potential financial constraints, the most important thing a company can do when considering sustainability initiatives is to focus on financial metrics, including payback period, ROI and opportunities for government incentives or subsidies.
In a high interest rate environment, this is a prudent approach when choosing between any potential projects and initiatives.
2. Focus on operational efficiency
Review internal assets and operations to identify areas where reduced emissions, increased efficiencies and cost savings can be achieved without compromising sustainability efforts. These kinds of projects are often referred to as cost leadership projects, and in the context of sustainability, such projects might focus on efficiency and environmental footprint reductions, including emission reductions.
This could involve streamlining supply chains, reducing waste, optimizing energy usage, increasing monetizable metals recycling, or implementing lean practices. The best part of these efficiency and related cost leadership initiatives is that they are most critical when capital costs are highest because they can drive value right to the bottom line.
3. Identify sources of capital to access
Let’s face it, high capital costs make sustainability initiatives (or any initiatives, for that matter) more difficult to justify. Fortunately, many entities seek to support green initiatives and benefit from association or collaboration on such projects. This presents opportunities for fundraising, financial and incentives that go well beyond typical fundraising limits of raising debt or issuing more equity. Some of the top sources of financing to evaluate include government incentives and strategic partnerships.
An example of government incentives is the U.S. Inflation Reduction Act (IRA), which offers the opportunity for both Investment Tax Credits and Production Tax Credits. For further information, read the “Summary of Inflation Reduction Act provisions related to renewable energy” on the EPA website at epa.gov/green-power-markets/summary-inflation-reduction-act-provisions-related-renewable-energy.
The IRA’s Investment Tax Credit (ITC) and Production Tax Credit (PTC) allow taxpayers to deduct a percentage of the cost of renewable energy systems from their federal taxes. These credits are available to taxable business entities and certain tax-exempt entities eligible for direct payment of tax credits. Companies in the material handling industry should consult their internal or external tax advisors to (1) determine if they are eligible for the IRA’s ITC or IPC, (2) to evaluate if accessing the ITCs or IPCs would be financially beneficial, and (3) to assess how these may be supportive of an overall emissions reduction strategy.