Investing in Treviso and Belluno: the benefits of environmental investment. Edited by Renato Chahinian

Source: Renato Chahinian

Similarly to investment of a social nature, investment aimed at improving the environment produces positive results in the long term and is therefore convenient, both for the company’s development and for the investor’s future return.

While the entrepreneurial network, even at a local level, is definitely aware of the economic advantages that social initiatives gradually bring both inside and outside the company, to the extent that these are widely practised, there is less sensitivity to environmental initiatives, above all because it is still believed that adapting to ecological standards (nowadays provided in an increasingly rigorous and challenging measure) will lead to the incurring of huge costs in the short term with the difficulty of recovering them even in the distant future.

This is not true if the management of such investments is carried out with proper efficiency and effectiveness, similar to other business operations. On the contrary, it generally happens that the future benefits, in the long run, will not only exceed the relative costs, but also, with the passage of time, will yield higher profits than the current ones and those that would have been generated in the absence of the same environmental investments, in particular due to the prospect of many unfavourable events subsequent to the failure to adapt. Furthermore, the urgency of such interventions must be highlighted, since the delay in meeting the need to protect the environment in which one operates will entail higher investment costs in the future and the danger of even greater adversities to overcome.

Environmental investment and its characteristics

As it is intuitive, every company, in the context of its activity, must not degrade the environment, and therefore in every sector and territory it is necessary to ensure that production (whatever it is: agricultural, industrial, or tertiary) is regularly carried out respecting the objectives of environmental sustainability, among which the most important are related to clean energy and the fight against climate change (respectively objectives no. 7 and no. 13 of the UN 2030 Agenda). Indeed, other goals (such as biodiversity and water availability for everyone) are very closely linked to the success of the first two.

In order to achieve these goals, expected by 2050 (but possibly earlier), efforts must be made to:

1. 1. reduce energy consumption as much as possible for the same production needs;
   2. replace the necessary energy from fossil fuels (especially gas, coal and oil) with renewable energy (from solar, wind, geothermal, biomass, etc.);
   3. preventing the first damage from climate change, which is already occurring and will increase thereafter until the aforementioned change is arrested.

In order to achieve all this, additional costs are obviously needed, which would not be incurred if the environmental factor were neglected, but which are necessary to prevent future ecological damage. These are therefore not unnecessary costs, but investments whose benefits will save many future costs. Therefore, the initial costs, even if high, must be spread over time and amortised over several years, because of the above-mentioned future benefits, which will occur over a very long time. On the other hand, if current liquidity is not sufficient for the initial payments, medium- to long-term financing is possible with loans (bank loans or bonds) or new venture capital. In this regard, new investors can take over, who, with their contribution of sustainable finance, enable a certainly sustainable development investment and will in any case have a satisfactory return at maturity.

The overall investment will thus allow the implementation of the three actions indicated above with the following costs for the company:

1. the first action is generally inexpensive, as it only requires an internal investigation to identify new technological and organisational solutions that allow less energy to be consumed, while still guaranteeing planned production levels. Only if there is a lack of appropriate expertise or if the possible changes are radical, it is necessary to resort to external consultancy or the purchase of advanced equipment, thus also entailing higher costs;
2. the second is generally the most costly. In fact, in order to use renewable energy sources as a substitute for fossil fuels, it is mostly necessary, in addition to specific preventive analyses and significant changes in production processes, to provide suitable new facilities with significant costs, even if they can be amortised over sufficiently long periods. In particular, in most cases, photovoltaic panels or other equivalent structures have to be acquired to obtain the clean energy required for the operation of production buildings, environmentally friendly means of transport and the entire production process (including service activities). Since the problem then concerns the entire upstream and downstream supply chain of the company’s activities, the analysis must be extended to all participating companies (but only by the largest ones) and some solidaristic help could also be useful for companies that are unable to adapt themselves to the transition;
3. The third intervention, lastly, would mainly concern the public entity, which would need to ensure public works capable of guaranteeing adequate adaptation to climate change, i.e. the safety of the territory from the danger of extensive damage caused by probable adverse events. However, in the absence or lack of such interventions (due to the lack of priority of public strategies towards environmental development), it will be important for private entities to cooperate effectively in order to carry out at least some joint preventive works that can reduce the highest natural risks. Even in this field, the economic commitment is not negligible, but it would be diluted over many years and among many subjects.

Cost-benefit analysis and investment evaluation

In order to assess the economic viability of the environmental investment, as for the social investment, it is necessary to compare all the costs of the investment with the discounted future values of the benefits that will be determined in the long term, due to the fact that the horizon for the cancellation of climate-altering and polluting emissions has been set at 2050. If we succeed in cancelling these emissions by that year, there will be no further need for investment in this field and we will only be able to proceed by maintaining and renewing the structures we have acquired.

But then it becomes clear that most of the costs are incurred initially (even if they are accounted for in very diluted depreciation allowances), while the benefits accumulate gradually, but continuously over a good 26 years. Indeed, if we plan and manage the initiative carefully, the sum of the discounted benefits over the entire period will congruently exceed the sum of the higher costs of the first years. With no need to go into mathematical details, the rate that solves the equation of the discounted differences between positive and negative flows expresses the so-called SROI (Social Return On Investment), i.e. the rate of socio-economic return on environmental investment.

The benefits, however, begin to manifest themselves very early, as

• with energy savings, the costs of avoided consumption are immediately reduced to zero;
• as the renewable energies come on stream, energy costs are reduced every year for as long as the installations are used. These cost savings are continuous and prolonged; moreover, they can become very significant during periods of difficulties in the supply of fossil fuels or strong speculation in the relevant markets, as was the case between 2021 and 2023;
• with possible climate change adaptation works, disastrous damage and even deaths and injuries can be avoided. Even if such effects are contingent, the progressive intensity and frequency of adverse phenomena puts all productive settlements (as well as residential areas) at risk with increasing probability of occurrence. Even a single such event is enough to jeopardise the performance of an entire company or even to put it out of business.

Without going into the many other benefits that are then reflected on the entire community, benefits that the company’s improvement of the environment consequently produces (and which subsequently end up benefiting the company itself), one can also mention the indirect benefits for the investing company, such as

• the revaluation of green assets, especially real estate;
• the valorisation of the most competent and innovative human resources behind the investment;
• the enhancement of market reputation for the meritorious benefits provided to stakeholders and the community;
• the production of greater company added value, which allows for the development of the company and the socio-economic context of reference.

Concluding remarks

If the investment in object after 26 years proves to be largely worthwhile, it must be taken into account even earlier, by the lenders, who will not always be willing to wait all this time for the repayment and remuneration of what has been financed.

First of all, banks can actually lengthen the time of loans on environmental investments, similar to what they do for the purchase of real estate, thus also facilitating the payment of instalments (which, diluted over time, will be less). On the other hand, the renewable energy plants themselves can act as a guarantee and thus ensure eventual recovery even after a longer maturity.

The same guarantees, moreover, may also be valid for any long-term bonds, where the debt repayment schedules are highly deferred over time or even fully repayable in the long term, while interest is paid periodically, which, precisely because of the low risk inherent in environmental investments, may be lower than the market rates of loans that instead finance higher-risk initiatives.

Lastly, if the financing is by means of venture capital (i.e. by issuing new shares), perhaps the problem is more complex, since in the first few years there will be no profits (and hence dividends), unless the company produces enough by virtue of other tried and tested factors, while only as time goes by will the profit margins become higher and higher. But the capital market (and above all the stock market) is no stranger to such eventualities, since initially investors will be long-term ‘cassettists’ and only later will short-term players also come forward (obviously paying more for previously issued shares).

It thus turns out that in any case, environmental investment pays off and in the end the positive differences with the returns of non-sustainable investments can be significant. On the contrary, the latter, due to ongoing climate shifts, may decrease compared to the current situation or even turn out to be negative. Therefore, the final difference between the two returns can be divided into two components: one related to the higher return of renewable energies compared to current fossil energies, and the other deriving from the fact that existing fossil sources will be more expensive for users in the future, due to the greater damage they will cause as a result of climate disasters and the possible additional taxation they will be forced to undergo.

In the provinces of Treviso and Belluno, there are also many SMEs that are now aware of the environmental benefits they could gain from an early transition to renewables, but they find it difficult to adequately finance themselves with the available funding channels and therefore need the contribution of new investors, even outside the local borders.

Translated by Cecilia Flaccavento
Intern at the Chamber of Commerce of Treviso – Belluno|Dolomites