Inflation – How does it impact investments in Sustainability and should it change our strategy?
Sep 03 2021
Back when I was a firefighter, I was incredibly lucky to study Economics and Environmental Policy at the University of Chicago in a graduate degree. In fact, much of my business is centered around a single course I took at that time.
I often think about the dilemma that economists face when considering climate change. The certainty (or uncertainty) of whether it will happen and how it will impact us 50 or 100 years out has always created a challenge in how we account for the investment. It comes down to interest rate – which is used to calculate the net present value of any big investment or energy savings that we might take. Accountants will look at this one way, economists who guide our economy in another. But they are both the same – how to you spend money today that will prevent a catastrophe tomorrow?
I think about this every day. At the time I studied, it meant something different to me (as all things impact us differently at different stages of life). Since graduating, I have grown a business that heavily depends on a bank line of credit, purchased a building with the help of the SBA, and been incredibly lucky to receive both PPP loans and EIDL loans. Interest rates are at the heart of those foundational funds. High interest rates drive one type of behavior at a time, low interest rates encourage a decision to buy property in Chicago.
We are commonly thinking about 3-5% interest rates over the past 20 years. However, net present value (the current grouping of all future liabilities) gets really hard to calculate with higher interest rates. Could we see 7-10% interest rates in the next few years? That impacts how we borrow money and what we do, as well as how we consider money today in 2021.
More Importantly – Inflation
More to the point, what does inflation impact our decisions? We are not often economists or accountants – we are trying to guide our organization down the right path. Do we consider solar for our building, do we invest in high efficiency HVAC, do we add another few inches of insulation to a roof as we replace it? All of that comes down to energy rates, since the energy savings is what drives our calculation. Each of us is different – most consider 2 years a good payback on lighting, 3-5 years a good payback on HVAC, and 7-10 years a good payback for solar power. But – those are usually just a checkpoint in the consideration – there are other reasons we all do these changes. Safety, comfort and clients impression usually drive these behaviors more than ROI, payback or environmental concerns.
I can’t say for sure that inflation will come heavily in the next few years. That is not my area of expertise, but I can certainly say we have all felt it this year, especially in the construction trades. I would say it is likely, and in my perspective, a great thing for sustainability.
As energy rates are the most important quantitative metric in making a sustainable investment – we have a base annual savings that typically formulates the foundation for that decision. What inflation does is shortens the payback – or makes investments in capital improvements more attractive. Of course, we all still have a variety of things we can do with money – so it isn’t just a clear decision. But, I do feel that with inflation on the horizon and incredibly low interest rates available now – it creates a great environment for making long term decisions…if you can. Fire stations, libraries, McDonalds – those that are not going anywhere for the next 20 years – are fortunate to have this consideration. Those that have a 7-10 year lease have an incredible opportunity as well – as do property managers.
Proactive planning and strategy are the key. And I say this as someone who just moved into a new building and has not even upgraded our own lights yet. But we are looking at roof insulation, HVAC upgrades, our own solar – as well as some other dreamy plans for a rooftop deck and indoor agriculture space – before we make too many commitments. But they will come, and with the knowledge that we are in a unique time and history – and that as long as you look far enough into the future, and investment in sustainability is a good one.
I recently had a conversation with an owner and operator of 15 hotels in Illinois and a few other states. We put together a compelling package based on our understanding of past investments in energy efficiency and their current pain points (huge, especially with large vacancy rates but consistent energy burdens in 2020 and 2021).
She challenged our proposal and asked that we include sensors on some fixtures that would push past the 2-3 year ROI they were looking for. She felt the pain of those fixtures being on during low vacancy, and is in the long-term ownership strategy for her buildings. She decided, and this was a different decision than she made just 3 years ago, that longer term thinking was important for her group. I was surprised, but it left me feeling optimistic. If all of us make small changes in our thinking about our assets – all of us will together benefit. She didn’t do it for love of the planet, fear of the future for her children – but because it made sense and she just needed to think about it differently. I love being inspired by people when we work together.
Rest of the Year Newsletter
If you have enough newsletters in your life and want to opt out, I won’t be offended. I plan to send out a similar note in October on the current state of solar PV in Illinois, as well as an November newsletter on EV Car Charging Stations and what people are thinking about for their buildings. I have also been exploring recycling our own commodities, and plan to take a deeper dive into how that impacts the circular economy. Would love to hear from you, whether a phone call (my cell is (847) 845-3981, email or social network message or post on what is on your mind. I bet we are thinking about some of the same things and I always enjoy a good conversation around how we can make strides together as a community.
Sep 05 2018
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