The Bruce Column — Finance drives sustainability and SSE to awards win

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13 Oct, 2015

Power supplier SSE has won the award in the large company category, sponsored by Deloitte, at the Finance for the Future awards. Robert Bruce, our regular, resident, columnist tells the story behind their achievements.

Building sustainability into huge capital expenditure projects so that all stakeholders can understand what is happening is a challenge for any finance function. But this is what has been achieved with Scottish Hydro Electric Transmission, (SHE), part of the power provider, SSE, which has won the overall award in the large business category at the 2015 Finance for the Future Awards, sponsored by Deloitte.

What they were aiming to do was develop the electricity transmission network capacity, what you and I would refer to as ‘the grid’, in the north of Scotland to be able to offer sufficient capacity to generators of electricity. Bearing in mind the European policy directive requiring the UK to generate 40% of its electricity from low-carbon sources by 2020, the emphasis had been shifted to new low-carbon generation. SSE was already aiming to provide the energy in a reliable and sustainable way and one of the company’s six core values was “Sustainability: operating ethically, taking the long term view to achieve growth while safeguarding the environment.” By definition that aligned sustainability with the finance function and the company’s finance models. ‘There is huge importance in conducting business in a long term and sustainable manner to meet our regulatory obligations’, said Dr George Cobb, group sustainability accountant.

‘We believed we needed to look wider in finance than purely economics, your standard cost-benefit analysis,’ said Cobb, ‘and we wanted to bring environmental and social aspects into the standard model. That was where our capital expenditure projects were having an impact. We wanted to respond to our stakeholders’.

So initially what was important was setting up a structure to demonstrate that future projects are both financially viable and sustainable in the long term. But the development, planning and approval process for capital projects can be complicated and time consuming. ‘Making significant untested changes increases risk’, said Cobb. What was needed was a documented and coordinated methodology to demonstrate a sustainable financial contribution across key areas, and balance their relative priorities.

And that assessment methodology is what they built. They built a Sustainable Commercial Model (SCM) for large scale transmission capital projects, a model that incorporates the wider, sustainable total value into strategy decisions, from planning to energisation and beyond where applicable.  

This used less than £1m of funding and focused on the sustainability impacts of the Beauly Denny Transmission project, a £600m project which has significantly increased the size of the Scottish Hydro Electric Transmission business to well in excess of £1bn of assets. Of course the new methodology has a long lasting benefit since it will be used for future capital projects – it is expected that the SHE Transmission will invest between £3-4bn during the eight year price control period to 2021.

 ‘Our goal was to have this communications tool that was driven by financial numbers’, said Cobb, ‘because everyone understands what a pound is, but a tool that is able to communicate very different measures sometimes, around health and safety, for example, visual amenity, and a tool that uses a robust methodology and robust challenge’.

‘One of the most positive stories is that initially it was going to be a finance initiative because it was around the money and whether we were getting a good return on capital’, said Cobb, ‘but it quickly became involved with our project teams and project managers. Now we are using it on multiple projects. We are talking to our regulator about it. We are talking to other infrastructure companies in the UK’. This is all part of the effort to collaborate and share. ‘We are happy to share’, he said. ‘We are happy to learn because we really do feel we can communicate our message and so really drive sustainability into finance’.

The sharing of the learning with other transmission operators in the UK creates a multiplier. Not only will the savings that SSE create be tangible, they can be rolled out across other operators.

‘It gives you’, said Cobb, ‘a worked example of how sustainability impacts can be measured and used to inform the financial and operational process of future capital investment decisions’. ‘It enables’, he said, ‘all stakeholders of transmission projects, and wider, to review the value created in a transparent and accountable format against an established baseline value. It is this baseline of knowledge that is the greatest contribution to finance and sustainability: a worked example and model which has been tested’. It is hoped that this can now be used as the basis on which future projects will be assessed and improved to provide truly sustainable, and financially sound, capital.

The result of the project was that, as with integrated reporting, there is a link established across disciplines from the finance function to the wider sustainability community, both internally and externally. And as a result they created a collaborative experience of sharing techniques, knowledge and experience of project outcomes and results. The work of the finance function embedded rigour and an audit trail into the process that allowed decisions and assumptions to be documented into a form which was transparent to all parties. ‘The project showed senior management, typically accountants, that sustainability and finance must work together’, said Cobb. ‘Although it is only one project so far, the results establish the process for future projects and, arguably, provide a very good estimate of future outcomes’.

And it has demonstrated the value and central role of the finance function in such projects. ‘The position of trust and significance that finance holds within our organisation is also fundamental to the success of the project’, said Cobb. ‘It has helped convert sceptics due to the level of rigour, relevance, transparency and engagement that was provided from an embedded resource’.

The project shows how accountants are at the heart of sustainability. ‘The accountants play a pivotal role’, he said. ‘The finance teams have a very privileged position, where they sit on projects, and that is where they can drive very significant change in sustainability’.

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