Topics: ESG,Risk Management
Topics: ESG,Risk Management
October 6, 2021
October 6, 2021
Informed organizations in all industries are establishing carbon emissions reduction and net-zero carbon emissions targets. Directors’ conversations on strategy have an important role in businesses’ energy transformations as the cost of renewables declines and the percentage of electricity consumed through non-fossil fuel sources—solar, wind, nuclear, and hydroelectric energy—in the total energy consumption mix grows.
Sustainable investments driven by the screening criteria of institutional investors and asset managers are on track to represent more than one third of the projected total assets under management by 2025. As the influence of millennials increases in the market, so does that of consumer preferences for doing business with companies committed to the well-being of the environment. Talent is migrating to those companies, too.
The bottom line is that management teams in all companies—including those that aren’t energy producers—need a strong narrative based on clear objectives and results. Every organization should consider green energy consumption in its strategic plan and establish clear accountability for results. And, just as important, the energy consumption strategy merits the board’s attention.
Without a doubt, energy producers generate the lion’s share of global industrial greenhouse gas emissions. But “non-energy companies”—companies other than oil and gas and power firms—aren’t getting a pass. Non-energy company boards should consider the below action items to better prepare for the energy revolution.
Be cognizant that more climate-related disclosures may soon be required to meet the needs of investors. Nearly two-thirds of the companies in the Russell 1000 Index and 90 percent of the index’s 500 largest companies published sustainability reports in 2019 using various third-party frameworks. According to Gary Gensler, the chair of the US Securities and Exchange Commission (SEC), the Commission is focused on increasing the consistency and comparability of climate disclosures and is set to propose a new mandatory climate risk disclosure rule for consideration by the end of the year. At this point, non-energy companies have to assume they will fall under the SEC’s mandate.
Encourage dialogue around the significant innovation opportunities in the marketplace. As the energy landscape changes, there may be significant opportunities in the market for entrepreneurs to create value. Boards should ascertain whether strategies and business models are being updated to address the changing energy landscape. For example, technology companies are deploying emerging and existing technologies to offer programmable, energy-efficient smart devices to consumers and to commercial and industrial companies. Combined with cloud computing, these devices collect, analyze, and present in real time the owner’s mountain of energy use data.
Recognize that it takes talent to implement new models. Identifying opportunities to exploit the energy transformation through new business lines can drive increased demand and competition for people with skills related to all areas of sustainability and renewables, from engineering to accounting. As more companies with large carbon footprints—airlines, shipping and delivery companies, and automotive manufacturers, to name a few—focus on the energy transition, increased competition is expected for energy-related skills. Adding to the challenge is that people are increasingly joining organizations with which they can align their values.
Inquire after plans for adjusting to market trends when deploying financial capital in renewable energy. How are evolving energy markets altering the company’s cost structure? How can the company shift the mix of energy consumed in its operations to increase the emphasis on green energy sources? Energy consumption should be tied to key metrics, from profitability impact to environmental, social, and governance (ESG) ratings.
With increasing concerns over carbon emissions, organizations want to be viewed as contributing to the solution rather than being part of the problem. For example, nearly 40 percent of global carbon emissions come from buildings and construction, highlighting the need for decarbonizing air conditioning, improving insulation, and increasing the efficiency of lighting, heating, and cooling systems. Lessees should review the energy efficiency of their facilities with proactive plans for improvement in the coming years.
Only about 20 percent of the energy consumed across all industries is powered by electricity. This opens up a strategic conversation to which boards can contribute around the sourcing and deployment of capital. Directors should inquire about management’s focus on increasing electric-powered consumption by working with utilities to supply relatively low-cost power and policymakers to provide supportive regulation.
Investors and lenders are increasing their portfolio allocations to companies with compelling sustainability strategies. Bank of America, for one, has set a $1 trillion goal for financing projects and investments to reduce carbon emissions and address other environmental needs across all sectors (in particular, high-emitting sectors) by 2030.
Encourage periodic reviews of operating practices that have a marked impact on energy consumption. The pace of change requires a constant focus on operating practices rather than occasionally calling a time-out or debriefing annually. In addressing the growing ESG expectations of customers, investors, and regulators, directors should ask management to consider revisiting default assumptions related to the refresh cycles for expanding and refurbishing both office and manufacturing facilities and replacing equipment, as well as long-standing business practices. Periodic “consumption audits” can raise questions that should be considered: Should all laptops be replaced every year? Can planned facilities expansion be postponed? Is it necessary to return business travel to pre-pandemic normals? These and myriad other questions can drive meaningful reductions in energy consumption and costs.
As for energy procurement, non-energy businesses focused on making progress toward a net-zero carbon future are purchasing renewable electricity from their power suppliers or independent clean power generators, or through renewable energy certificates. Corporate buyers in steel, heavy machinery, technology, retail grocery, and other industries are undertaking this strong sustainability play.
Learn and stay informed about evolving energy policy. In the United States, several bills creating benefits and financing for carbon capture, use, and sequestration have been introduced in Congress and have bipartisan support. Carbon capture and use technologies also have become part of the conversation for achieving net-zero carbon emissions.
While these developments merit a close watch, smart boards should be concerned about the more likely scenario of an “invisible carbon tax”—the increased costs across an enterprise resulting from newly required investments, higher debt service, additional capital expenditures, and other activities related to the energy transformation.
View improving supply chain agility and resilience as a risk conversation, with a potential energy play as a byproduct. The issues around the Suez Canal blockage, the shipping logjam in San Francisco, and other pandemic-induced supply shortages call even more attention to the interdependence and fragility of global supply chains. Scarce raw materials tend to be overly concentrated in a few areas of the world, including those that are either politically unstable or potentially unfriendly. These developments create incentives for alternative solutions that reduce dependence on these materials, including reshoring and near-shoring options. As companies explore these options, they should also consider the impact of compressing supply chains on the company’s carbon footprint.
Finally, focus on the parallel tracks of evolving security and privacy risks. The rise in electrification—the so-called electrification of everything—is opening the door to a rise in security and privacy risks, as it expands a company’s exposure to the electricity ecosystem. As more things go electric, the use of technology and the variety of technologies deployed increase. This adds more ways for companies to be vulnerable to breaches, leaks, and hacks, adding yet another dimension to the boardroom conversation on security and privacy risk.
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