How Can Energy Companies Enable A Risk-Free Transition to Renewable Business?
Climate change is already making its mark on the world. Extreme and unpredictable weather, rising sea levels, even pandemics such as COVID-19 are causing social and geopolitical instabilities that are compelling companies to act to safeguard their future operations.
Nowhere is this happening more than within the energy industry. According to the International Energy Agency, two thirds of greenhouse gas emissions are linked to combustion for energy generation purposes, and in Europe, energy accounted for 78% of total emissions in 2015.
The result of this is that energy companies are scrambling to transition their businesses to more sustainable models. However, while crucial, this task still carries plenty of risks. What are they, and what strategies can companies employ to mitigate or avoid them?
The risks of sustainable energy business transition
The first risk to energy companies engaging in sustainable transition are national and international laws designed to tackle climate change. Whether it is the setting up of carbon taxes or carbon credit systems, these are almost certain to target the most polluting industries, and that means energy companies will be firmly in the regulatory spotlight.
Second, with research from Imperial College London finding that companies with a higher fossil fuel intensity will have lower equity returns by 2030, investors are warming to the concept and returns of companies with a firm commitment to environmental, social, and corporate governance (ESG). As this becomes more widespread and younger, climate-conscious generations begin to invest, more businesses – including those in the energy industry – will have to meet their demands.
Finally, competition is a key risk companies must watch out for. As energy companies diversify and decarbonise into lower-cost-per-kilowatt forms of energy, they will have the edge over slower adopters still mired in fossil fuel investments and operations. According to Jean M Stephens, CEO of consultancy RSM International, this is especially important for middle market companies: “With the potential to be more agile and adaptable than larger organisations, middle market businesses can quickly take advantage of the investment opportunities – locally, as well as on a global scale.”
How energy companies can mitigate transitional sustainability risks
To ensure that these risks do not pose a threat to the operations of energy businesses, it is crucial that they are robustly tackled.
First, adopting ESG approaches is an important step in both guiding energy companies to a more sustainable future, as well as satisfying the needs of investors.
This involves adopting policies designed to combat the business’s impact on climate change, resource usage, and pollution; ensuring that workers, their communities, and groups impacted by operations are treated fairly; and the business itself is governed according to strong and positive approach to ethics, compliance, diversity, and taxation. This can be a complex task, but ESG is increasingly the benchmark against which companies are assessed by investors, their customers, and perhaps in the future, regulators.
Gaining legal counsel can help navigate these challenges, as well as the introduction of climate-friendly policies by governments and international bodies. It can be valuable to hire a specific consultancy with experience in the energy industry; these will have a deep understanding of the sector-specific risks, and extensive experience in solving them.
Acting decisively and rapidly is one way energy companies can avoid legal and competitional risks. By ensuring operations are up to date with regulations, driving efficiency gains, and adopting new, greener activities, they can pre-empt legal changes and gain early-adopter benefits, such as increased growth opportunities.
To better inform action, companies should invest in modelling. This will provide an in-depth understanding of various eventualities, such as the potential impact of extreme weather such as flooding on critical business infrastructure – power generation facilities, for instance.
By mitigating against sustainability risks, energy companies can safeguard their low-carbon transitions and ensure the long-term viability and productivity of their businesses. How do you think these businesses could best grow sustainably? Let us know in the comments section.
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