Is Your Company Part of 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% 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 U.S. 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.

Recognize that it takes talent to implement new models.

Thinking out of the box can identify opportunities to exploit the energy transformation through new business lines. But it can also drive increased demand and competition for people with skills related to all areas of sustainability and renewables, from engineering to accounting. As more companies focus on the energy transition, increased competition is expected for energy-related skills at non-energy companies, particularly those with large carbon footprints. Adding to the challenge is the tremendous strategic battle for talent — people are increasingly joining organizations with which they can align their values.

Inquire after plans for adjusting to market trends when deploying financial capital into renewable energy.

How are evolving energy markets altering the company’s cost structure? There are several aspects to this discussion:

• How can the company shift the mix of energy consumed in its operations to increase the emphasis on green energy sources?
• Only about 20% of the energy consumed across all industries is powered by electricity.
• Investors and lenders are increasing their portfolio allocations to companies with compelling sustainability strategies.

This opens up a strategic conversation to which boards can contribute around the sourcing and deployment of capital. Directors should inquire of management’s focus on increasing electric-powered consumption by working with utilities to supply relatively low-cost power and with policymakers to provide supportive regulation.

Encourage periodic reviews of operating practices that have a marked impact on energy consumption.

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 of both office and manufacturing facilities and equipment as well as long-standing business practices. Periodic “consumption audits” can raise questions that should be considered. 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.

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. While starting as a market expectation, carbon capture could become a regulatory requirement. Yes, there is the possibility of a carbon tax in the future, but smart boards should be concerned about the more likely scenario of an “invisible carbon tax” — the increased cost across an enterprise resulting from newly required investments, higher debt service costs, 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. They also lead to assessments of 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.

Everyone knows that energy companies worldwide are under pressure to alter their strategies and business models to accommodate expectations of activist investors, demanding consumers and governments mandating emissions targets. But the above commentary suggests that there is also a robust conversation in the boardrooms of non-energy firms around energy transformation.

For more about the energy revolution, read the article here.

(Board Perspectives — Issue 144)