The Energy Revolution Is Underway: Is Your Company a Player?

Everyone knows that reducing energy consumption is a priority. The introduction of renewables continues as costs decline. The percentage of electricity consumed through non-fossil fuels sources — solar, wind, nuclear and hydro energy — in the total energy consumption mix is growing. 

The Biden Administration has made climate change a priority as other countries all over the globe embrace green energy. Sustainable investments driven by screening criteria of institutional investors and asset managers are on track to represent more than a third of the projected total assets under management by 2025.

And as the influence of the Millennial generation continues to increase in the market, so do consumer preferences for doing business with companies committed to the well-being of the environment. Most importantly, talent is migrating to those companies. Studies have consistently highlighted climate change as the single biggest issue young professionals care about.

Bottom line, leaders in all companies, including those that are not energy producers, need a strong narrative for the street based on clear objectives and results. As more robust environmental and other disclosure requirements shed greater transparency on the impact of a company’s activities on the environment relative to its peers, leaders should ensure that appropriate policies, processes and systems are in place, targets are set, an effective plan for achieving those targets is established and people with the requisite knowledge and skills are in place to execute the plan along with monitoring metrics and measures to track progress. 

Simply stated, 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 attention of the executive team and board. Without a doubt, the lion’s share of global industrial greenhouse gas (GHG) emissions is generated by energy producers. But “non-energy companies,” companies other than oil and gas and power companies, are not getting a pass in this environment. 

More climate-related disclosure is coming

In the United States, 70% of the companies in the Russell 1000 Index and 92% of the index’s 500 largest companies published sustainability reports in 2020 using various third-party frameworks. This reporting is largely voluntary, with issuers choosing the frameworks they wish to apply. Accordingly, there is considerable variation in reporting practices, leading many to assert that the sustainability reporting model is so fragmented and inconsistent in terms of depth and specificity across industries and even within the same industry that it lacks the comparability investors need to make informed decisions. 

Four months ago, the SEC proposed rules that would require reporting companies to enhance and standardize their climate-related disclosures. The proposed changes affect disclosures of:

• Information about climate-related risks contained in registration statements and periodic reports, such as a company’s annual Form 10-K, that are likely to have a material impact on the business, results of operations or financial conditions.
• Certain climate-related financial statement metrics in a note contained in the audited financial statements.
• The registrant’s GHG emissions, a commonly used metric to assess its exposure to climate-related risks.

Some believe that the proposal, in its present form, could result in legal challenges around such issues as the SEC’s authority and certain climate disclosures (Scope 3 emissions). The point is that the winds of change are blowing. An explicit climate change rule, in one form or another, is coming in the U.S., and issuers and public company aspirants had best prepare for it. 

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. Senior executives and boards should ascertain whether strategies and business models are being updated to address the changing realities of the energy landscape. 

For example, technology companies are deploying emerging and existing technologies to offer programmable energy-efficient smart devices to consumers as well as to commercial and industrial companies, such as thermostats, water heaters, refrigerators and other Internet of Things (IoT) applications combined with cloud computing to collect, analyze and present in real time the mountain of energy data falling out from their use. 

Installation of EV chargers in company parking lots, LED light bulbs and eco-friendly mobile chargers are other examples of how companies are exploiting the energy transformation. 

Recognize it takes talent to implement new models

Innovative thinking 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, more competition is expected for energy-related skills at non-energy companies, particularly those with large carbon footprints — airlines, shipping and delivery companies, and automotive manufacturers, to name a few. Adding to the challenge is the tremendous strategic battle for talent: People are joining those organizations with which they can align their values.

Inquire about plans for adjusting to market trends

There are important strategic questions for leaders to consider. For example:

• 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 emphasis on green energy sources? 
• How can we tie energy consumption 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. To illustrate, nearly 40% of global carbon emissions come from buildings and construction, highlighting the need for decarbonizing air conditioning, improving insulation and increasing efficiency of lighting, heating and cooling systems. 

Lessees can no longer take a laissez-faire approach to energy use; they should review the energy efficiency of their facilities and adopt proactive improvement plans for the coming years. 

Investors and lenders are increasing their portfolio allocations to companies with compelling sustainability strategies. For example, Bank of America has set a goal of $1 trillion in financing by 2030 for projects and investments to reduce carbon emissions and address other environmental needs across all sectors and, in particular, high-emitting ones.

Only about 20% of the energy consumed across all industries is powered by electricity. This opens up a strategic conversation to which leaders and their boards can contribute around the sourcing and deployment of capital. They should assess the extent of the company’s focus on increasing electric-powered consumption by working with utilities to supply relatively low-cost power and policy makers to provide supportive regulation. 

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 on an annual basis. In addressing the growing ESG-related expectations of customers, investors and regulators, management should 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 address relevant questions such as:

• Are there areas in our operations and facilities where we are wasting energy? Are there inefficient machines that should be upgraded or replaced? 
• Are there practices we could implement to reduce energy consumption, such as powering down equipment, using energy-efficient lighting, adjusting operations to avoid peak period rates and installing energy-recovery heat exchangers? 
• Should all laptops be replaced every year? 
• Can planned facilities expansion be postponed or canceled now that the pandemic has proven that work-from-anywhere and/or hybrid workplace options are viable? 
• Is it necessary to return business travel to pre-pandemic normals? 
• Must everyone return to the office, resulting in congested, energy-consuming commutes that generate higher levels of emissions? 

Needless to say, as companies address these and myriad other questions, they can drive meaningful reductions to selling, general and administrative costs. 

As for energy procurement, non-energy corporates focused on making progress toward a net-zero carbon future are purchasing renewable electricity from their power supplier or an independent clean power generator, or through renewable energy certificates (RECs). 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 U.S., several bills creating benefits and financing for carbon capture, utilization and sequestration have been introduced in Congress and have bipartisan support. While starting as a market expectation, carbon capture could ultimately become a regulatory requirement. 

Yes, there is the possibility of a carbon tax in the future, but smart executives and boards should be more concerned about the more likely scenario of an “invisible carbon tax” — e.g., the increased cost across the enterprise for any number of activities, investment requirements, lending activities and capital expenditures related to the energy transformation. For example, companies are investing in on-site distributed energy resources (DERs) to provide a stable energy source in an increasingly volatile power market. 

To illustrate, the grocery chain H-E-B installed its own power source systems. In one city, it built and operates its own solar energy system, which connects 62 buildings. This practice could become common for companies with operations spanning multiple facilities.

In addition, carbon capture and utilization technologies have become part of the conversation for achieving net-zero carbon emissions. Carbon capture, either through direct air capture or point source carbon capture and storage is making it possible to utilize carbon for alternative purposes in lieu of it being released into the atmosphere. For example, captured carbon is being used in large-scale emissions processes, including natural gas processing; fertilizer, chemicals and jet fuels production; and manufacture of industrial materials such as cement, plastics, iron and steel, and pulp and paper. 

View improving supply chain agility and resilience as a risk conversation but with a potential energy play as a byproduct

The issues around the Suez Canal blockage of 2021, the shipping logjam in San Francisco, which continues in 2022, and other pandemic-induced supply shortages add yet another highlight as to the interdependence and fragility of global supply chains. Scarce raw materials tend to be overly concentrated in few areas in the world, including those that are either politically unstable or potentially unfriendly. These developments create incentives for alternative solutions that reduce dependency on these materials. They also focus companies on reshoring, near-shoring and friend-shoring options. As these options are explored, the impact of compressing supply chains on the company’s carbon footprint should be considered.   

Finally, focus on the parallel track 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 risk as it expands a company’s exposure to the electricity ecosystem. As more things go electric, the use of technology and the variety of the kinds of technology deployed increases. This adds more ways for companies to be vulnerable to breaches, leaks and hacks, adding yet another dimension to C-suite and boardroom conversations on security and privacy risk. 

Everyone knows that energy companies worldwide are being pressured 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 there is also a robust conversation to be had in the C-suites and boardrooms of non-energy firms around energy transformation. 

Questions for executive teams and boards of directors 

Following are some suggested questions that senior executives and directors may consider, based on the risks inherent in their organization’s operations:

• Do we have a strategy and plan for maximizing the cost, market and reputational advantages of green energy sources? Are we sufficiently focused on sustainability and climate issues? Is there an executive team sponsor? Are we reporting on progress, and are relevant metrics included on the CEO’s dashboard?
• What metrics and data are we reporting to the street around energy utilization and efficiency and reduction of our carbon footprint, and do our reports convey our progress? With respect to the energy consumption goals and targets we have committed the organization to pursue, what execution plans have we established, and how have we set accountability for results across the company through metrics, measures and monitoring? What frameworks are we using to guide our disclosure practices? Has feedback from investors confirmed the value of our disclosures and whether our strategy is resonating with them?   
• Are we prepared for forthcoming regulations requiring enhanced climate change disclosures to investors?