Exploring the business risks associated with transitioning to a low-carbon economy

Published: Monday, 29 August 2022 12:52

Antea Group looks at the risks that risk managers will need to consider during the coming transition to a low carbon economy and provides some advice to help organizations move forward in this area.

If the transition to a low-carbon economy were easy and painless, it would have already been completed long ago. Any realist needs to acknowledge that it’s inevitable to face challenges and sacrifices on the path to a better future.

Throughout the history of humanity, we’ve found that the most worthy and rewarding undertakings are rarely easy or comfortable. In the words of Teddy Roosevelt: “Nothing in the world is worth having or worth doing unless it means effort, pain, difficulty.”

That’s not to say these things can’t be minimized with smart planning and execution.

The best way to progress toward a low-carbon future is not to pretend downsides and risks don't exist in this process. It’s to be aware of them, proactive about them, and ready to mitigate their impacts.

First and foremost, there is one critical thing to recognize:

The biggest business risk is NOT transitioning to low-carbon

Facing these challenges is worthwhile primarily because of what the opposite course of action (or lack of action) means. Businesses that don’t prioritize energy transition as part of their sustainability strategy are putting themselves at the greatest risk, for two principle reasons – one more optical, one more practical:

Brand reputation and corporate responsibility. Customers, investors, and communities are scrutinizing industries more than ever when it comes to key sustainability priorities like this one. The rise of ESG criteria is urging more transparency and accountability. Energy poverty is emerging as a critical issue for societies around the world.

Costs and business continuity. There are concerns that energy demand could begin to outweigh traditional fossil fuel supplies. We’ve already witnessed spikes in fuel prices due to converging global factors. There’s also the eventuality of carbon taxes and other regulatory fees. Meanwhile, renewable energy sources continue to become more accessible and affordable.

The business sector is quickly getting on board. Forbes reports that at least one-fifth of the world’s largest companies have committed to meeting net-zero targets in the pursuit of a low-carbon economy.

It’s the right move. But it brings its own set of risks and complications. Let’s explore them:

Energy Transition Risks & Challenges: How to Mitigate Them

Here are some considerations that business leaders should prepare for as they set their organizations up to play an impactful role in lowering carbon emissions.

Operational audits and implementation of changes

The first step in this process is to take one backward: get a full bearing on your organization’s current state, and where your opportunities lie.

As an article published by the investment management firm BlackRock Inc. in the Harvard School Forum on Corporate Governance explains:

“Companies will need to assess their operations and vulnerabilities, craft scalable solutions, and consider low-carbon investments, among other initiatives. These changes will require balancing urgency with available technology and low-carbon alternatives. Companies need to adequately address near-term climate risks and opportunities, while simultaneously making the necessary internal process, policy, and capital allocation adjustments to allow for long-term financial viability in a low-carbon economy.”

Sounds like a fair amount of work. And it is! No one should mistake these energy transition commitments as short-term, passing projects. An audit will reveal gaps and opportunities, which may lead to recommendations for new investments, supply chain shifts, searches for different vendors and more. It’s not hard to see how this could be perceived as potentially disruptive to the course of operations.

Your best bet is to plan intelligently. Work with expert consultants who can help you efficiently get a lay of the land and pinpoint the best low-effort/high-impact opportunities. It’s important to keep in mind that these frictions of change will only become more problematic in future for companies that keep kicking the can down the road.

Financial outlook and business model dependency

The oil and gas industry is one that finds itself at the center of energy transition, with its future very much in flux. Many companies are weighing significant choices about the future, as this McKinsey article explores. It’s natural for businesses that are fundamentally involved in the energy space to have trepidations about these transitions and what they mean.

As the McKinsey article points out, some companies are using this moment as an opportunity to build a more resilient core business and rethink their operating models to find new competitive advantages. Oil and gas companies, it is noted, "have an abundance of capabilities that may be valuable parts of a new low-carbon energy system."

That’s just one of many examples where a perceived risk or challenge is very much an opportunity. And it’s one that even successful companies are wise not to overlook.

“One of the lessons of economic history,” the authors assert, “is that successful incumbents can be swept away as a new era emerges.

Lack of visibility and perceptions of ‘greenwashing’

Another risk associated with the transition to a low-carbon economy is that your efforts will be seen as insufficient, or overblown. Greenwashing – a term for the perception of words (and marketing) outweighing action on behalf of climate change – is a risk that companies are increasingly sensitive to.

When it comes to mitigating this risk, much of it comes down to clarity and context in messaging. As Charlie Quann, Antea Group’s Climate Change Advisory Lead, has put it when discussing carbon offset credits (skyrocketing in demand despite greenwashing claims): “Whether the project itself relates to the business or helping the company achieve a [U.N. Sustainable Development Goal], a great way to avoid greenwashing backlash is making sure you present the project within the context of your low-carbon transition plan."

Again, it’s beneficial to work with knowledgeable experts and consultants who have experience with the framing and messaging around energy transition strategies, and how to avoid greenwashing pitfalls.

Turn risk into reward: join the energy transition movement

The primary risks involved with energy transition are those driving companies to focus on it as an integral part of their sustainability strategies. If you’re ready to start clarifying your organization’s future vision in this regard, know that you don’t have to boil the ocean: there are methodical steps that can get you started in a meaningful way.

“You see this a lot,” said Quann, “where companies aren't quite ready to jump into really detailed work, it can be expensive and costly, and then at the end of the day, that organization might not be ready to commit the capital to achieve, to investing in those initiatives, that you've done the detailed economics on.”

He added: “Oftentimes the first place that a company will need to start with the low carbon transition plan is just outlining what we're talking about in really rough numbers … Helping to, at least at a high level, reframe that narrative to show that there are real tangible returns on investment, that this actually makes good business sense, that's really a starting point for this.”

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