Sustainable Energy Goals And ESG Risk

The UN Sustainable Development Goals are a useful high-level framework to assess your firm’s ability to make a positive social impact. They cover a wide area of topics including equality, energy, climate change, responsible growth and more.

There are many frameworks that governments and NGOs try and get business behind. Each has its pros and cons. The UN Sustainable Development Goals are a global framework which enables comparison sustainability reporting between companies that operate in different jurisdictions or industry sectors.

Boards and senior executives should assess their current operating model against the 17 high-level SDGs to capture a baseline. They can then identify the areas of their operating model that make a positive or negative impact on these goals and generate sustainability reporting to track their progress in moving towards a responsible operating model that incorporates sustainability outcomes into the transformation process.

Goal 7: Ensure access to affordable, reliable, sustainable and modern energy

Goal 7 of the UN SDGs is to ensure access to affordable, reliable, sustainable and modern energy. Almost 1 billion people still don’t have access to reliable electricity, half of them in sub-Saharan Africa. Energy production and consumption are responsible for nearly 60% of total greenhouse gas emissions globally.

Globally, not even one-fifth of global electricity production is from renewables. There are many areas of energy that will need to improve over the next decade including energy efficiency, battery storage technology, renewable energy production, and reliable energy supplies for developing countries that doesn’t cost too much.

The benefits of clean energy for our planet are enormous. Reliable and affordable energy sources mean that cooking, cleaning, and necessary business activities become possible for people in developing countries.

In developed countries, increasing energy efficiency, even more, means that marginal energy producers that rely on fossil fuels such as coal, natural gas, and oil can sunset older plants and invest in renewables such as solar, wind, geothermal, and hydropower.

 Some countries have already made enormous progress in developing their renewable energy sources, including China which has some of the most significant solar and wind power initiatives in history in operation and under construction.

The ability to make an impact on goal 7 isn’t just for businesses in the energy sector. Responsible electricity consumption and energy efficiency initiatives are realistic in a company that uses electricity.

Thinking about the energy efficiency of your entire value chain including the energy efficiency of your suppliers and partners means that operational due diligence on suppliers should start to include questions around their electricity provider, their investments in energy efficiency, their analytics and insights into their energy use, and developing a strong understanding of their strategy to reduce their carbon emissions and increase the proportion of their electricity supply from renewable sources.

Board And Senior Leader Considerations

There are many different frameworks and reporting guidelines for sustainability and ESG risk. As at January 2020, there are no global standards like IFRS that enforce certain levels of disclosure. Some companies will not care about transparency on these issues because, for some, it could be “brand destroying” to be open about some of the ESG risks that exist in their value chain.

Boards and senior leaders should start with a high-level assessment of their current operating model. Working through the basics of your business model is necessary before launching into exhaustive ESG risk analysis.

  • What is your purpose? Why do you do what you do?
  • What is your business strategy?
  • How do you deliver your strategy?
  • Who delivers value to your customers?
  • Where are your operations located?
  • Who are your key suppliers?

The business model needs to be understood and decisions made on the boundaries of how much the board and senior leaders are willing to change the business model to achieve the targeted level of ESG risk in their business.

The risk management framework and risk registers will already include many of the risk themes that emerge during a strategic review of this nature. However, some of the ESG risks like social risk and environmental risk, are facing ever-increasing community expectations.

Boards and senior leaders need to be forward-looking in their identification, mitigation or elimination of these risks. They need to be ahead of the curve because an acceptable business practice today could be completely unacceptable from a social license point of view after one newspaper article or one tweet goes viral.

A great example of an ESG risk related to energy is the proportion of your electricity supply that comes from renewable sources. Some organisations have changed their procurement procedures to ensure that only the suppliers with the best effort on increasing renewable sources of electricity supply are even in the running for tender opportunities.

What does this mean? It means that because the era of the press release is over, boards and senior leaders need to be thinking long-term about how to position their business strategy so that their operating model does not give rise to any potential ESG risks that will put their economic engine at risk.

The business case for building a responsible operating model and reducing or eliminating as much ESG risk as possible is not just about return on investment. Customer satisfaction, shareholder approval, cost avoidance, revenue retention, regulatory compliance, social license maintenance, and employee satisfaction all have some elements that can be quantified to support the financial side of any business case for a programme of work to build your responsible operating model.

The UN Sustainable Development Goals have one significant advantage for boards thinking about how to measure and monitor their social impact. They are a global framework, and many major global companies already include their SDG reporting in their annual reports.

One consideration is that some companies are already so far ahead on adjusting their operating model to deliver better sustainability outcomes, that they could already “lock-in” a strategic competitive advantage.

Costs to businesses not taking ESG risk seriously can arise in visible areas such as the ability to raise capital. Look at how thermal coal companies are on the way to becoming unbankable as an increasing number of financial institutions globally stop lending, cut lines of credit, don’t take commercial paper, and don’t invest in equity or debt raises for thermal coal companies.

Thermal coal miners are currently losing their ability to raise capital. Retail and institutional investors will increasingly demand near-perfect delivery from boards and senior leaders on the reduction and elimination of their preferred definition of ESG risk.

The rising community expectations on these issues will impact a firm’s social license to operate, and focusing on short-term operating model changes that deliver outcomes will be judged better than long-term ambitions that will take decades to achieve.