Insight Article: Energy Crisis meets ESG
The use of energy is unavoidable for any business, but how the energy is generated and how much energy is used can vary greatly. Businesses that have already identified their energy consumption, are taking steps to generate their own renewable energy and reduce their consumption, may be less concerned about the impending price increases.
It’s unlikely the companies with energy reduction plans in place did so because of the war in Ukraine and the closure of the Nord Stream 1 gas pipeline. It’s more likely as a result of their net-zero ambitions already in place.
They have already prioritized their environmental responsibility as part of their ESG strategy and are, therefore, more likely to be financially sustainable. This is a very good example of how ESG helps sustain businesses through turbulent periods by being more resilient to uncontrollable events.
* These figures were taken before the new Prime Minister took office and proposed a new domestic price cap. Business figure will depend on the company’s current energy contract.
Energy is measured in Kilowatt Hours (kWh) – i.e. how much energy an appliance uses within an hour. A dishwasher, for example, may be labelled as having a power requirement of 1kW and, therefore, if the dishwasher runs for 1 hr the energy required will be 1kWh. If you run it on a short wash that takes 30mins, then only 0.5kWh is required. The electricity provider adds up all the kWh and charges a rate per kWh.
How does energy price increase relate to ESG?
Prior to the current crisis, energy would sit predominantly in the environmental pillar of ESG with a focus on carbon emissions (i.e. from fossil fuels) and the business’ carbon reduction plan. The operations division of the business would be tasked with reducing energy as much as possible without undue effect on production.
Business growth is achievable while the energy price is low, or sustainably affordable, so only minor elements of energy sit within the social and governance pillar. For example, in the social pillar, energy may have been given to employees for free through electric car charging or a communal fridge for employees’ lunches. In the governance pillar, the board would need to decide how much to invest into their net-zero ambition and how ethical they want the business to become – i.e do they buy energy from Russia?
With the anticipated dramatic increase in costs, energy will now sit firmly across each of the three pillars….
- Within the environmental pillar, the choice of generating renewable energy, fixing a price with a renewable energy provider or installation of motion sensitive light switches is now even more compelling. The decision will now be forced upon businesses because of changes in global situations but inadvertently the business’ carbon footprint will be reduced too. Potentially the board may also decide that to reduce paying for expensive energy with volatile prices, they will invest in own energy generation.
- The choice of external energy provider will fall within the governance pillar as there may be moral and ethical issues about buying energy from demonised sources.
- However, the most interesting and possibly controversial aspect of the energy price inflation will be within the social pillar. Clearly businesses will want to reduce the energy consumption whilst maintaining maximum productivity. Questions such as closing the office to reduce heating and lighting bills, removing electric vehicle charge points for staff, removing appliances that are only used in recreation time e.g. a fridge. These examples will save the company money but could be very unpopular and detrimental to morale.
So, what should businesses do?
In the short term, businesses should now be preparing for when the energy prices increase. They should be looking at their total energy consumption and compare it over the past 3 and a half years, 2019 – 2022. Each of these years will show different scenarios where every business operated as necessary:
- 2019 will show business as usual pre-Covid where WFH was not prevalent.
- 2020 will show how the business operated within a year of complete disruption where WFH was normalised and production may have been on a bare bones structure.
- 2021 will show how the business responded to Covid and modified operations.
- 2022 will show how the business is now working in the new normal.
Now the business has an understanding of how much energy was being used in a variety of scenarios. Based on this, new scenarios of how to reduce energy consumption could be formed, combining elements of what worked and what didn’t work. A key element to stress-test the scenarios will be involving your employees in these decisions. For example:
- WFH may be overwhelmingly popular, pointing to a decision to move offices to a substantially smaller office where heating, lighting and AC is now minimised.
- WFH may be very unpopular as employees want to save energy at home by working from the office.
Once a new scenario has been identified, the business should then conduct a more technical energy audit of the business assets. This will help identify better maintenance schedules, more insulation, use of smart meters and timing switches to use energy at low peak times. It may uncover some ugly truths about some very energy-hungry appliances. This data will then assist in forming the energy reduction plan needed to overcome further electricity price fluctuations.
The long and short of it is that we need to use less energy whether this is based on financial reasons or environmental. The less we use, the less our bills will hurt and less carbon will be produced.
This is the beginning of an ESG strategy.