International Companies’ Renewable Strategy Management

ru xiang sui su

When you enter a village, then you should follow its customs.

When in Rome, do as the Romans do.

Executive summary

International companies are recognising that many emerging economies and developed countries globally have enacted new energy policies to promote their fossil to clean renewable energy transformation whilst reducing their fossil fuel consumptions so as to meet their Paris Agreement commitments. This has led many leading energy companies, including gas and oil companies, to adopt new corporate strategies to reduce their GHG emissions and to make new investments into renewables. Experts have reported that the new renewable energy investments by leading oil and gas companies globally have already grown by over USD3 billion over the last five years. Looking ahead, these are expected to grow further in the foreseeable future. The clean renewable energy growths in various leading oil and gas energy companies, including state-owned enterprises and multinational companies, will be discussed in more detail in this chapter with international business examples.

Renewable corporate strategy transformations and risks

Leading companies globally, in both emerging economies and developed countries, have to take account of the rising climate change and global warming impacts on their future business performances, as the values at stake could be enormous. The World Bank has estimated that the combined revenues of global businesses could rise to more than S190 trillion within a decade but there are many risks, especially climate risks. It is important for company boards and managements, for both public and private companies, to developed suitable new climate change strategies with good clean renewable energy investment strategics (Mckinscy, Competing in a world of sectors without borders, 2016).

Leading companies, in both emerging economies and developed countries globally, should ensure that they would compile with the growing new climate regulatory, environmental and clean renewable energy requirements. Companies should also take into consideration various key market and consumer drivers for climate change and sustainability improvements. Managements have to reduce GHG emissions and improve environmental performance of their production sites. They also have to improve their corporate strategies to take account of the rising climate change risks and clean renewable energy requirements. Organisations have to recognise and anticipate climate-related risks plus important drivers such as changing government policies, clean energy regulatory requirements, product-preference shifts and price volatility.

Experts have showed that there are, in broad terms, six different kinds of key climate risks which may affect leading companies globally. These climate risks would include value-chain risks and external-stakeholder risks plus stakeholder risks which we shall discuss more below with international business examples (Mckinsey, How companies can adapt to climate change, 2015).

Value-chain physical risks arc normally related to the damages that could be inflicted by extreme weather incidents, on infrastructure and other corporate assets, such as factories and supply-chain operations. Climate change has led to increased frequency and intensity of extreme weather events, such as wildfires, floods, hurricanes, typhoons, etc. The frequency and severity of these climate-induced extreme weather disasters have increased markedly since the 1970s. These could negatively affect company performance and cause serious damages.

A good business damage example is Cargill, which is one of the world’s largest food and agricultural companies. In 2012, Cargill had to post its worst quarterly earnings in two decades. This was caused largely by the serious US droughts, which were induced by climate change. These extreme droughts have led to food crop failures and poor agricultural yields. These have then led to serious reduction in the corporate revenues for Cargill, which resulted in it having to post its worst quarterly earnings.

Another interesting business example is Western Digital Technologies, which is a major supplier of hard disk drives. In 2011, it had posted a sharp decline in corporate revenues, after serious climate-induced flooding in Thailand. These floodings have severely affected most of its manufacturing plants in Thailand, which affected their production and global supplies. Their loss of production also meant a global slump in hard disk supply worldwide, which had severe reverberations for the company plus many other computer manufacturers. It is good to note that Thailand, after experiencing these serious floods, has been implementing the new low-carbon sponge city designs in many of its major cities so as to better protect them from the rising flooding risks induced by climate change.

Companies have to take steps to prepare for severe climate-induced events which are likely to occur more frequently in years and decades to come with the rise of climate change and global warming. Companies should consider a range of possible scenarios together with potential mitigation actions.

Digital tools for climate forecasting can help to estimate high-level risk probabilities by region, such as for flood, drought or sea-level rises, and for long-term changes in such factors as temperature, humidity or rainfall patterns. Advances in digital technologies and big data systems have helped to improve the accuracy of climate forecasting and weather modelling with super computers.

Climate change can bring serious price risks that can negatively affect companies. These serious price risks could include increased price volatility of raw materials, feedstock supplies to companies, etc. A good example is that climate change has resulted in extreme weather incidents which could lead to widespread droughts. These could then lead to unexpected high price rises of water supplies to many companies in emerging economies and developed countries globally.

New energy policies and climate-related regulations could also drive up the cost of fossil fuel supplies as countries promote the switch from fossil fuels to renewable clean energy. High-tech and renewable energy industries could also face unexpected price risks in their competition for resources globally. A good example is the rising competition for rare earth materials, which are being used in the production of advanced battery systems, computer hard drives, televisions, wind turbines, solar photovoltaic systems, and electric vehicles. China is currently the world’s leader in the production and supply of rare earth material.

Rising global warming has also resulted in unstable weather which has forced companies to cope with increased risks of production, energy, transport and supply chain disruptions. Many leading companies have been taking proactive steps to manage these potential serious risks so as to minimise business disruptions and interruptions to their supply chains.

A good business example is that Ikea has been undertaking clean energy transition away from fossil fuels to clean renewable energy supplies at many of their stores, in both emerging economies and developed countries globally. Looking ahead, Ikea is planning to become largely self-sufficient with regard to electricity power supply based on clean renewable power generation integrated with advanced digital distributed power management systems. It would give Ikea better control of what prices it would have to pay for power and energy supplies, together with improved power security. It would enable Ikea to be better able to insulate itself against global and regional energy price spikes, plus protect against unplanned power disruptions. In addition, Ikea has established a new partnership with NESTE. This partnership is exploring new commercial production of bio-naphtha and bioplastic from waste oil recovery in Europe. Ikea is planning to apply these new bioplastics in its packaging and furniture products globally so as to reduce consumption of plastic chemical materials. More details of the Ikea Neste pilot are given in Chapter 6 on bioenergy in this book.

Another good example is that the German car manufacturer Volkswagen (VW) is also undertaking clean energy transition away from fossil fuels to clean renewable energy for its car manufacturing operations. VW has implemented various hedging strategies against the possibility of rising fossil fuel prices and has invested €1 billion in renewable energy projects. It has plans to power its various car manufacturing sites globally mainly through its on-site renewable power productions, integrated with advanced distributed power control systems.

Looking ahead, it is expected that increasingly leading manufacturing companies globally will want to go “off-grid” and become self-sufficient in power generation, for both strategic and economic reasons. Like Volkswagen and Ikea, it is expected that increasingly leading companies will undertake clean energy transitions. They plan to reduce the use of fossil fuels and increase clean renewable energy applications for their manufacturing operations. To generate their own clean renewable power reliably, they would need to employ advanced distributed power digital technologies and power storage systems, with their renewable power generation, including solar, wind or biomass. They would also need to ensure that they have good cyber security for their new digital power systems so that these will have high reliability and not be affected by hackers which could cause severe disruptions.

Climate change can also induce serious product risks which could seriously affect company performances. Product risks could include core products becoming unpopular or even unsellable due to various reasons. These could cause companies to lose market shares or in severe cases to go under entirely. A good example is that climate change could promote the development of alternative cooling technologies with environmental friendly refrigerants. These would then have major impacts on conventional air-conditioning systems with chemical refrigerants, which have high global warming impacts.

On the positive side, new greener products have been emerging in a number of industries to cope with global warming implications. The construction and infrastructure sectors have been developing new products and services that cater for cleaner low-carbon smart cities. These included new energy-efficient buildings, electric-vehicle charging infrastructure, renewable integration, smart metering, smart grids, congestion-fee systems, plus high-performance green building materials and technologies. These have created new business opportunities for some traditional construction companies.

A good international business example is Saint-Gobain, the construction and packaging giant. It has recognised the important implications that climate change will have on its construction and packaging businesses. It has taken these climate risks into consideration when developing its new sustainable corporate strategies. It has incorporated the development of new sustainable housing technologies at the core of its new green product development strategy.

Climate change and global warming can also lead to higher operational risks and uncertainties. A good example is that many ski resorts in Europe and the USA had suffered significantly less snow falls, due to abnormally high winter temperatures induced by global warming. Many of these ski resort operators had to apply artificial snow generation so as to ensure that their ski runs have sufficient snow cover for the skiers to enjoy.

New climate-related regulations in many countries have also resulted in the introduction of additional carbon tax or new higher carbon emission costs in some countries. These have increased the coal and fossil fuel power generation costs significantly. A good example is that carbon taxes have raised the price of coal power generation in many markets above that of clean renewable energy on a full life cycle basis. These would also lead to additional ripple effects on the associated coal mining industries, coal mining-equipment manufacturers and related coal supply industries with reduced demands, which have led to unemployment in some sectors.

Many utility companies have also been changing their traditional power supply business models in many markets globally so as to participate in the fossil fuel to clean renewable energy transitions. A good example is that advances in digital distributed power technologies with renewable power generations have resulted in more decentralised power generation together with advanced distributed power management systems being applied in many countries. These could help to provide electricity power to one billion people in more remote communities globally who previously have no access to electricity or power. However, these new systems must also have good cyber security protections built into the digital management system so as to ensure good power supply reliability plus guard against hackers or terrorists which could cause severe disruptions.

In the important business-to-consumer (B2C) sector, fast-changing retail and consumer preferences are making inroads as consumers have become more willing to pay for greener products. A good business example is the fast-growing organic food and green grocery sectors which have seen double-digit growths for the past decade in many countries globally driving by new customer preferences. Consumers arc now able to find plentiful supply of organic food in many supermarkets globally.

Companies will need to be actively monitoring these emerging megatrends so as to revise their corporate strategies accordingly. One way is to adopt a “design to sustainability” approach, in which new products are designed to minimise waste and to be designed for breaking down for reuse or recycling. Another is to redefine corporate strategy so as to align business interests with climate-change mitigation and adaptation. A good business example is that Siemens has developed a new dedicated “environmental portfolio” of new carbon-efficient products as part of its new corporate climate change and product strategies.

Climate change has also raised external-stakeholder monitoring and risks for companies globally. Whilst these risks could vary widely between and within industries, companies with carbon-intensive activities should proactively manage these potential risks. A good example is that more than 4,000 corporates have proactively decided to report their carbon exposure on a transparent basis to the Carbon Disclosure Project (CDP). Many leading oil and gas majors have also been applying new internal carbon pricings on their evaluation of new fossil projects, so as to better guide some of their strategic investment decisions globally.

Around the world, many governments have been introducing new climate change and clean energy policies which could affect the business prospects of many leading corporates. A good example is that China has launched its new national carbon emission trading programme, following trial carbon emission trading programmes in seven regions. The new carbon emission trading system will initially cover the power sector in China. It is expected that many power companies in China will have to improve their operations and accelerate their fossil to renewable transitions, so as to reduce their GHG emissions.

Another good clean energy example is that most US states have also introduced new renewable portfolio standard (RPS) which will require a certain proportion of the state’s electricity to be produced from renewable sources. In Africa, Ethiopia has also developed a new climate master plan to actively develop its low-carbon economy so as to become a middle-income emerging economy country, through low-carbon economy growths with its climate resilient green economy strategy.

It is important to recognise the potential political uncertainty of new climate change policies, at both the national and international level, deriving from new election results. A good example is the significant change in the US approach to climate change and the Paris Agreement following the election of the US President Donald Trump. Companies globally have to actively monitor and manage these potential political and regulation changes and the associated risks. They should be active in understanding the changing political and policy landscapes in the countries that they operate in. In some cases, leading corporates have to undertake active government lobbying, so that they can help to shape future regulations and policy options. Companies must also develop new climate change strategy so as to put the company in a position to react quickly and effectively to possible new regulations and policy changes. These should also work with external stakeholders, such as regulators and industry groups, to proactively share their perspectives and provide inputs into future policy formulations.

Climate change has also increased reputation risks for companies and governments globally. These could be either direct or indirect risks. Direct reputation risks could stem from a company-specific action which could influence the corporate reputation. Indirect reputation risk could come in the form of public perception of the whole industrial sector. In the climate change context, negative reputation risks could lead to declines in business performance and profitability. A poor corporate reputation in climate change could also damage company sales. In the worse scenarios, it could lead to consumer boycotts or local community protests against the company. It could also damage investor relationships and corporate image. In some worse cases, it has led to ethnical impact investor and shareholder actions against the company board and management. A good example is the recent shareholder challenges to the Commonwealth Bank of Australia on its poor climate risk management on its housing investments.

There are also growing global ethnical investor concerns on climate change. Investors are asking companies for disclosure on their carbon emissions and footprints. In some cases, investors have started to lodge serious concerns about potential “stranded” assets in the fossil fuel to clean renewable energy transformation. These might include fossil fuel assets which are becoming unusable or unprofitable due to climate-policy regulation or physical climate change. A good example of stranded assets includes old coal-fired power stations which would

Renewable strategy management 183 have to be phased out in future to reduce environmental pollution and minimise GHG emissions.

Globally, there are growing numbers of customers who believe that sustainability and environmental friendliness should be essential elements of the companies from which they would want to buy products from. Non-governmental organisations (NGOs) are getting more influential and are actively measuring and comparing corporate performances in the climate change area. University graduates arc also hesitant to apply to companies with poor climate change performances.

A good corporate challenge example is the recent serious challenges by ethnical investors and shareholders to the ExxonMobil management. They have severely challenged the company management on their climate strategies as they do not believe that the management has developed adequate climate risk management approaches. These challenges have led to sustained declines in the ExxonMobil share prices and serious reputational damages globally.

In response to the climate change and renewable transformation implications, many companies have taken active steps to improve their climate change strategies and reputation. A good example is Unilever, the Anglo Dutch conglomerate. Unilever has led the FTSE CDP Carbon Strategy risk and performance index and has improved its carbon efficiency by 40% since 1995. It stated that corporate environmental improvement goals are to reduce the carbon and water footprints of its various products to half of their 2010 levels by 2020. Another good retail example is Kohl, which has won recognitions for its efforts to improve the environmental impacts of its operations and to reduce GHG emissions significantly.

In the digital IT sector, IBM has also won positive feedbacks for its good actions on climate change. These included setting up new rigorous greenhouse gas emission standards for its computer suppliers and value chains. IBM has won a 2013 Climate Leadership Award from the US Environmental Protection Agency for supply-chain leadership. It was also recognised in 2014 for its greenhouse gas management.

It is encouraging to see that many good leading corporates understand the importance of climate change and renewable transformation. They have been actively managing these and improving their environmental performances. Many other companies have to do more to improve their climate change and renewable transformation strategies. Otherwise, they could be exposed to serious risks and negative impacts, including product, operational, pricing, reputational, etc.

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