CEO: don’t underestimate the energy transition

Two sides of the same coin

While nobody likes to start the new year with a pessimistic message, CEOs are undeniably facing a considerable number of challenges. As the results of PwC's 26th CEO Survey show, this manifests itself in the pessimistic growth outlook that CEOs have for their own company. Their biggest concerns revolve around the economy, with inflation, the labour market and volatility topping the list. And yet, these concerns cannot be viewed in isolation from climate change and the energy transition – they're actually two sides of the same coin. 

The energy transition: a surprise in the results

The fact that we're now facing an energy crisis shows how interconnected energy, climate, geopolitics and inflation are. Higher prices are a consequence of the energy crisis – it's as ‘simple’ as that. 

A recent study by PwC Strategy& shows how rising energy prices are hitting many companies hard. Businesses in the manufacturing, chemical and agrifood sectors are particularly vulnerable to rising energy prices, especially as other production costs are also rising sharply alongside. This development affects companies' profit margins and production costs, and that’s a real concern for CEOs.

It is clear that that specific action is called for. According to our survey CEOs in the Netherlands are looking to tackle higher energy prices over the next 12 months by reducing consumption (67 per cent) and passing on higher costs to customers (59 per cent). This won't come as a surprise given that these are really the only two control levers that CEOs can turn in the coming year in order to see an immediate effect.

But there's also a positive surprise in the survey results: at least a third of all CEOs say they’ll be thinking about switching energy sources this year. A third of respondents may not sound like much but redesigning business processes takes time, money and technical effort. Changing energy supply is no simple matter, especially taking into account that the desired infrastructure is lacking in many part of the Netherlands. I’m an optimist, however, and view the world through a half-full glass… The fact that so many CEOs indicate that they’re dealing with this issue makes me hopeful.

Climate is a strategic issue

Despite this and the fact that more companies are taking action regarding various ESG themes, I also firmly believe that a large number of firms still need to make substantial progress. They need to recognise that climate change really isn't an issue that can be put off until tomorrow. Like the economy, this is a concern for today. It appears that some companies underestimate the impact that climate and energy may have over the course of the next decade. There are tangible and visible threats on the horizon such as flooding, heat, drought and scarcity of energy resources.

Critical business processes will therefore need to be climate-proof if you are going to ensure the resilience of your company’s operation. There’s also a burgeoning market for sustainability due to increasing customer demand and the importance that stakeholders attach to this issue. Last but not least, climate change requires a proactive attitude on the part of CEOs – by taking the path of energy efficiency, sustainability and innovation now, they can contribute to the long-term protection of the climate.

Three recommendations for CEOs

All in all, this isn't an easy time to be a CEO. Making decisions in uncertain times requires more guts, vision and leadership than before. The key word is to be bold! Here are my three recommendations for CEOs with regards to energy and climate:

1. The economic argument for making the transition has been further reinforced in light of all the recent developments. In other words, the business case is strong. CEOs will therefore need to critically review their company's own energy use this year in terms of both consumption and access to resources. How do you reduce your use of energy? How do you make your energy consumption more sustainable? Quite apart from price, do you always have access to energy?
2. Spread risks and increase opportunities. Get a complete picture of all your company's climate and energy dependencies. Also bear in mind the new dependence that might be created when taking steps to improve sustainability. Going for solar panels? They mainly come from China. Switching may reduce your dependence on Russian gas but add to your dependence on Chinese technology. How about gas from Qatar instead of Russia? This too will create new dependencies, and while it need not be a major problem you certainly need to be aware. Always ask yourself how you can reduce or mitigate your company's dependencies.
3. Fully internalise the climate issue in every single aspect of the organisation. That’s expected and enforced by society, but it’s also essential in terms of economic resilience. The instability that we’re now experiencing politically and economically is climate-driven and – especially in this volatile world – here to stay. So the starter question for every CEO is now: ‘how does climate affect our decision-making’?

While anybody can jot down advice, making it operational is incredibly complex and demands effort from everyone in the organisation. A different way of looking at business operations is required, and CEOs will need to be able to deal with contradictions and make difficult decisions. Not least because a company’s experience-based feeling of security may be coming at the expense of greater sustainability or vice versa. As already noted, you have to be bold!

Licence to operate

The climate crisis and the energy transition therefore affect how you as a CEO design your business. It’s a strategic issue and – especially with regard to customers and stakeholders –  a ‘licence to operate’.

For CEOs, this means continuously focusing on building a robust, resilient and future-proof operation. As an optimist, I have every confidence that is possible.