Published: February 01, 2011
"The world appears to be emerging from the worst economic crisis in decades. Many countries have made commitments under Copenhagen Accord to reduce greenhouse gas emissions. Commitments have also been made by the G-20 and APEC to phase out inefficient fossil fuel subsidies. Are we, at last, on the path to a secure, reliable and environmmentally sustainable energy system?" International Energy Agency (IEA), November 2010To all intents and purposes,sadly the answer must be ‘no’. For the consumer, the implications are primarily in fluctuating (and typically increasing) household heating bills and fuel pump prices.For corporations, the ramifications of a volatile energy market with considerable medium-term uncertainty are both challenging and exciting, depending on how a company can take advantage of the opportunities that the current energy situation presents. In the years immediately preceding the financial crisis, the ‘green’ agenda was high in many politicians’ and corporations’ set of priorities. Over the past two and a half years, economic priorities took over,and the word ‘sustainability’ seemed to all but disappear. Now, however, politicians, CEOs and treasurers alike need to recognise that future economic stability, corporate growth and energy sustainability are inextricably linked.
Firstly, without repeating energy predictions that are routinely spattered across the press during the latter part of the old year and the beginning of the next, the prospects for energy consumption versus production look grim. Commentators have been quick to predict a 2011 return to $100bbl for oil, although not necessarily remaining at this level throughout. The issue is not necessarily a decline in production, although inevitably this must happen, but on increasing demand, and for some industries, more rigorous carbon penalties. Unsurprisingly, China is the key perpetrator. According to the IEA World Energy Report 2010 (published November 2010), China’s demand for energy derived from fossil fuels is likely to increase by 75% between 2008 and 2035, and a tripling of electricity requirements. Other countries in Asia, particularly India, the Middle East and Latin America are also set for considerable growth in demand, with around a 35% increase in energy predicted by 2035 globally. And with energy production set to increase by only 15%, the challenge is clear.
The shift in demand from OECD to non-OECD countries has an impact that may be as significant, if not more so, than the actual increase in demand. Petrochina, already the world’s 17th largest company and growing fast, has announced its strategic intention not only to increase domestic production but to “realise a quantum leap in international operations” (Petrochina website, Jan 2011) largely through acquisition. Significant acquisition from Chinese companies to meet domestic energy demands could have a considerable impact on the balance of economic and political power, and also potentially affect security and availability of supply in other parts of the world.
The uncertain nature of global energy supply and demand in the future creates both challenges and opportunities for corporations globally. Energy efficiency and production should now be the watchwords for every company, irrespective of industry. Locust recently found a way to reduce data centre power consumption, currently costing $10bn each year, by 90%.The implications of this for almost every company, particularly large users of technology, are significant. Furthermore, with renewable energy set to triple over the coming few years, (although still only predicted to be 14% by 2035 by IEA) the opportunity not only to produce energy is not limited to traditional energy companies, but also high intensity users.
Technology companies, manufacturers, food producers – in reality, a huge proportion of companies whose activities produces a waste product of some sort have the opportunity to become creators of energy. Technology giant IBM, for example, is one such company that has joined the energy game. The company believes that the heat generated from the world’s thousands of data centres can be recycled to heat water for homes and businesses. In Switzerland, a pilot project is under way to attach a network of capillaries filled with water to the chip in each computer. The chips then heat the water, which is passed through a heat exchange and piped out. [[[PAGE]]]
While biofuels have a place in the overall renewable energy portfolio, the land required to generate material amounts of energy is significant. Twice the land area of the United States would be required to produce enough soybeans to support today’s energy needs. In contrast, The Colorado State University Engines and Energy Conservation Laboratory and the University of New Hampshire (UNH) are suggesting that breeding algae (due to its efficiency in converting solar to chemical energy) could supply enough fuel to meet 100% of America’s transportation needs in the form of biodiesel, using only 0.2% of the country’s land mass. Depending on the outcomes of his research, the implications for companies that own sizeable land masses, or may seek to acquire them, are very considerable and could make them energy-independent at a relatively low cost. Furthermore, waste water or even sewage can increase the yield even further; the algae absorbs CO2, and the by-product is a sustainable and environmentally friendly fertiliser.
Energy efficiency and production should now be the watchwords for every company, irrespective of industry.
A UK drinks company built a £65m bio-energy facility that uses waste products from the distillery, such as malt, to generate renewable energy amounting to 98% of the plant’s thermal steam and 80% of electrical power required at the site. This facility cuts carbon dioxide emissions by 56,000 tonnes per year (equivalent to 44,000 family cars) and avoids the need to transport and dispose of 90,000 tonnes of waste from the site. With many companies producing waste products of some description, recycling waste into energy has enormous potential. A UK sugar factory is now producing the heating and substrata required to grow tomatoes in the UK all year.
As well as increasing efficiency and production, energy storage is becoming an increasingly significant issue, such as the transformation of batteries. According to IBM, “scientific advances in transistors and battery technology will allow your devices to last about 10 times longer than they do today” by using “the air we breathe to react with energy-dense metal.” Looking at electric vehicles and power in cities, for example, the potential for improved energy storage is significant.
The long-term impact of a change in the way that individuals, companies and countries consume, conserve, store and produce energy, brings a range of issues not only for company strategists but also for treasurers. In addition, treasurers need to help protect the company from the potentially negative effects of ongoing volatility in the energy markets.
Small, innovative companies with energy-related solutions will continue to be desirable acquisition targets for larger companies that seek to leverage commercial opportunities or protect themselves from energy market volatility and uncertainty. Companies that may not necessarily appear to have similarities in the products and services they deliver may have natural synergies in the use of waste products or use of resources, resulting in a new generation of mergers and joint ventures of complementary companies. Corporate restructuring and joint ventures often create challenges for treasurers to reflect new entity structures and spin off or integrate new treasury activities. Using a leading treasury management system, with the ability to maintain multiple entity structures and to change these over time is essential, as is a clear procedure for integrating new businesses. While historically acquired or merged companies were typically in the same industry, and therefore with comparable business practices, this may not be the case as less closely related companies work together.
Leveraging the opportunities in the energy market will need the right people, technology and just as importantly,cash. Treasurers and CFOs sitting on large cash cushions, and/or who have strong forecasting capabilities, are ideally positioned to advise the company on the amount of surplus cash that could be invested in new energy conservation, storage and production initiatives, both to create commercial advantage and mitigate risk. Furthermore, working capital optimisation continues to be vital in order to reduce the amount of cash required day-to-day, and to maximise the amount available for investment.
Energy hedging should no longer be the sole domain of transport companies. Every company has energy needs, even if just to light and heat offices,so treasurers need to work with other senior management to assess the financial risks (as well as potential risks to supply) of a significant increase in costs, and look at ways of mitigating them. The derivatives market will be a logical destination for companies purchasing large quantities of oil or other energy commodities, but investing in complementary industries that produce renewable energy may be another.
Decision-makers are waking up to the mutual dependence of energy and economic sustainability. As the World Economic Forum Report on Sustainable Consumption, 2010 summarises,
“Populations are rising. The availability of natural resources is diminishing. Global economic health is based on consumption.Without fundamental changes, our global economy is at risk.
A prosperous future depends on innovative new products and business models that achieve transformative efficiency – and create new market opportunities.
This transformation will be significantly driven by companies, in parthrough public-private co-operation and partnerships. Tomorrow’s businesses will meet the future by channelling their creativity to form markets that capture the emerging opportunities these shifts offer.
Every period of disruptive change brings winners and losers.The formula for business success during our era of great change will place a premium on innovation, collaboration and smart investments to shape a globally prosperous and sustainable future.”
While international agreements on energy conservation, emissions and renewable energy lack ambition and are incomplete, individual companies can gain strategic and competitive advantage by leveraging the new opportunities that innovative energy technologies present. By developing their role in enterprise risk management, and positioning the company’s finances to permit strategic investment in energy, treasurers have a valuable role to play.[[[PAGE]]]
The following theoretical, Utopian speech appears in the World Economic Forum Report on Sustainable Consumption, 2010 and provides a fascinating view of how global industry players can move from today’s unsustainable energy and consumption model to a more sustainable, but commercially attractive business proposition.
Speech made by Adreanna Lopez, Chief Executive Officer of ConsumerGoodsInc from 2012-2021, to celebrate her acceptance of the Nobel Prize for Economics in October 2030.
“Thank you. I want to start by acknowledging two groups of individuals without which ConsumerGoodsInc’s combination of commercial success, consumer engagement and sustainable innovation would have been impossible to achieve.
First, our employees, now more than a million strong, whose involvement in every stage of redefining our strategy has been crucial.
Second, our customers, who have been so important in helping us shift to our model of ‘shared value’. Unlocking our customers’ ideas as innovators and mobilising their engagement as citizens has been vital to our success.
ConsumerGoodsInc has, indeed, achieved astounding success since its foundation in 2010, when I joined a small executive team to explore how the type of model developed by eBay could be applied to our sector. It was not the easiest of times to launch a new corporate entity. At that time, the consumer goods industry was just coming out of the worst financial crisis in 75 years, and emerging into what some called the “long crisis of globalisation”. At the time,our industry’s business model saw the ever-increasing consumption of goods as the end goal. That model was needlessly wasteful of natural resources, mispricing scarce resources and failing to capture the huge efficiency gains available both along and across the entire value chain. It was a model that, in the end, could provide neither the long-term growth that we needed as businesses, nor the long-term prosperity we needed as global citizens. It was, in short, unsustainable.
But the confluence of environmental and economic crisis which the industry experienced in 2010 spurred us to rethink our businesses and, in the process, to develop and capture new markets. And, in committing to long-term economic, environmental and social sustainability across all our business lines, we were part of the shift from a world of resource consumption to a world of value optimisation. ConsumerGoodsInc was instrumental in leading the way for two major changes in how our industry and, by association, the global economy operates today.
First, with our Waste Partners programme, we revolutionised the way we worked with players through our entire value chain to eliminate the concept of waste. As a result, today’s consumers take a world without waste for granted: operating a low-carbon, closed loop value chain with efficient resource use and collective stewardship across life cycles is part of businesses’ licence to operate.
Our efforts to find ways to reduce our material footprint were small to start, but became larger and larger as other companies started to imitate us, and we realised that, by facing what were essentially systemic challenges, we were also creating massive opportunities. As an industry, we began to innovate ways to deliver the ‘smart’ prosperity we are familiar with today. [[[PAGE]]]
In 2012, we transformed the Waste Partners programme from a closed, supply chain system to an open-source platform that our consumers could join – not only could they feel more secure about their purchasing decisions by knowing exactly what waste we were producing in which countries, they could advise us on material choice and help us make connections to other businesses that turned our excess material into a valuable input elsewhere. As more and more stakeholders, including our competitors, joined the programme, the bottom-up wave essentially forced policy-makers to provide the right incentives to allow true valuation of all materials and externalities.
If sustainability started off as the creed of efficient resource management, it has ended up helping us build a new economy which values resources and products differently. This is at the heart of ConsumerGoodsInc’s second key contribution to today’s economy – our True Value for Money movement, which started almost accidentally as a campaign launched in 2016. Through this movement, we worked with our customer base to rethink the value proposition of the goods and services we provide. As a result, today we produce nothing more than is required to enhance and improve consumer lifestyles and well-being. While we have not yet managed to convert all our product ranges into dematerialised services and experiences, we have certainly managed to get across the message that we are no longer selling ‘stuff’; we are enhancing people’s well-being overall.
Sustainability to us has therefore been a catalyst for innovation, not just in terms of the facilities and technologies – the smart grids and local generation technologies which now allow 80% of houses to run on local power sources, and the break-throughs in waste reprocessing and capture that have taken us so close to zero waste – but also innovation in defining what value means to the economy and how it can be delivered. In doing so, ConsumerGoodsInc has helped unlock significant financial rewards. And while those rewards have spurred fierce competition within the industry, new forms of collaboration have been a key in ensuring that we race to the top. Open source architectures make it easy to share non-competitive information across entire value chains, and we have developed targeted industrial ecosystems that combine competitive advantage with benefits to our wider community and society. We have also put the consumer at the core of the collaborative process to help us design more high-impact, high-value consumer experiences that can profitably fulfil needs and aspirations without costs to the global commons.
But the roots of our success, as I see it, are wider still. ConsumerGoodsInc, like many of our competitors, has invested boldly in thousands of small, experimental initiatives, models and promising technologies that we felt could transform our businesses. We constructed new languages and metrics to communicate more clearly with our boards and external investors, and we have found patient capital to suit our long-term commitments. We have been open about what has worked and what has not, since we knew the journey was about learning as well as succeeding. We have accepted that every CEO should be judged on his or her contribution to the firm’s entire stakeholder group, with the environment as a critical component. And we have been surprised along the way by some of the advantages of embracing an agenda for sustainable consumption – we benefit from greater levels of employee and customer loyalty than any other large consumer goods company. Together, we have helped build a ‘new normal’ for the world economy. And while smarter regulations from governments and incentives for sustainable investing have been essential to us achieving our goals, we are proud that it has been business, in partnership with consumers, investors and other stakeholders, which has both led the change and embodied the change to a more sustainable and successful path for the economy as a whole.
Finally, I want to point out that, despite the fears that many had in 2010, all this has been achieved without sacrificing established lifestyles, while bringing nearly all of the world’s 8 billion consumers online in all global markets, the very markets where many of ConsumerGoodsInc’s most innovative ideas were produced. It is an amazing honour to accept this prize, and almost ironic that, while shifting global perceptions of waste and value, we were merely doing our best to innovate our way to success in a fragmented and competitive market in a tumultuous landscape. It is even better to celebrate this success knowing that the model we pioneered has been accepted, adopted and often improved, reaching the lives of almost every citizen on the planet right now, without compromising the lives of future generations to come. Thank you.”
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