Shaping the energy business strategy of the future: Two crucial changes for the next two decades

The global energy sector is going through significant and constant changes. The next two decades are expected to be critical, with undoubtable geopolitical shifts and complex challenges that will accelerate the reshaping of the sector. This new landscape demands contemporary stakeholders to look beyond traditional approaches.

It cannot be overstated that economic development depends on a growing energy supply. Sustainable development depends on whether it is renewable.

This is a reminder of the critical significance that energy plays in everyday life and in achieving a sustainable future through flexibility and adaptation. Rising concerns over climate change, volatile commodity prices, global interdependence, and changing leadership dynamics across nations will require the energy sector, both public and private, to adapt, embracing innovative, collaborative strategies to tackle these multifaceted changes. Organizational management must be thought out anew.

A SHIFT IN CORPORATE GOVERNANCE STRATEGY

Political frameworks and sustainable policies have become increasingly determinant for businesses and non-profit organizations seeking effective impact, as well as a broader sense of mission. To manage the challenges of the next two decades[1], organizations must consider innovative approaches capable of redefining energy leadership as a catalyst for real impact.

Two types of executive functions must be combined in this approach, namely the position of Chief Political Risk Officer (CPRO), with a global affairs orientation, and the Chief Sustainability Officer (CSO), with a sustainability mission. These roles might already exist, but they demand levelling up the profiles, signalling the organizations’ awareness of the critical nature they will assume in coming decades.

The energy sector may turn challenges into opportunities by investing in such an innovative governance strategy, pioneering new benchmarks for responsible and forward-thinking approaches in other sectors.

But why a CPRO? A disruptive global affairs strategy can redefine action plans in line with global energy transition and sustainability goals, and the CRPO can play a crucial role in navigating the complexities of contemporary political landscapes. That is not to say that the CPRO should be a political actor with limited ties to the sector. They shouldn’t. Instead, they should be, first and foremost, skilled and innovative executives, bridge-builders. Grasping the complexity of corporate governance and knowledgeable of the energy sector, they should be capable of ushering a new era of collaboration between the public and private camps that, in fact, frequently share significant common ground.

Why now? Lack of communication raises invisible walls between public and private spheres. Public opinion often creates a narrative around the incompatibility between the objectives of the corporate bottom line and the public sector’s goals for common good, as if these were opposing perspectives. This can disable any inclination from the two sides to explore collaboration, when instead, smart business strategy looks beyond the immediate bottom line, towards long term business viability, which aligns with principles of global sustainability at environmental, social, and economic levels, and therefore, with public sector goals.

The COVID 19 pandemic, the Russian aggression against Ukraine and the escalation of tensions in the Middle East following the war in Gaza, create both a complex atmosphere for global coordination and an increased need for such coordination, reducing the culture of antagonism that negatively impacts mutual goals. A more balanced and productive relationship between public and private sectors can be achieved by recognizing each other’s strengths, discovering common ground, and encouraging cooperation.

Traditionally, energy businesses and public administration have prioritized security of supply, operational efficiency, technological improvements, and financial strength. A CPRO is an asset to understand geopolitical matters that create risks to energy markets[2], reducing potential losses and capitalizing on opportunities, while safeguarding institutional reputation. According to EY’s Geostrategic Outlook for 2024[3], the energy sector is contributing to the geopolitical multiverse, with more countries becoming energy producers. Business strategy must navigate the paradoxical effects of inflation in the slowing down of green policies’, combined with a need to accelerate energy security and diversify sources and suppliers to avoid dependency on foreign adversaries. The CPRO can guarantee that a company’s interests line up with national and international energy policy by building bridges and relationships with governments, legislators, and other stakeholders around the world. This must happen without fear of conflicting interests, but rather transparently aligning them, with the ultimate objective of assisting the implementation of green public policy and boosting economic development.

Companies and organizations that adopt this management strategy will not only ensure their resilience – by identifying untapped markets and expanding into emerging economies -, but they will also guarantee a positive impact on the world’s sustainability path.

The CSO, on the other hand, is not a new position, but surely one with new challenges in a time when sustainability becomes synonymous with survival. One of the central findings of a 2021 global survey, conducted by the Institute of International Finance (IIF) and Deloitte[4] in the financial services sector, is that appointing a CSO and giving them “strong executive support as well as a broad, strategic mandate”, provides “benefits from having at the top of their organisations a “sense-maker in chief””, elevating the role to a new status.

Why has this executive role been gaining new momentum? The CSO’s main responsibility is to fully incorporate sustainability into the operations and culture of the company. The CSO takes on the crucial role of implementing a disruptive strategy for sustainable practices. This is especially true in times of urgent and broad accountability regarding sustainability reporting and performance tracking. By integrating sustainability into all management aspects – people, profit, and planet – the CSO departs from an auditing and recommendation role in conventional hierarchical structures to promote an innovative, fully integrated, and forward-looking culture with all activities of the company/institution.

A CSO and an elevated sustainability strategy reinforce and empower the work already done within sustainability departments, constantly questioning the accepted wisdom of the day and promoting cutting-edge solutions, technologies, and procedures. This will be a catalyst for change in the market, setting the organization apart by making a positive impact while driving wider prosperity. In turn, pioneering organizations will more likely attract and retain environmental and socially conscious talent, which no longer settles for traditional job benefits and requires a sense of purpose.

The significance of sustainability within global affairs has been advocated by several European and international leaders and opinion makers. The President of the European Commission, Ursula von der Leyen, stated multiple times that: “The private sector can be a powerful force for good when it comes to global affairs and sustainability. By adopting sustainable practices and investing in green technologies, companies can lead the way in creating a greener and more prosperous world”. This outlook is further reinforced in the European case by EU Directive 2022/2464 on corporate sustainability reporting, requiring from this year on the disclosure of business strategy, business model resilience and sustainability risks strategy[5].

The need for C-level executives, specifically a Political Risk Officer and a Sustainability Officer, becomes crucial to guarantee the private sector’s contribution to accelerate the Fit for 55 Package with the enforcement of updated NECPs, without which the EU’s 2030 climate target is at risk, as highlighted by the alert from the European Scientific Advisory Board on Climate Change this January[6].

In both the public and private sectors, top level geopolitical and sustainability expertise is essential to overcome obstacles and ensure effective policies are in place.

This includes a broad and global vision to tackle the socio-economic fallout from the energy transition. A progressive and just climate policy is a one-way road. Without it, we risk growing inequalities to trigger more social unrest, widen the presence of extremist ideologies in the political spectrum and lead to unforeseen effects in the overall economy, hindering its ability to bring about societal progress. Business strategies can contribute to either pour gas in this fire or literally bring the temperature down and be key players for a sustainable future. And this can only be a reality if both geopolitical and sustainability strategies are high on the agenda and sitting at the executive table.

AN AGILE AND INNOVATIVE PUBLIC-PRIVATE BRIDGE FOR THE ENERGY SECTOR

National Energy Agencies stand out as actors who can act as catalysts in policy implementation, creating synergies between public and private actors, and a better multilevel dialogue between national and local levels.

National Energy Agencies are at the centre of the energy and climate transition and have a privileged position to ensure coherence between the development of public policies and market instruments. They can engage with businesses and sectoral associations to ensure private sector commitments towards public policy goals. They engage in research and innovation with a variety of stakeholders, making for a more informed political decision. They are engaged in international networks, such as the European Energy Network (EnR) or the Mediterranean Association of National Agencies for Energy Management (MEDENER), allowing for a close international cooperation, aligned with similar challenges. They promote better multilevel governance, improving coordination between national and local actors, regarding climate action.

National Energy Agencies are therefore effective hubs for this public-private collaboration which is the only way to ensure a swift and effective transition to a sustainable energy future.

CONCLUSION

There´s a lot of work to do, which requires greater commitment from all stakeholders. Regarding sustainable development in general, and the energy sector in particular, the road is, in the words of the Beatles, a “long and winding” one. Public and private organizations, working together, can realize common objectives and accelerate a just energy transition.

National Energy Agencies can mediate this public-private collaboration, assisting public policy development and implementation, while connecting to the private sector to foster strategies that positively contribute to it.

As organizations go through a transformational journey to maintain their future relevance, they must adopt new managerial approaches to address critical global issues. Having a CPRO that can navigate wild and uncharted geopolitical waters, while cooperating with a CSO that can leverage disruptive approaches to economic, social, and environmental affairs is no longer optional or just “nice to have”. It’s now a requirement, a “must have”.

[1] As highlighted by the World Economic Forum in the report The Global Risks Report 2023, “The next decade will be characterized by environmental and societal crises, driven by underlying geopolitical and economic trends.” (p.7) https://www3.weforum.org/docs/WEF_Global_Risks_Report_2023.pdf [Accessed January 28, 2024]

2] The Global Risks Report 2023, from World Economic Forum, underlines geopolitical matters as strategic and a “must consider” kind of risk.

[3] McCaffrey, C.R., Jones, O., Krumbmüller, F. (2023), 2024 Geostrategic Outlook, EY Report, December 2023 https://www.ey.com/en_gl/geostrategy/2024-geostrategic-outlook [Accessed January 28, 2024]

[4] IIF/Deloitte (2021) The Future of the Chief Sustainability Officer

[5] Either because they are already obliged according to the EU directive, or because they are part of the supply chain of other institutions where sustainability accountability is already a reality.

[6] ESABCC (2024) Towards EU climate neutrality Progress, policy gaps and opportunities – Assessment Report 2024, Luxembourg, Publications Office of the European Union doi:10.2800/216446 https://climate-advisory-board.europa.eu/reports-and-publications/towards-eu-climate-neutrality-progress-policy-gaps-and-opportunities/esabcc_report_towards-eu-climate-neutrality.pdf