Our planet is facing an uncertain future. The impact of climate change has reached a point of crisis, and it is up to the organizations of today, and to all of us, to take action.

This week our guest on the Outthinkers podcast, Michael Raynor, author of The Strategy Paradox and co-author of The Innovator’s Solution, emphasized the immediate need for companies to incorporate the climate crisis into their strategy. Also this week, our network of chief strategy officers, leaders from $1B+ companies all over the country, was joined by Chris Marquis, Professor in Sustainable Global Enterprise at the Cornell SC Johnson College of Business and author of Better Business: How the B Corp Movement is Remaking Capitalism. Chris’ work focuses on how organizations are turning ESG (Environmental, Social, and Corporate Governance) practices into a powerful differentiator and competitive advantage.

Today, we’ll focus on the E of ESG — the environment — and how three trends in the energy industry are leading the way toward a more hopeful future.

The urgency of the climate crisis 

In this week’s podcast episode, among his reflections on strategy, Michael shared that the climate emergency is the only thing that matters.

“It’s not something to incorporate into what we do. It’s something to constrain and override pretty much everything we do,” he said.

Michael is a managing director with Deloitte LLP, where he is part of the team working on developing and implementing Deloitte’s two-track response to the global climate crisis. The first track focuses on reducing and eventually eliminating the firm’s carbon emissions, while the second track comprises a portfolio of efforts designed to mobilize larger ecosystems of organizations — commercial enterprises, NGOs, governments, etc. — to generate an impact on the scale of the problem.

Three trends in the energy industry 

While the impacts of climate change are becoming more apparent — snowstorms in Central Texas and dangerous droughts in California — the global demand for energy has never been higher. In developing countries, growing populations, increased access to energy sources, and higher standards of living are contributing to increased energy usage. The global energy demand is expected to rise 20% by 2040. The energy industry has realized that urgent action is required, and has begun to shift its strategies based on three key trends:

  1. Heightened focus on renewable energy sources: In 2020, despite pandemic-driven economic hardships, $303.5B was invested in renewable energy, up 2% from 2019. Renewable energy projects, like solar and wind, that faced a 10% decline in growth in 2020 are expected to rebound in 2021. The commissioning of two large hydropower projects in China in 2021 is driving the rebound in renewables. Green hydrogen, key to reducing global CO2 emissions, is expected to become cost-competitive.
  2. Green regulation and incentivization: This year in the US, a new administration under a new party brings attention back to environmental sustainability. The US has re-entered the Paris Agreement, and President Biden has announced plans for nearly $2T in green infrastructure and clean energy investment. Post-pandemic US economic stimulus packages aim to free up state budgets so that they can pursue clean energy packages. The US is also reported to be exploring increasing the social cost of carbon, which is around $50 US per ton. The UK government has laid out extensive plans for reaching climate targets. The EU has also committed to the green economy.
  3. Decline in production and use of fossil fuels: Prior to the COVID-19 pandemic, the oil industry was already struggling due to pressure to shift toward renewable resources. The last year has made the situation dire. Investor concerns about physical, policy, and liability risks are making markets challenging for major oil companies. BP, Total, and Shell have announced strategic shifts toward renewables. Electric generation from coal has decreased 32% in the past four years. The international demand for coal is expected to continue declining, and several US coal producers have closed their mines permanently. In 2020, Blackrock, the largest asset manager in the world, announced that it would exit investing in coal production. Coal demand has reached its peak already and demand for oil and gas is expected to follow the same trajectory in 2029 and 2037, respectively.

Applying ESG practices across industries 

These shifts are not only relevant for the companies in the energy industry. According to Chris, ESG practices are vital for anyone in business. Companies who focus on them are creating a more resilient, competitive, and sustainable form of capitalism. Research show that, in the near future, we may see scenarios where stimulus packages are tied to companies who provide evidence that their investment portfolio is environmentally sound.

Enrico Viale, Head of Enel North America said, “Companies who commit to best practices in energy, emissions and resource usage will see new opportunity as corporations increasingly look to cut emissions from their entire value chain.”

Suppliers should be prepared to transition to sustainable business practices and meet a higher standard of transparency and climate action, or they will fall behind.