What ESG means for energy procurement


What ESG means for energy procurement

In a recent post on LinkedIn, I shared the following excerpt from a Financial Times article: 

“Soaring energy prices are currently precipitating an alarming decline in the competitiveness of Europe’s industrial energy consumers,” said the European Round Table for Industry in a letter to Ursula von der Leyen, president of the European Commission, and Charles Michel, head of the European Council. Without immediate action to cap prices for energy-intensive companies, “the damage will be irreparable.”

These ominous words reminded me of a recent discussion with Sourcing Industry Group’s Dawn Tiura regarding SIG’s research for an upcoming article she wrote.

In that article titled “Rising Energy Costs: Looking Beyond The Short-Term Pain To The Long-Term Gain,” Tiura provides some sobering statistics that should move our collective needles from ESG being the right thing to do to be the smart thing to do.

Getting Beyond the Insanity

An old saying defines insanity as doing the same thing repeatedly but expecting a different result.

While this latest energy crisis is justifiably creating fear among executives and politicians regarding a possible wave of “deindustrialization,” this isn’t the first time we have encountered the ravages of high oil prices. 

Referencing SIGs research, “over the past twelve months, the price per barrel of crude oil climbed from $83.75 to $97.13.” Currently, it sits at $95.17 per barrel. 

According to Tiura, it wasn’t that long ago, at the height of the pandemic and the start of social distancing, the price per barrel of crude oil “experienced a drop from $55.66 in February 2020 to $32.01 one month later in March.”

In a very short window of time, this represents a significant swing from $32.01 in 2020 to today’s high cost of $95.17 in 2022.

However, even though we are acutely experiencing the short-term pain of high oil prices, it isn’t the first time we have dealt with dramatic cost fluctuations. In 2008, SIG reported that the cost of oil was “a staggering” $143.95 per barrel. When the financial crisis hit, the price per barrel “dropped by as much as 70% from a January 2009 high.”

Time To Take the Off-Ramp

When it comes to traditional fossil fuels, price volatility is nothing new! Like the proverbial “Doom Loop” described by Jim Collins in his book Good To Great, we seem to view every dramatic price fluctuation as an isolated or siloed event. In other words, we approach each instance of volatility as a one-time reactive versus proactive situation. In other words, this is not the first time that energy costs have wildly fluctuated, and it will not be the last.

We really need to look for an off-ramp to another solution.

According to the SIG article, “renewable energy resources, or “renewables,” are naturally replenishing fuel sources that can replace coal, oil, natural gas, and nuclear power with clean, safe, reliable power.”

The benefits of the transition to renewables include the following:

  • Avoiding the inherent and obvious risks of fossil fuel price fluctuations and regulatory changes.
  • Attracting customers, partners, and employees interested in corporate responsibility.
  • Driving corporate growth by keeping pace with competitors.

In short, by strategically transitioning to renewable energy and pursuing targeted ESG objectives throughout the supply chain, organizations will become somewhat impervious to volatile shifts in future energy costs.

Visibility Is Critical

I want to stress that, like building Rome, the transition to renewables will not happen in a day – both figuratively and literally. We must still tap into the lessons from the past and leverage current capabilities and technologies to navigate through this current crisis.

In the previous Scoutbee article, “Achieving A Balanced Line-Of-Site Is The Key To Supply Chain Visibility,” the author discusses the importance of partnering with an “expert” technology provider. The expertise to which the writer refers is the ability to provide you with “in-depth and extended DeepSee” real-time insights into your supply chain.

You “can identify potential new and previously unknown supply partners to integrate and expand your supply reliability and resiliency through this increased visibility.” With greater supply chain “reliability and resiliency” comes the ability to address the acute short-term challenges that are now before you while simultaneously laying the groundwork for an actionable ESG strategy that will ultimately shield you from the volatility of an ever-changing energy market. 

In a future post, we will get into the specifics of proactively managing price increases through greater visibility.