“The most effective approach to profit-making for companies is one which encompasses a purpose that goes beyond mere financial returns to investors by also incorporating social and environmental issues”.
Transforming the way energy is consumed
Growing challenges such as climate change, security of energy supply and resource scarcity call for rapid action at the national and international levels. Though developmental realities differ from nation to nation, there is a growing need for national stakeholders to respond to the rising global population by embracing new forms of thinking, acting and working across the board.
As demographic trends are expected to push the world’s population to 9.7 billion by 2050, natural resource constraints related to either availability or infrastructure are challenging established modes of consumption, from the individual level to global corporate supply chains. This requires all public and private parties to become increasingly resource-efficient, carbon-constrained and resilient moving forward. In turn, and as documented in the 2016 EY study entitled ‘The Upside of Disruption’, over 30 countries to date have taken steps to reform their energy markets in order to facilitate the increase of renewable energy production and introduce resource efficiency innovations.
Critically, the need to become resource-efficient is closely linked to energy efficiency. This is primarily because the transition from fossil fuels to renewable energy will be a lengthy process due to the extensive inventory of fossil-fuel-based systems, at both the generation, and application and usage levels. Consequently, the move towards resource optimisation has led to the adoption of energy efficiency as a key element of sustainability. As the International Energy Agency pointed out in its 2014 report ‘Energy Efficiency Indicators: Essentials for Policy Making’, this has also been accompanied by a growing recognition that enhancing energy efficiency is frequently the most economic, proven and readily available means of transforming the way energy is used.
Technology driving energy efficiency
The global utility market is shaping reforms in the energy sector, resulting in the need for active management of energy supply and demand by large-scale consumers. Such reform is exemplified in global utility markets that combine on-site renewable energy generation, energy management technologies and the optimisation of energy storage. As ‘The Upside of Disruption’ report demonstrates, concrete examples such as the evolution of the Internet of Things, in conjunction with machine learning in industrial energy, logistics and manufacturing systems are giving rise to new levels of energy efficiency and performance optimisation around the world.
In Malaysia, the National Energy Efficiency Action Plan 2016-2025 (NEEAP) devised by the Ministry of Energy, Green Technology and Water (KeTTHA) is directly addressing issues pertaining to the management of energy supply and demand. The plan identifies energy efficiency as crucial to mitigating the losses that occur across the energy value chain, including those that arise at power generation plants, during power distribution and transmission, and with regard to energy use associated with the extraction and transportation of fuels. Accordingly, the NEEAP stresses that saving one unit of energy on the demand side can save between three and four units of primary fuel.
A practical example of Malaysian efforts to boost energy optimistation and efficiency is afforded by the launch of the Home Energy Report (HER) by KeTTHA and Tenaga Nasional Berhad in October 2017. The HER is an energy efficiency programme aimed at engaging and empowering customers to manage their home energy use while simultaneously reducing monthly electricity bills. The scheme is innovative in that it utilises behavioural economics and data analytics in order to achieve its energy efficiency objectives.
Ongoing advancements in technology, along the lines of the HER, are critical to the success of wider sustainability efforts in the private sector and on the demand side. For example, the convergence of energy, batteries, smart technology, logistics and transport is fostering the emergence of innovative and networked solutions that are leading to greater levels of efficiency in transportation industry. Significantly, pressure in that particular sector is not only coming from governments, but also from customers who are increasingly demanding that their transport and logistic providers demonstrate their environmental and social responsibility credentials.
Similarly, electric vehicles, connected and autonomous vehicle technology and ride-sharing platforms are transforming the way customers perceive and embrace mobility. In fact, smart technologies have created smart ‘systems of systems’ that are yielding increasingly resource-efficient and resilient infrastructure.
Energy strategy formulation
In the private sector generally, in Malaysia and beyond, the benefits of energy efficiency cut across three dimensions of price, volume and time. Such benefits enable businesses to pay less for each unit of energy, to utilise less energy, and to shift energy use to non-peak periods. Indeed, company concerns related to energy consumption go beyond managing the impact to their bottom lines since genuine benefits help to drive the implementation of a broader, more targeted strategy that does not solely focus on energy costs.
Formulating a company-specific energy strategy is becoming increasingly important. In an EY survey of senior executives from 100 energy-intensive companies with revenues of over US$1 billion each, 44 per cent of respondents agreed that issues of energy strategy are discussed frequently at company board meetings, while 69 per cent concurred that energy strategy decisions are taken centrally. The findings from this study suggest that an energy strategy is now a business imperative in terms of building competitive advantage through innovative energy-efficient and low-carbon projects and processes.
One element of such an energy strategy through which companies are able to achieve energy savings is via the implementation of an energy review. This approach is noteworthy because it offers businesses a threefold benefit scenario: first, the opportunity to reevaluate operations; second, to drive increased competitiveness through reduced overheads; and third, to ensure greater business resilience as a result of decreased exposure to sharp energy-price changes in potentially volatile global markets.
Rising demand for nonfinancial disclosure
Beyond energy strategies, nonfinancial disclosures are a form of reporting that are closely linked to driving corporate value. These disclosures incentivise companies to establish targets and goals that go beyond solely economic gains to include the measurement of environmental and social performance. Essentially, this principle is based on the premise that if something is formally measured, it is formally managed.
The 2017 EY study, ‘Is Your Nonfinancial Performance Revealing the True Value of Your Business to Investors?’ shows that environmental and social matters afford both risks and opportunities. As a result, these two concepts are becoming an increasingly important factor for investors who are seeking long-term benefits from their investment in conjunction with lower investment risks.
In addition, investors are demanding more information in relation to nonfinancial information. According to EY research, 82 per cent of 320 institutional investors surveyed contend that Environmental, Social and Governance (ESG) matters produce real and quantifiable impacts. There are also expectations that corporate sustainability agendas should be driven from the top-down, with more than 92 per cent of survey respondents indicating that CEOs should establish long-term, board-reviewed strategies to that effect on an annual basis.
Demand for sustainable investment is being driven, in part, by millennials who prefer to invest according to personal values. That is significant since the 80 million people that make up this particular age group in the U.S. alone are expected to inherit more than US$30 trillion of wealth during their lifetime and, as a consequence, the demand for sustainable investment will continue to grow.
In turn, fund managers are increasingly allocating resources to the development of products to capture this emerging client segment. The 2017 EY study ‘Sustainable Investing: The Millennial Investor’ has found that firms could lose between 70 to 80 per cent of their assets when the ownership of these financial products transfers to the new generation. Therefore, it will be those wealth and asset managers who are able to successfully supply millennials with value-based investment options that will be in the strongest position to attract new resources to their firms.
In the Malaysian context, listing requirements have made sustainability reporting an obligation whereby public-listed companies (PLCs) are required to disclose a narrative statement on their ESG management strategy, including associated economic risks and opportunities. In addition, the FTSE4Good Bursa Malaysia Index, introduced in December 2014, is designed to showcase companies that demonstrate leadership with regard to ESG risk management. As of mid-2017, 43 companies constituted this list, comprising PLCs from across the small, medium and large market capitalisation segments.
A 2015 study compiled by Oxford University and Arabesque Asset Management, ‘From the Stockholder to the Stakeholder’, found that 88 per cent of reviewed sources showed that prudent ESG practices at companies generate improved operational performance. The same report concluded that 80 per cent of the reviewed sources demonstrate that company stock performance is positively influenced by good sustainability practices. This evidence suggests that the most effective approach to profit-making for companies is one which encompasses a purpose that goes beyond mere financial returns to investors by also incorporating social and environmental issues.
Consequently, pursuing energy efficiency practices should be seen as one of the pathways towards meeting the global sustainability challenge. Since energy is a fundamental component of all forms of businesses and operations, re-imagining the way in which it is consumed can pave the road to increased profitability, sustained long-term business, optimised corporate strategies, and the ability to serve an increasingly extensive customer base.
Note: The views reflected in this article are those of the author and do not necessarily reflect the opinions of the global EY organisation or its member firms.