5. Risks of clean energy transition
What are the primary risks and how can businesses safeguard their future?
While not quite a domino of disaster, over the past 15 years or so businesses have faced the 2008/9 economic crash, US-China trade tensions and tariffs, Brexit and, most recently, the global pandemic recession and ongoing supply chain headaches. Should anyone wondering, ‘what next?’, brace themselves for the challenges of the clean energy transition?
“If you look at what the climate changes are doing now with floods and drought and temperatures, which are so high, so ESG also is putting companies more and more responsible for those elements. So doing nothing is not an option. I'm sorry, but it's not an option. So only sustainable businesses in the end will survive.”
Dimitri Pelckmans, Atradius
Any period of change will bring an element of unknown and uncertainty. For some businesses, energy transition may just involve ensuring their energy, and possibly that of their supply chain, is sourced from clean energy suppliers. For others, clean energy transition will mean extinction. For example, manufacturers of transmissions for combustion engine cars will need to diversify or die, as car producers transition to building electric vehicles that don’t need to change gears in the same way. The majority of businesses will need to balance the books with a myriad of competing challenges. This is likely to include ensuring adequate liquidity while investing in new technology or adapting systems and processes. Businesses should assess the risk of offering credit terms to highly leveraged (transitioning) customers and suppliers. Will this risk to trade be greater than being associated with (non-transitioning) trading partners who may be tarnished with poor environmental reputations?
Risks of clean energy transition
In the end, only sustainable businesses will survive.
Trading during periods of uncertainty
When it comes to a question of risk, clean energy transition is not so different from any other period of change that has impacted global trade. According to Atradius risk expert, Dimitri Pelckmans, the key is to arm yourself with knowledge and take measured decisions based on the insights you gather. In other words, in terms of trade if you employ robust credit management processes, you can continue to operate with business as usual. This means know your market and know your customer. Understand the risks of your trade environment and take steps to mitigate the risks of offering credit terms by adjusting credit terms, taking out credit insurance, or seeking other credit risk mitigation tools as required.
“Only sustainable businesses in the end will survive, of course.” Dimitri Pelckmans, Atradius
Doing nothing is not an option
In response to a question about the primary risks facing businesses at this time, Dimitri Pelckmans said: “Doing nothing is not an option… Only sustainable businesses in the end will survive.” This is an important point on several levels. First, businesses that fail to take steps to monitor the changes in their markets, their supply chains and with their customers are likely to face increased risks. He advises businesses to take a proactive approach to credit risk monitoring and to work with partners, such a credit-insurers, to gather as much up-to-date information as possible. In addition, businesses that ‘do nothing’ in terms of energy transition itself, could also face increased risks. While early adopters of clean energy solutions may face higher prices than later adopters in a more mature market, this is by no means certain. Increased demand could drive higher prices and could also result in depletion of stock. Depending on the market and local legislation, late adopters may also face fines, sanctions or carbon taxes. As before, Dimitri advises arming yourself with knowledge. Understand what is happening in your sector and be prepared to act quickly if necessary. Robert Leportier, Head of Credit Insurance and Arcelor Mittal agreed. He made the point that businesses that “are not doing anything on decarbonisation, they [will not be] sustainable in time.” He recommended being alert to companies that have no objectives in energy transition and conscious of the limitations facing businesses operating in areas where energy costs or availability are insecure as these may struggle in the future. There is no simple equation or foolproof algorithm that can guide businesses on when to invest in clean energy transition, or how much. Certainly, it is important to avoid cost structures that are stretched too thin and to be wary of unproven technologies. However, as ING’s Gido van Graas indicated during the panel event, one possible way forward for businesses is to seek opportunities for collaboration. This could mean something like a community ground source heat pump where different companies on the same business park collaborate on the costs and the use of one innovation. Or it may mean working with governments or other grant-giving organisations on subsidies large capex projects.
Green ratings and energy risk assessments
When assessing a customer’s credit risk and, indeed, looking at your own risk profile, it is important to factor in reputation. As the race to net zero accelerates, businesses that are perceived to be doing nothing to lower their greenhouse gas emissions may find their reputations sliding downhill. This may cause consumer boycotts, or even the possibility of being blacklisted from supply chains where procurement protocols require evidence of carbon reduction. Although some ratings agencies are bringing green ratings to the markets, including Moody’s and Sustainalytics for example, there is not one agreed set of areas to assess. Perhaps because of this, green ratings may differ according to the parameters of the assessment. What is true, however, is that risk assessors and trade credit insurance firms, including Atradius, already look at areas such as environmental concerns and steps towards clean energy transition as part of creditworthiness assessments. This is part of the business-as-usual approach that Dimitri Pelckmans described. When he said “know your customer, know your market”, he was advocating developing an understanding of any developments, challenges, risks and opportunities. Clean energy transition can arguably apply to all of those parameters.