"Understanding a company's full exposure to energy and environmental risks will in many cases be a - if not the the - decisive factor determining its long-term viability."
Yet another interesting bit of information I came across over the summer was some research from McKinsey & Company.
In the June edition of McKinsey Quarterly, the authors behind a survey of more than 1,400 executives around the world discussed the importance of key global trends, their impact on business and the need for pro-active trend-spotting, issues management, etc.
"The fact is, trends matter. Systematically spotting and acting on emerging ones helps companies to capture market opportunities, test risks, and spur innovation. Today, when the biggest business challenge is responding to a world in which the frame and basis of competition are always changing, any effort to set corporate strategy must consider more than traditional performance measures, such as a company’s core capabilities and the structure of the industry in which it competes. Managers must also gain an understanding of deep external forces and the narrower trends they can unleash. In our experience, if senior executives wait for the full impact of global forces to manifest themselves at an industry and company level, they will have waited too long."
McKinsey's research identified five global trends expected to define the coming era, including:
- The Great Re-balancing - the shift in the nexus of the global economy from developed to emerging economies.
- The Productivity Imperative - the need for among developed-world economies for pronounced gains in productivity.
- The Global Grid - impacts of increasing cross-border flows of capital, information, goods and people on the global economy.
- Pricing the Planet - the effects of growing resource shortages and competition.
- The Market State - the role of national entities in a globalized world.
The most interesting/relevant trend from an energy point of view is "Pricing the Planet", i.e. McKinsey's take on the role of resources and resource shortages in the future economy.
"A collision is shaping up among the rising demand for resources, constrained supplies, and changing social attitudes toward environmental protection. The next decade will see an increased focus on resource productivity, the emergence of substantial clean-tech industries, and regulatory initiatives."
McKinsey identified three forces that will affect what resources we use, how we use them and what price we will need to pay for them, including:
- Growing demand - projections for global economic growth over the next decade suggest that demand for natural resources will rise by at least a third. About 90 percent of that increase will come from growth in emerging markets.
- Constrained supply - as easy-to-tap, high-quality reserves are depleted, supply will come from harder-to-access, more costly, and more politically unstable environments.
- Increased regulatory and social scrutiny - there is an emerging global consensus focused on environmental sustainability. While climate change is the most visible battleground, other issues loom: water scarcity, pollution, food safety, and depletion of global fish stocks, among other things. For businesses, this new sensibility will lead to stricter environmental regulations and growing demands from consumers and employees that companies demonstrate greater environmental responsibility.
McKinsey's research is really a business-focused take on what has been a long line of research and opinion tattempting to understand the limits to human population growth. Beginning with Malthus in the early 19th century, the Club of Rome in the 1970's and more recently the exploration of "planetary boundaries", there as been a regular dialog on the limits to how much our population can growth and obtain the resources needed to support us. McKinsey is looking at the globalizing economy and what it means for business, but it builds on a well established foundation.
McKinsey's research applies to resources in general. However, looking specifically at energy, the authors offer two views.
One speaks for the status-quo:
"The fossil fuel consumption infrastructure is so large that, despite recent clean-energy investments, the ratio of fossil fuel to renewable and nuclear power use in 2020 will still be 80 percent, as it is today. ....... Despite huge investments in clean energy, in 2020 the ratio of fossil fuel consumption to renewable and nuclear power will remain largely as it is today—roughly 80 percent. No realistic scenario will move the needle: the embedded resource infrastructure is so large that any transition away from fossil fuels will take decades."
But the other looks at the key role clean tech will have for new energy investment:
"But the view changes dramatically when you look beneath the supply stock to the flows of new investment. Suddenly, clean tech emerges as one of the next decade’s biggest growth industries. Upward of $2 trillion will probably be invested in building clean-energy capacity globally over the next ten years. In the United States, 90 percent of this expanded capacity will be in renewable or nuclear energy—66 percent in the European Union and China. Before 2020, this investment will probably create a clean-tech industry generating well over $1 trillion a year in sales."
As these trends come to affect energy and other resource availability, McKinsey predcts a changed global economy, one in which resource productivity will be key. To achieve that goal, the authors offer a range of prescriptions. However, the philosophy that they are espousing seems best summarized as "in uncertain times, the need to plan for widely differing outcomes is the one clear certainty".
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