If the cost of living crisis wasn’t enough to keep customers at home, companies face a threat from within too: their own costs. Crippling energy prices are already pushing many to the brink, with a staggering rise in bankruptcies reported in the UK alone. According to the country’s Insolvency Service, 5,629 companies went bust across England and Wales between April and June 2022 – up 13% on the previous quarter and an astonishing 81% on the same period last year. The government, for its part, has quickly blamed energy prices and staff shortages, adding that nine in ten of those insolvencies were voluntary. That may be so – but those 4,908 liquidations represent the largest amount in a single quarter since records began in 1960. It represents, in short, a bleak prelude to the coming winter months.
Meeting the energy challenge
Just hours into her short-lived premiership, Prime Minister Liz Truss set out a raft of measures intended to help British businesses navigate the coming months. For the first time, firms were offered guarantees on energy costs – at least on the amount they would pay per kilowatt hour. Regardless of the guarantee, though, it didn’t address the issue of energy supply: potential black or, more likely, brownouts, the reduction of electricity to certain areas or industries to counter the risk of a wider break in supply.
The situation isn’t any better across Europe, where governments are pumping hundreds of billions of euros to try to avert all-out disaster. In September, the Brussels-based think-tank Bruegel estimated that as much as €280bn had been allocated to lessen the impact energy bills will have on customers in the EU, and to support the continent as it faces a winter of energy shortages.
Policies that ration energy have also been floated across Europe’s largest economies, while business owners are already speaking of the devastating impact prices are having on their profits, let alone the damage energy restrictions might have – either directly or through their suppliers.
For Bavan Nathan, the energy crisis that businesses are facing tells its own story of how risk management is changing. He says events of recent years – the pandemic, supply chain breakdowns, the war in Europe and now the energy crisis – have “changed the dynamic” of risk management, particularly due to their frequency. Nathan has considerable experience in business audit and risk management, spanning almost two decades, having served as internal audit, risk and compliance services leader for KPMG, and more recently as chief audit and risk officer at Tesco.
Changing risk
“In the past, companies have been very much attuned to responding to operational challenges, financial challenges and regulatory challenges, if you think through the ‘risk lenses’,” explains Nathan. “But what you’re talking about now are massive macro, strategic, global issues and risks that are impacting on them directly and almost daily.” Among them are issues of climate change and sustainability, food availability, skills and even general labour shortages, to say nothing of the conflict in Ukraine and the ongoing energy crisis. Perhaps unlike ever before, however, multiple challenges are happening simultaneously and are indeed intertwined – what happens in Ukraine, for instance, impacts energy and food supplies too.
“You’re already starting to see the big industrials and manufacturers manufacturing and stockpiling their products.”
199,928
The amount of natural gas in cubic metres that Russia exported in 2020.
OPEC 2020
In relation to the looming energy situation businesses will likely be in, Nathan says risk managers are providing support to their senior leadership. A tangible impact is an increase in scenario planning, where they aggregate data, both internal and external, structured and unstructured to, as he puts it, “provoke the conversation” among senior leadership. This, Nathan adds, would typically have happened once or twice a year at best – but in today’s climate it is happening more frequently. Similar to those interrelated geopolitical developments, meanwhile, what happens in energy markets may not only affect a company’s bottom line. Less energy-intensive sectors – particularly customer facing ones – could face a downstream impact scenario that increases their costs, interrupts their supply chains and ultimately stifles their ability to function properly.
“You’re already starting to see the big industrials and manufacturers manufacturing and stockpiling their products,” says Nathan. “Some of them are pivoting to actually reduce production levels and, as a result, their energy consumption, and some have set in motion their detailed contingency plans on the basis that if they can’t manufacture, [should they] scramble to procure from alternative sources?”
40%
The minimum level of normal supply – without interruption from pipeline closures – Germany needs of Russian gas this winter if it is to ‘narrowly’ avoid fuel shortages.
Kiel Institute for the World Economy
14%
The percentage of UK businesses that said they could not obtain the materials, goods or services they needed from partners in the EU in January 2022.
Institute for Government analysis of ONS data
Certainly, these worries are reflected in the behaviour of companies and business organisations across the continent. In Norway, for instance, a major fertiliser maker announced it was temporarily cutting ammonia production in half due to soaring energy costs. Further south, paper makers in Italy and Austria were forced to stop manufacturing altogether, crippling an entire industry. For Pro- Gest, a mill near Venice, the reasoning was clear in the most fundamental economic sense: the selling price of a tonne of paper ended up less than the energy costs needed to make it.
Chain reaction
Yet if the impact energy disruption could have on supply chains is significant, supply chain problems are hardly new. In recent months, in fact, they have become increasingly common. In the UK, supply interruptions hit the headlines in the second half of 2021, with businesses reporting their lowest stock levels in almost 40 years, according to the Confederation of British Industry. The Office for National Statistics (ONS) added that a survey of businesses found almost a quarter (23%) were unable to source goods or services from the EU, with 15% even struggling within the UK. The impact was quickly felt by the public, with ONS data suggesting that in the final weeks of October, one in six adults had struggled to get essential food items.
It was arguably a prelude to what might follow. In August, it was widely reported that Number Ten had asked the food and beverage sector to identify potential risks to supply in the event of winter power outages. Although the government did not confirm the report, ministers acknowledged the potential for disruption to power supplies, and alluded to contingency plans. A Bloomberg report even suggested the government was planning for a series of power outages over a four-day period in January.
Nathan says companies like Tesco will already know where their pinch points might be, where they can find secondary and tertiary sources should their primary suppliers fail – and how customers might react to shortages. This practice, he says, has become far more organised over recent times. Coupled with shifting economic winds, he adds that the need to be prepared is becoming ever more acute. “Unlike a strategic planning process in the past – where it’s three, six, even 12 months – it’s looking and feeling like it’s almost daily at the moment, almost a day-to-day crisis management.”
And if these shorter-term adjustments are certainly important, there is equally plenty of evidence that major corporations are looking ahead as well. Perhaps unsurprisingly, technology can be a major boon here, with Adidas aiming to automate 20% of its production by 2023, sharpening its internal supply chains along the way. Nike, for its part, is moving in a similar direction. Apart from exploiting automation, the Oregon conglomerate has expanded its inventory by over 40% – probably a wise choice in the face of continuing supply chain uncertainties.
Embracing risk (managers)
If clever use of technology is one path forward, Nathan says businesses have another area that is under their control: the role of the risk manager. In relation to energy, for example, the role of risk managers has so far been limited, something he laments. But asked if they can be more involved, Nathan’s response is clear: “Absolutely.” He says that, right now, involvement stretches only to the level of exposure, leaving actual decisions to be made at an operational level.
Shifting approaches highlights an area Nathan is especially excited about: a business-wide cultural shift in the way risk managers are engaged and used. He says risk managers are good at provoking a conversation, offering different perspectives and helping colleagues across the business view a problem through a different lens – something not done enough in today’s business environment.
This is only possible, he adds, if a company’s corporate culture changes too. “My philosophy at Tesco was to provoke conversation,” he says. “My team and I prepared briefing materials that said ‘you should be worried about this, but you could be taking more risks here’. Then the conversation immediately starts with colleagues saying ‘I agree with you’ or ‘disagree with you’ – then it becomes a valuable exercise. So it comes down to the culture and how you manage it.”
Nathan believes that as much as risk managers need to understand what keeps their colleagues up at night, others across the business need to better understand the role of the risk manager, and how they can leverage their skill sets – otherwise, they risk suffering a disconnect. “It may not be parallel, it could be sequential, but it’s needs-based and, all too often, if you don’t get the partnering right, that’s when the disconnect happens.”
Perhaps partly the result of global events, Nathan believes there are signs of a change coming. “I’ve had an executive ask ‘where will we be in five, ten, 12 years from now – quantify what the emerging risks look like and what they mean for us.’ That’s a great place for us to be as risk managers. It’s a strategic role to play.” All the same, the onus isn’t all on the business and its strategic and operational leadership, Nathan warns. Risk managers have to be proactive and earn the right to participate by provoking conversations, building relationships and showing their worth.