Energy transition driving rising uncertainty for risk professionals

A permanent and volatile shift in the global energy ecosystem is forcing businesses to restructure energy strategies as they tackle the twin challenges of rising energy demand and climate change, Airmic delegates heard in a panel debate on managing growing uncertainty, moderated by Airmic’s Alex Frost, head of partner and markets.

The Iran conflict has driven energy security to the top of the business agenda. Oil prices have fluctuated by approximately $50 a barrel since the crisis began while the world is witnessing a fundamental shift in the geopolitics of energy supply chains, according to Sean McGovern, CEO UK and Lloyd’s, AXA XL.

“The Middle East conflict is a profound macroeconomic shock to the world,” he said. “We are going to be living with the repercussions for many years because we're seeing a realignment geopolitically but also economically, particularly around energy supply.”

At the same time, AI, digitisation and electrification are driving a strong rise in energy demand globally. In the US, for example, data centres currently account for around 5% of its electricity consumption – a figure that is expected to double by the end of the decade.

The combination of rising energy insecurity and growing demand is shifting boardroom conversations about climate change. As businesses seek to diversify and increase the operational resilience of their energy supply chains, the focus has shifted from energy supply to energy mix, said McGovern:

“It's not a case of ‘we are now transitioning to renewables’. We have to recognise that oil and gas are going to be part of the mix of energy supply, at least in the short to medium term.”

However, while the Iran conflict has prompted some governments to increase oil and gas production in the short term, McGovern believes the conflict will speed up the road to renewables in the long run:

“The Iran war is accelerating the need for people to transition to renewables. And it’s accelerating the need for everybody to start making some choices and investments,” he said.

The power of small change

The Iran conflict is part of a “volatile cocktail” of risks facing risk professionals, each of which is moving at an accelerating pace, observed Clarissa Franks, head of retail UK and Ireland at Lockton UK.

Energy insecurity, cyber security and supply chain disruption are the three principal challenges impacting businesses and increasing costs today, she noted.

“The process of looking at each risk in isolation has changed permanently. The challenge our clients face is not just understanding the connectivity but the amplification of all these different risks.”

Making small but carefully considered changes can have a powerful and positive impact over time, Franks advised businesses seeking to navigate this “overwhelming” risk landscape.

“It is important for us to celebrate, recognise and value the impact of incremental change in risk management,” she said. “Continuously, proactively making improvements and raising the profile of risk and resilience in an organisation can add up to huge transformational change.”

The problem with efficiency

Businesses should also shift away from focusing purely on risks to considering their organisation’s vulnerabilities, argued Nina Arquint, CEO UK & Ireland at Swiss Re Corporate Solutions.

“We cannot predict risk given the interconnectedness that we’ve talked about. That’s why it’s so important we think about where your key vulnerabilities lie. And that leads us to scenario thinking – and that’s the fundamentals of risk management.”

Efficiency and resilience can often pull in opposite directions, she noted. During the prolonged period of relative stability, many businesses prioritised efficiency and cost reduction.

Over the past decade, for example, organisations adopted 'just-in-time' supply chains, reducing inventory and lowering costs. While this approach improved efficiency, it also left businesses more exposed to supplier disruptions when shocks occurred.

Today, this is a luxury most organisations cannot afford. According to Arquint: “We're now living in a world where efficiency is not what might help you to be successful in the future.”

Businesses are prioritising earnings stability and predictability, she noted, and when there is a trade-off, resilience takes priority. “If you look at these significant shifts, I think that topic of resilience really becomes so absolutely core to everything.”