By Gil Forer, Global Cleantech Leader, Ernst & Young
Commodities and natural resources drive roughly 10% of global GDP and underpin the performance of most industries. Perhaps even more significant to GDP, however, would be the impact from constraint on the availability of a critical commodity or resource.
The world’s resources are finite; easily accessible energy sources and commodities are giving way to harder-to-access and more costly alternatives. The tension between constrained supply and rising global demand—driven by population growth, urbanization, and increasing wealth in emerging markets—will continue to rise.
Energy security concerns, rising and volatile energy prices, growing food challenges, and water scarcity create new risks and new opportunities that few businesses can afford to ignore.
In this context, there is a compelling case for elevating corporate resource management to the highest levels of executive management—call it a Chief Resources and Energy Officer (CREO).
Rising Risks and Value Creation Opportunities
Corporations face a set of resource and energy risks that are becoming more acute:
- Weaker financial performance due to resource and energy price increases and volatility
- Business disruption resulting from resource or energy insecurity
- Brand equity erosion because stakeholder expectations related to resource and energy use have not been met
- Regulatory compliance costs and potential penalties
Companies in different sectors are at various stages of reckoning with these challenges. Those in resource and energy-intensive industries like mining and transportation have identified and responded proactively to the risks. Companies in other sectors—such as consumer products—have been slower to recognize their resource and energy risks, because these derive primarily from their supply chain or customer base.
Service sector companies face less direct exposure to resource issues, but are highly exposed in terms of second-order risks. Their clients’ prospects can suffer if energy prices spike or a key resource is suddenly in short supply.
The insurance industry is taking a proactive view of these risks as it assesses the resource impacts that climate change might have on its underwriting exposures (e.g., power outages, energy supply chain disruptions, water scarcity).
As energy and resource concerns grow, the strongest argument for dedicating an executive to oversee these issues goes beyond simply avoiding the risks to finding new opportunities. Left untended, resource and energy constraints pose a great threat to business operations; however, companies that are well-prepared for key shortages and price volatility can leap ahead of less-prepared rivals.
Defining the CREO Role
A CREO’s role is to capture the shareholder value that could be gained through resource efficiency and resiliency. The CREO must also ensure a proper capital allocation for resources and energy-related projects, and define appropriate IRR measures. Key to achieving this is developing relevant per-product resource consumption metrics and communicating them externally.
It follows that this role is best-filled by a seasoned veteran that is well-versed in data analysis and able to delve into diverse operational areas. This person must also be able to spearhead financial and risk management reporting through the supply chain.
While duties will vary from business to business, the agenda of the CREO can be framed as follows:
- Diagnose current and anticipated resource and energy use and related risks, engaging with business units, suppliers, customers, and stakeholders as well as benchmarking against peers
- Design an improvement agenda to optimize resource and energy procurement and consumption market by market, mapping alternatives and designing integrated improvement initiatives
- Implement the plan by combing through the company’s portfolio of equipment, real estate, and energy services agreements to identify improvement opportunities and realize savings
- Sustain the benefits of resource and energy optimization through continuous measurement and improvement as well as driving cultural change
The rise of the chief information officer is an instructive precedent. The CIO title became common only long after the first computers appeared in corporate America. Similarly, we are in the early stages of formalizing business roles dedicated to resource risk management.
As real-world experience with the position is gained, CREO responsibilities are likely to be assumed by an existing senior executive. Some models for integrating the role of the CREO into the responsibilities of existing C-level executives are emerging, with the common theme of empowering cross-functional resource management. Some examples include:
- Chief sustainability officer with authority beyond moral influence to make operational decisions
- Chief operations officer with a broad view of resource risk and understanding of resource reporting requirements
- Chief financial officer extending financial risk management and reporting competencies to resources and energy (especially in light of growing movement toward integrated reporting)
- Chief information officer bringing a focus on productivity and data management to the enterprise-wide resource data collection and analysis
- Executive management board focusing on resource and energy strategy, taking a cross-functional approach that is backed by the authority of the CEO
The successful CREO requires a diverse—and currently rare—set of attributes:
- Data savvy
- Knowledgeable about of energy resource markets and options
- Understanding of the different resource contexts in which the company operates globally
- Experienced in corporate project development
- Adept at innovating new corporate processes and approaches–a change agent
- Familiar with emerging resource and energy technologies
- Big thinker who can not only find savings, but also new opportunities
The CREO role is likely to be formalized over the next few years as the position’s ability to boost competitiveness is recognized and recruiting becomes more targeted to this skill set. Now is the time for directors and C-level leaders to become more sophisticated in their understanding of the potential contribution of a CREO.
Resource and Energy Imperative
There is little debate that most companies face rising risks from less predictable, costlier, and scarcer resource and energy supplies. Given these risks, business leaders should no longer be wondering “Should we prioritize these issues?” Rather, they should begin to answer the questions “Who will lead this effort?” “How will they lead it?” and “When do we start?”