Setting Strategy for a Net Zero World

There is no greater need for careful and deliberate strategy setting and execution than in carbon emissions intensive industries today. Net zero targets are being set globally, with legislation being brought into effect in countries all over the world which will create risks and opportunities throughout the market, customer and stakeholder ecosystems. 

It is a time of great opportunity, and of existential risk. Global ESG assets surpassed $41 trillion in 2022 and are expected to reach $50 trillion by 2025, one-third of the projected total assets under management globally, according to reports by Bloomberg Intelligence. This trend continues the rise of ESG assets after they surpassed $35 trillion in 2020.

In the energy, infrastructure and transport industries, billions of dollars have been raised in equity markets by companies seeking to disrupt value chains.  Not everyone will make this through this next phase of transformation.  It is critical for companies to know where they are heading, and how they are going to get there. 

Losing the Past, Optimising the Present and Blueprinting the Future

Mapping an alternative future is an organisational, functional and cultural odyssey, and one which often requires a transactional pathway to execute. This is because sound management of any company requires optimisation of the present, reshaping for the future, and elimination of those decisions made in the past which are no longer relevant. Businesses which are no longer working towards a clear and executable vision must either be divested or transformed, and new businesses acquired to provide either the seeds for future innovation for utilities or, has been seen in the case of the largest German electricity companies, a complete structural pivot. 

Embarking on this path requires hard work and a serious bout of numerical self reflection. It means avoiding the preference of humanity for gut, rather than data based, decision making and the impacts on business outcomes that are consequent.  In the world of strategy, data is more than a friend, it is the framework upon which a strategy is built. 

The Time for Reactivity is Over

Markets are changing.  Energy markets are shifting from a linear coal/lignite based model with monopoly transmission companies, peak-demand driven distribution companies and margin based retailing to an entirely new architecture.  The era of the combustion engine, which brought with it a revolution of connectivity and industrial flexibility for our societies globally is in its last half century.  We are redesigning how, as a world, we make things, transport ourselves, grow our food and power our societies.  Apprehending the risks and seizing the opportunities from these changes must not be reactive. Least regret decisions require careful, well reasoned choices made from a heavy base of analysis, the cornerstone of which is research. This is the piece most often ignored amid the more convenient option of committee based strategy sessions, and is more often than not the biggest obstacle to success. 

Using Data to Set a Strategy for Success

Choosing the path of transformation, divestment and diversification can be difficult, and means understanding possible outcomes numerically before charting a course. While this places a heavier burden on the organisation up front, it in turn alters the nature and the pathway for strategy setting, and requires more authenticity in understanding not what needs to be achieved, but the cultural, functional, funding and organisational barriers to achieving it. This “system 2”, more structured approach to identifying and truly understanding the expected drift, under each scenario, of value and profit is critical, and allows a methodical placement of options and an understanding of the basis upon which choices will be decided. 

Digesting these outcomes fuels the identification of both ideas and redundancies; questions of why don’t we do this, but also why are we still doing that; and a sifting of current activities into what lies on and off a least regrets strategic pathway.  Only from this platform can a list of possibilities be drawn spanning new opportunities to be pursued and those functions, businesses, and services that can be let go.

The process of evaluation of options takes time, with commercial analysis and research best applied, per opportunity, high-level implementation options (partnerships, capability development etc) considered, and the large number of prioritisation dimensions considered; across attractiveness and ability to compete, strategic fit, size of the prize, investment, risk, and speed to scale. The quality of the answer must be allowed to match the intensity of the question, when the potential threats to an organisation are nothing short of existential. Only when such a process has been done should companies consider the options of organic growth, acquisition or sale.  

Our thesis is that markets will hit tipping points in the next 2 years, when the risks and opportunities created through Government transition policy begin to give way to a gradual institutional realisation that the world may not meet the challenge of climate change and that financial and physical risks need to be accounted for more urgently.  It is no longer enough to set strategy by consultation. 

Rennie specialises in an intensive data rich approach to defining and setting strategy for a changing world.  Message us for more information or to arrange a meeting.