We are in a period of significant volatility and uncertainty, marked by geopolitical conflicts, recovery from the Covid-19 pandemic and the increasingly tangible impacts of climate change as the world moves toward net-zero carbon emissions. For boards and executive teams, building resilience is now more urgent than ever. It is becoming a critical factor in determining a company’s success.
However, traditional corporate approaches to resilience don’t rise to today’s challenges. They focus too much on near-term risks, without fully recognizing the potential impacts up and down the value chain, well beyond individual company boundaries. They usually make very limited use of advanced predictive tools that could help identify some of those risks. Moreover, they fail to connect risks to the organization’s long-term strategic goals and economic model.
Narrow strategies may result in overlooked risks and a false sense of security. A Bain survey in 2023, found executives overly confident in handling various threats. This includes climate change impacts, technological vulnerabilities and supply shortages despite the escalating nature of these threats. This high confidence might stem from underestimating rare events like climate change effects, due to limited firsthand experience. Leading companies adopt a broader approach, focusing on strategic, operational and supply-chain resilience, along with managing environmental risks to physical assets.
Strategic resilience
All strategy is formed amid some level of uncertainty, but the changes inherent in the energy transition multiply the difficulty. Uncertainty can handicap a firm in several ways: Overconfidence can lead to corporate myopia while under-confidence can leave firms in paralysis. Either scenario can stall action until it’s too late to prevent a bad outcome.
Companies in evolving industries often fail by not adopting strategies adaptable to shifting conditions. Leading firms focus on long-term planning and adapt to environmental shifts. However, many neglect to plan for unlikely but impactful “corner scenarios,” events that are possible but much less likely, like unexpected policy shocks or losing access to capital markets.
But ignoring high-risk scenarios is, increasingly, a short-sighted strategy. The tumult of recent years makes it clear that the energy and natural resource transition is likely to become more disorderly, even chaotic. Stress testing a company’s capabilities is crucial for identifying and understanding the implications and opportunities of low-probability, high-risk scenarios.
Operational resilience
Reducing Scope 1 and 2 emissions helps ensure long-term commercial viability in several ways. First, it positions a company to be closer to compliance as regulations or carbon taxes increase. Closely related, it helps maintain an asset’s social license to operate and extends its lifespan through operational updates, signalling these advantages to investors focused on long-term business viability in a rapidly changing energy sector.
In addition to ensuring resilience for operations, companies also have to ensure the adaptability of their decarbonization programs to various challenges. This includes extreme weather, economic downturns, technological shifts and unforeseen obstacles. While some companies are quickly advancing to front-runner status, others adopt a wait-and-see approach, to benefit from future technological efficiencies and economies of scale.
Supply chain resilience
Once the purview of the COO and purchasing functions, supply-chain resilience has become a top priority in corporate agendas. That is due to recent crises like the pandemic, semiconductor shortage and global conflicts. While quality and price remain fundamental, supply-chain executives are now focusing more on enhancing flexibility and resilience.
Supply chain resilience generally involves proactively minimizing risks, absorbing shocks and recovering from setbacks to mitigate operational impact. Taking a holistic view of the entire chain can help companies identify key risks, evaluate their likelihood and find opportunities to differentiate from competitors while considering impacts on energy markets and the environment.
Read: COP28 places the GCC at the center of the fight against climate change
Physical resilience
Many companies are already experiencing the effects of climate change on their operations. An example is the shutdown of some production facilities in Sichuan, China, where a drought stalled multiple hydropower plants. However, the likelihood and extent of physical climate risks are often underestimated. Companies rely on limited risk-transfer methods like insurance, instead of using strategic and operational measures to build resilience.
A more proactive approach to resilience starts with a systemic look across the entire value chain, using analytical tools to estimate risks today and in the future. Companies can then focus on practical actions to adapt to these risks. In addition, they can make decisions about which assets or facilities to protect and what strategic changes may be necessary to survive and thrive. The changes may include revising capital planning processes, restructuring or nearshoring the supply chain, or advocating for new policy solutions.
Eric Beranger-Fenouillet is Middle East head of energy & natural resources practice at Bain & Company and Raja Atoui is partner at Bain & Company Middle East.
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