By ESG McGill Analyst Tilley Woodford
What is the Energy Crisis?
In the past two years, the cost of energy has skyrocketed in the United Kingdom, causing annual energy bills to increase from £1000 to £3,500 over 2022 and are expected to exceed £5000 later this year. The main driving factors for the rising energy costs are the reopening of the economy following the coronavirus pandemic and Russia’s invasion of Ukraine. These events have produced restrictions on the gas supply in Europe and have driven up the wholesale price of gas. These increased costs have been passed onto the consumer and have put UK residents and business owners in a challenging position, particularly impacting the poorest and most vulnerable groups. Many families and students across the country are struggling to afford to turn the heating on.
Furthermore, this crisis has significant impacts on the ESG agenda. On the one hand, the energy crisis has triggered investors to rethink the overreliance on oil and gas as the primary energy source, leading to more investment in clean energy and transitioning to a decarbonized economy. However, many economists worry that the energy crisis has derailed sustainable investing and has caused ESG concerns to be put on the back burner.
What is the Impact of this Energy Crisis on the ESG Agenda?
As mentioned above, the opinions on the impact of ESG goals are divided. Some believe the energy crisis has posed a significant threat to the ESG agenda because of the swift need for energy security. For example, governments may increase their reliance on and investment in fossil fuels to ensure energy security for citizens. Though investment in renewable energy sources has been growing over the years, simultaneously, there is continued investment in fossil fuel energy. Additionally, with the increasing pressure on the government to respond to the rising energy prices, they may seek short-term solutions by utilizing more fossil fuels and postponing long-term clean energy plans.
“In a dramatic U-turn from the government’s pledge to phase out coal by 2024, business secretary Kwasi Kwarteng began negotiations to bring up to five coal plants out of decommissioning to help keep the lights on this winter” (Davies, 2022).
Contrastingly, some view this energy crisis as a unique opportunity to invest in sustainable and low-emission fuels. In a recent study, it has been found that the large investments being made in clean energy technology and renewables are powerful enough to drive down the global demand for fossil fuels and halt any further investment in oil and gas extraction. Alongside this, the revenue produced as a result of this crisis can be funnelled into clean energy investment, thus allowing the ‘Net Zero by 2050’ global plans to succeed. The focus on non-carbon energy sources can also aid in diversifying the energy industry and reducing the risk associated with the UK’s reliance on global gas and oil supply.
“Being exposed to rising fossil fuel prices provides strong incentives for actions and investments that can not only increase our resilience and energy security but also aid the transition to net zero” (LSE British Politics and Policy, 2022).
Do Companies and Governments have an Ethical Responsibility to help Citizens and Businesses?
Regarding the social and governance pillars of ESG, the UK government’s decisions on policy and investment have a direct effect on citizens, which is especially significant regarding this energy crisis. Does the government have a responsibility to help people navigate the rapidly rising energy costs and subsidize these unprecedentedly high costs? In addition, some moral and ethical issues arise for governments when it comes to deciding whether to buy energy from Russia or other corrupt sources, as opposed to prioritizing their commitment to net zero. Next, the social pillar, which concerns the quality of life and business function, is critical in relation to this issue. For instance, the high energy cost will produce high business operating costs. This means that business owners will have to make hard decisions regarding energy consumption and maximizing profitability. Such as closing offices, lowering heating, and removing appliances. Therefore, not only does this energy crisis have an economic impact, but it can also lead to negative environmental consequences if ESG is no longer a priority and produces significant ethical and social issues.
References
- https://blogs.lse.ac.uk/politicsandpolicy/why-have-energy-bills-in-the-uk-been-rising-net-zero/#:~:text=The%20UK%20is%20particularly%20exposed,and%20poorly%2Dinsulated%20h ousing%20stock.
- https://www.proactiveinvestors.co.uk/companies/news/989734/has-the-energy-crisis-derailed- esg-989734.html