• About us
  • Raising the Bar
  • Raising your Game
  • The Extra G - Geopolitical
  • Risk Matters - Roundtables
  • Leadership Team
  • Events
  • Blog
  • Contact
  • Menu

The Risk Coalition

  • About us
  • Raising the Bar
  • Raising your Game
  • The Extra G - Geopolitical
  • Risk Matters - Roundtables
  • Leadership Team
  • Events
  • Blog
  • Contact
blog-gas-2.jpeg

Gas debacle – a failure of prudential risk management?

September 24, 2021

Just as UK regulators consider new financial resilience rules, further corporate failures, this time in the critical energy sector, offer some early lessons in how patchy governance, and insufficient focus on geopolitical risk with its complex links to ESG, can undermine financial viability.

The proximate cause of this week's energy company failures was a sharp rise in wholesale gas prices, leaving some firms financially unviable in the face of a government-imposed consumer price cap.

The UK story runs deeper, however. The geopolitics of Nord Stream 2, and Russia's wider role in European gas supply, are key factors in what the International Energy Agency (IEA) has described as the ‘steep rise in European gas prices’. In their statement on 21 September, the IEA diplomatically noted that Russia ‘could do more to increase gas availability’.

Russia’s control of gas supply is increasing just as European governments accelerate public policy efforts to decarbonise and (in Germany) denuclearise domestic energy supplies.

Economic recovery from Covid has also increased global energy demand, while the IEA noted that international LNG production is reduced, squeezing UK gas imports further as we go into autumn. The rise in shipping costs has only exacerbated these challenges.

Could this confluence of factors have been anticipated by boards or management teams in UK energy companies – as the kind of stress event that BEIS recently highlighted as requiring enhanced financial resilience statements in company reporting?

The short answer is yes. Geopolitics has long influenced energy supply. Putin’s broad geo-strategic approach and European NetZero policies are not state secrets, while global energy market data are widely available. A smart reading of geopolitics, ESG imperatives and energy trends could therefore have identified a ‘severe but plausible’ market stress scenario that would undermine financial viability.

We don’t yet know what financial strategies, if any, affected firms had in place to ride out market stress. Hedging can be expensive. But scenario analysis could have illuminated quite how slender were the financial risk tolerances for some UK suppliers operating within a price-capped market.

If management teams were not engaged in scenario analysis and planning of this kind, overseen by their boards, this episode would represent a failure of corporate leadership and governance.

The unpredictable and external nature of geopolitics, with its complex ESG nexus, are difficult areas for company boards, risk and management teams to grapple with. But increasing external volatility is affecting many industry sectors, with impacts across strategy, financial viability, operational resilience and reputation.

A ‘head in the sand’ governance approach on geopolitical risk is no longer adequate. It can prevent access to commercial opportunities too - British Gas saw its share price rise this week as it takes in customers from failed firms. Other resilient firms in the market will be able to follow suit.

Recent events demonstrate why the Risk Coalition, working with GRI Strategies, will shortly publish important guidance for how firms can address geopolitical and related ESG risks in systematic and sophisticated ways. This includes effective use of scenario analysis, as well as guidance on wider integration of geopolitical issues into governance and risk management frameworks.

The Extra G - ESG2 will therefore help boards and risk functions foster resilience, enhance management decision-making and support agility in taking commercial opportunities.

This guidance is the first of its kind, drawing on input and support from a wide range of professional bodies. Had our guidance been applied by affected firms, outcomes may well have been different. This week’s events in the UK retail energy market therefore show how much new corporate approaches are needed as global geopolitical challenges intensify.

For a short overview of the guidance please email team@riskcoalition.org.uk.

Derek Leatherdale is founder of GRI Strategies and an Associate Director of The Risk Coalition. He was HSBC's founding global head of geopolitical risk and set up the bank's group geopolitical risk function, before leading the bank’s global government affairs campaigns. Derek also has prior experience in national security and intelligence roles for the British government. GRI works with firms across industry sectors to improve oversight and management of geopolitical risks

Tags: Derek Leatherdale
Prev / Next

Blog

Featured
Apr 15, 2025
Vera Cherepanova
The future of ESG: navigating a fragmented landscape
Apr 15, 2025
Vera Cherepanova
Apr 15, 2025
Vera Cherepanova
Mar 6, 2025
Mo Warsame, Gavin Hayes
Internal audit and risk management must work together to navigate uncertainty
Mar 6, 2025
Mo Warsame, Gavin Hayes
Mar 6, 2025
Mo Warsame, Gavin Hayes
Sep 4, 2024
Polly Williams, Mia Harris
Three key threats of phishing to be aware of
Sep 4, 2024
Polly Williams, Mia Harris
Sep 4, 2024
Polly Williams, Mia Harris
Aug 25, 2024
Felix Ritchie
Principles versus rules in data and corporate governance
Aug 25, 2024
Felix Ritchie
Aug 25, 2024
Felix Ritchie
Jul 16, 2024
Jane Hunter, Mia Harris
How can you maintain high standards in your business without suffering burnout?
Jul 16, 2024
Jane Hunter, Mia Harris
Jul 16, 2024
Jane Hunter, Mia Harris
Jun 2, 2024
Afshan Moeed
Enforcement of individual accountability in UK banking: a new boardroom recipe for change or continuity?
Jun 2, 2024
Afshan Moeed
Jun 2, 2024
Afshan Moeed
May 28, 2024
Craig Morris, Mia Harris
Three exciting new developments for AI in 2024 that you need to know about
May 28, 2024
Craig Morris, Mia Harris
May 28, 2024
Craig Morris, Mia Harris
May 24, 2024
Stefan Hunziker
The stuff of nightmares: risk management is shut down, and nobody notices
May 24, 2024
Stefan Hunziker
May 24, 2024
Stefan Hunziker
Mar 20, 2024
Neil Tinegate
What should boards know about digital technology?
Mar 20, 2024
Neil Tinegate
Mar 20, 2024
Neil Tinegate
Mar 15, 2024
Francis Kean
The insolvency risk for company directors - are you swimming naked?
Mar 15, 2024
Francis Kean
Mar 15, 2024
Francis Kean
Feb 29, 2024
Andy Watkins-Child
Are you sitting comfortably?  Cyber risk, board attestations and the implications for NEDs
Feb 29, 2024
Andy Watkins-Child
Feb 29, 2024
Andy Watkins-Child
Oct 24, 2023
Mamun Madaser
Risk management and internal audit should collaborate to navigate the poly-crisis of risk
Oct 24, 2023
Mamun Madaser
Oct 24, 2023
Mamun Madaser
Oct 18, 2023
Jim Watson
How to mitigate the risk of cyber security breaches – part 2
Oct 18, 2023
Jim Watson
Oct 18, 2023
Jim Watson
Oct 13, 2023
Nisha Sanghani
Risk management and internal controls: much (needed) work to do as a result of the proposed changes to the UK Corporate Governance Code
Oct 13, 2023
Nisha Sanghani
Oct 13, 2023
Nisha Sanghani
Oct 9, 2023
Jim Watson
How to mitigate the risk of cyber security breaches – part 1
Oct 9, 2023
Jim Watson
Oct 9, 2023
Jim Watson