November 26, 2024 [Supply Chain Digital]- John Donigian, Senior Director of Market Strategy at Moody’s, discusses how energy companies can thrive in an increasingly unpredictable global market

Global complexities are presenting unprecedented challenges for energy and utility companies, creating a perfect storm of obstacles.

Regulations are evolving rapidly, environmental risks are escalating and supply chain vulnerabilities have never been more apparent.

Energy companies once again came under scrutiny for their role in the green transition during COP29. However, against this backdrop, supply chains for both renewable and fossil fuel sources are facing extraordinary pressure.

Moody’s, a global leader in credit ratings and integrated risk assessment, offers KYC and AML solutions to help firms identify threats from illicit actors while ensuring regulatory compliance.

When it comes to the energy sector, Moody’s risk assessments enable organisations to navigate complex regulations, manage environmental risks and make informed investment decisions that align with their operational and strategic objectives.

Leveraging comprehensive risk management capabilities, Moody’s enhances supply chain resilience across both traditional and renewable energy sectors.

Here, John Donigian, Senior Director of Market Strategy at Moody’s, discusses how modern energy companies can not only survive but thrive in an increasingly unpredictable global market.

What’s the current regulatory landscape for energy, oil and gas firms? How does it differ for those operating in renewables?

The regulatory landscape for energy, oil and gas firms has become increasingly stringent with the arrival of mandates on emissions, transparency and environmental standards. These sectors face complex compliance demands and heightened third-party risk, given the intricate nature of their supply chains that often function across regulatory jurisdictions.

A key example is the EU’s new Methane Regulation, which came into force in August 2024. The directive seeks to significantly reduce methane emissions from fossil energy production and applies to oil, gas and liquified natural gas (LNG) importers within the EU. It mandates operators establish firm monitoring and reporting procedures on methane emissions.

Firms operating within EU member states are obliged to fulfil these compliance responsibilities — if they fail to meet reporting requirements they face fines of up to 20% of their annual turnover.

Renewable energy firms are subject to a less intense regulatory environment, even potentially benefiting from tax incentives and streamlined permitting processes, such as with the EU’s Renewable Energy Directive.

However, the sector is still subject to reporting requirements that focus on responsible sourcing and supply chain transparency, which aim to combat greenwashing.

For both sectors, integrated platforms that support compliance and comprehensive third-party risk management are becoming essential, enabling smoother regulatory adherence and mitigating supplier risk across global supply chains.

How can firms, particularly those operating in energy/utilities, best identify and measure risk in their supply chains?

Technological solutions are key to staying on top of supply chain risk. Energy companies can manage their compliance processes much more effectively with the help of advanced data tools, which help map out dependencies in the supply chain and model potential disruptions before they happen.

Automated solutions also make it easier to create detailed risk profiles that are continuously updated with factors such as jurisdictional anomalies, shell companies and sanctions risk exposure.

Similarly, advanced analytics platforms, which centralise the data compliance professionals need to conduct risk assessments, provide a unified view of risk.

This means companies can keep a close eye on suppliers and identify risks early on to act swiftly, ensuring they remain aligned with regulations, meet contract terms and build better resilience.

How can these risks be avoided?

Energy and utility companies can avoid supply chain risks by diversifying their supplier base, maintaining strategic inventory buffers and investing in real-time monitoring to detect potential disruptions at early stages.

Each step provides a barrier against supply-chain failures, from reducing reliance on any single entity and their associated risks, introducing safeguards against supply-chain interruptions and making supply chains more adaptable before disruptions can impact operations.

This proactive foundation enables companies to adapt swiftly and avoid costly operational setbacks.

Firms can also avoid supply chain risks by adopting a thorough approach to third-party risk management.

De-risking begins with asking the right questions, particularly when onboarding new suppliers, such as who they are and who they’re doing business with, as well as understanding material risk factors like financial stability and business practices.

Compliance teams should return to this practice regularly at each potential change in risk level, so should a supplier’s risk status change, they can act upon the information.

Without consistent oversight, a singular incident of poor practice can impact an entire supply chain, potentially resulting in costly operational delays, regulatory breaches and financial penalties.

How can firms prepare for less predictable risks like natural disasters?

The risks posed by catastrophic environmental events are increasing significantly in cost, frequency and severity.

A report on the impact of climate-related disasters in the US by the National Centers for Environmental Information revealed that in 2023 major weather and climate events in the US resulted in US$92.9bn in damages.

The financial damage posed by these increasingly frequent natural disasters underscores the need for businesses to build resilience against such risks, particularly to protect their supply chains.

Building resilience begins with using climate data and predictive analytics, which allows companies to pinpoint high-risk areas and adjust sourcing and logistics strategies.

Firms may also consider relocating operations from vulnerable zones, establishing relationships with alternative suppliers and enhancing overall supply chain flexibility to improve adaptability in the face of evolving environmental risks.

By combining environmental data analysis with proactive supplier monitoring, organisations are better equipped to anticipate, adapt to and withstand emerging threats to their supply chains.