Podcast: The era of Assurance 4.0: Navigating the energy transition and achieving net zero

Welcome back all to LRQA's Future in Focus podcast, where we like to talk about all things risk management. My name is Holly Johnston. I'm the Global External Communications Manager for LRQA. But you know me, I want to skip to introducing my now regular guest, which is Stuart Kelly, LRQA's Chief Commercial Officer. So welcome back, Stuart. How are you doing?  

I'm very good, Holly, and yourself?  

Yes, not bad thank you. You know what? People don't ask the host how they're doing. I'm well, thank you for asking.  

I'm very conscious of that, and at the end of the day, you know, if it wasn't for you, these podcasts wouldn't happen. So it's important that we're both good and ready to go, but really looking forward to this. I do enjoy these sessions.  

Oh, thanks Stuart, love that. So let's just recap actually before we get stuck in. I want to recap for our listeners that this episode is actually part of a miniseries with yourself, Stuart, where we've been exploring the era of Assurance 4.0 and how I've been describing it to people just very quickly is that you've heard of Industry 4. 0, now we have Assurance 4. 0 and it's the new era of risk management. 

So at LRQA, we define this new era by three global trends, and that's ESG considerations (Environmental, Social, and Governance), it's supply chain complexity, and lastly, the need for cybersecurity maturity. And when you combine those new trends with traditional risks across assets, people and systems, you know, what businesses are typically used to, you've suddenly got a whole host of challenges that I know clients and businesses worldwide, are coming to us for support with.  

So what are those client challenges? We have assuring assets and management systems. We have achieving product integrity.  Sourcing responsibly, navigating the energy transition and achieving net zero, and lastly, strengthening cyber security maturity.  Now today is all about one of the challenges I just described there. It's navigating the energy transition and achieving net zero. And I'm particularly excited to talk about this topic because it could not come at a better time. We've got COP29 coming up between the 11th and the 22nd of November in Baku in Azerbaijan, a huge global event, global dialogue, incredibly important, joining together of governments, non-government organisations, press, campaigners, industry, decision makers, experts. 

So today's episode is super relevant and super timely. But enough from me now, Stuart, I'd love to turn to you to help bring this topic to life for us, if you can, all about your client experience, I'd like to start by defining what we mean here, navigating the energy transition and achieving net zero. I want to ask you, what does that mean for businesses? Because I'm conscious we're talking about two different types of client here. We've got the energy sector, managing energy asset life cycles and actively supporting that transition, but then you've also got consumer brands that are just trying to reduce their carbon emissions. So how would you define this challenge for the businesses you work with?  

Yeah, it's increasingly complex. Holly, thanks for the intro there, because I think, you know, this is very much from a client experience point of view. And I think the market that we are dealing with right now is in not turmoil, but a state of change and uncertainty.  

Quite frankly, you mentioned rightly COP29, which is always on everyone's mind. There's a lot gets talked about. There's a lot gets promised. Not always as much of that then ends up in reality, but it does tend to mean that legislation changes or directions of accountability change and businesses have to be agile enough to be ready to respond to that.  

So we're seeing the energy sector very much driving towards building that cleaner, greener energy. source because that's what they are now being asked to provide, and that, that changes everything from industrial production, investor focus and, and where they get the funding from and the cost of that funding. 

Because obviously, you know, a lot of investment funds and a lot of investors are now veering towards greener, kind of funds and greener, greener investment opportunities for them. And that can sometime attract, different funding levels and different levels of payback and interest. Thanks. But even in the energy sector, they're thinking about government regulation. 

They're thinking about where they're producing that, where it's being shipped or, you know, or provided to. And those, those two areas can be different and have different legislative requirements. And they've obviously got their own corporate governance. A lot of these energy providers are transitioning from some of the older, more traditional fossil fuels into cleaner energy. 

And there's historical information and challenges that come with that as their business changes and then in the wider business landscape, you've got the whole expectation. And we talk about this a lot in these calls, Holly, around the consumer and the demand from the consumer for more information, a wider clarification on. 

The source of where their raw materials are coming from. And therefore the wider business is now, I really expected to provide proper progress reports, real evidence of what they're doing to provide this greener energy and of the progress that they're making towards the targets that they set out, which are normally ambitious and not always fulfilled and achieved. 

And therefore they're being held to account for that in a much higher and tighter way than before. And of course, every step of the way, we've had various buzzwords around the last few years, greenwashing being a good example of one, and therefore actually verifying the data and the reports that are being used to make these claims and statements has become an absolutely critical enabler for that trust and transparency that we talk about all of the time. 

A lot of this is down to trust, transparency, the consumer believing in the brands that are that are making the energy transition, and also the claims and statements that have been made by the consumer brands that are investing and buying that cleaner energy as part of their carbon strategy. So again, it all comes down to transparency and stakeholder trust, quite frankly.  

Thanks, Stuart. I mean, you've, you've hinted at my next question a little already. I want to ask why this is so relevant to our clients now in the era of Assurance 4. 0, why they should be taking this so seriously if they're not already. And I guess, I'm asking here, maybe more about the consumer brands. Would it be reasonable for a business to be sitting there thinking, well, COP29 is happening, you know, the right people are in the right room, it's governments, it's academics, it's experts, talking about what we need to do at a national level, or actually, should they be recognising the crucial role that industry, corporations, businesses, play alongside those more organised efforts via forums like COP29?  

Yeah and again a really good question and I think the answer is probably both depending on the brand. Let me explain that. The larger brands, the global brands that are operating in 100, 200 countries around the world have the confusion of different legislation, different requirements, different reporting expectations, different buying expectations, depending on the market that they're actually operating in. 

That is creating a whole industry in itself for them to be able to comply with what they're expected to under the government rules and regulations. I think. There's a, there's a, an opportunity on a, an accountability and responsibility for them to do more to educate the governments, quite frankly, because some of the governments are making decisions, not in isolation, but without the experience and the practical knowledge of, of what they're trying to put in place. 

And a lot of the global brands have got that experience and want to do the right thing. They're on the journey for themselves. So they. They're leading the way and therefore I think there's an opportunity for better engagement there. I also mentioned that I said both because there are also a number of brands that just need to comply. 

Their policies are such that they want to do the right thing legally but they're not in a position to really drive that agenda forward. But you asked why and why they should be thinking about this now. We kind of covered it a little bit but there's two reasons for me that are coming to the table every single time. 

Number one? Because I need to be able to demonstrate to my consumer that I'm doing the right thing. and you know, you can't get anything past the consumer these days with the social media outlets that we have, with the, the global awareness of everything that's going on. So, you know, I need to be able to provide to my consumer that reassurance that I'm doing the right thing as a brand. 

That's number one, right? Number two, why is the world is a really volatile place still. And I know we mentioned this in a couple of other podcasts, but, you know, we're talking now about recent elections in the UK, recent elections in America, you know, other volatility still remains around the Middle East. We've got challenges in the Lebanon and so on. We've got, you know, Ukraine war tragically still going on and all of this means that, you know, suppliers are being pivoted from one country to another as supply and demand peaks and troughs. That means that other legislative. Kind of challenges are coming in. 

It also means that investment is changing and therefore the why number two is to make sure that you are fit for purpose for this volatile world as the financial climate around you and the investment strategies around you actually fluctuate with what's going on in the world. So, you know, being fit, ready and healthy is a really good place to be, particularly if you rely heavily on gearing and funding to drive the growth that your business expects.  

Thanks Stuart. Once again, the way you paint these challenges and kind of bring them to life is really unique. You know, being fit, ready and healthy, I love that. Talking about the engagement that needs to happen between industry and governments, change is the only constant. You're right, bringing to light some of those tragic real world examples of the volatility that we're, we continue to see. So thank you for painting that picture.  I want to explore what else clients are struggling with. So we've talked about, you know, change in regulation and the volatility there, but I'm wondering from your direct engagements with, you know, clients, anything else you've seen as particular pain points? And any examples specific to sectors as well?  

I'm thinking one which actually will apply to many sectors, but especially defence and aerospace, will be scope three emissions, for example.  so emissions that are not produced by the company itself,  but is are produced as a result of activities from assets owned above and below them in the value chain,  which they still have to be responsible for. 

So is that another pain point you are seeing and anything else? Yeah, that's a massive one. A lot of global brands in sectors are very aware of their immediate supply chain. They're very aware of their tier one, less so of tier two, and then a lot have virtually no, no visibility of, of kind of tier three. 

And, you know, let's put that into perspective. It's a little bit like, I'll give you two examples. Let's take the food sector as example one. If you have a retailer in whichever country that you happen to live in around the world and you decide to buy some spice from that retailer, they will trace that spice back to the source country but that will come from a number of different farms that will then go through an agent and a broker who will You know, consolidate all of the different spice that's been produced in that country or in that region within a country, and then sell it as a bulk purchase. 

So how do you actually trace that back to the actual farm that has produced that for you? And that's a real challenge, because that's a level that is very difficult to go down to when you think of, you know, particularly in some of the countries around the world where, you know, the single livelihood of that farm and that farm produces a particular spice, you know, in quantities that are not very large, but it's absolutely critical that it gets sold into the market. So that's a trade that you can't stop, but it's a trade that becomes very difficult to trace right back to kind of source. And another one that's come up quite recently is, you know, being able to source a particular piece of metal in a machine that is sitting in a supplier that is supplying a supplier to them, that is supplying a product to our client. 

Right, so you're going down three layers in the supply chain and now you add the complexity of, as you say, scope three emissions and how you're actually able to track and monitor that. So that's becoming increasingly complex and it's an area that we're helping quite a few clients. And I think it's fair to say consumer goods, apparel, food, sectors are slightly more advanced because they've traceability in the supply chain.  

Normally for other reasons, but increasingly now carbon and scope three emissions becoming part of that, but you know, they've been looking at things like modern slavery, workers rights and ethical trade for quite some time, so they're probably slightly more advanced in that kind of mapping and scoping. 

I think the other thing that they've got those problems where they're looking for solutions is, and again, the same themes come up time and time again, data. Okay. If I can only do certain things, if I have to prioritise my risks, which products, which commodities, which geographies, Can I focus on and should I focus on how does my supply chain map against those risk areas? And therefore, how can I segment and prioritise where I turn my attention because we can't do everything in one goal. So we need to do this in a systematic way that protects the brand, provides the consumer with the reassurance that they need and has that continual improvement in place. So, you know, we're seeing a lot of. 

People looking for help in how do I use the data and how do I map it against the, you know, the world to actually identify that risk in a, in a more dynamic and quick way. 

Thanks, Stuart. There's a lot to unpack there, actually. I have two follow on questions just based on that response alone. first off is just, it really came to the fore there about this growing relationship between the E and the S in ESG. So you're talking about this relationship between monitoring your emissions up and down the value chain, alongside, you know, monitoring responsible sourcing practices up and down the value chain. So is that an area we're seeing increasing crossover and that we're helping clients with?   

Yeah, huge crossover. And it makes sense if you think about it, you know, you tend to use carbon where people are operating and doing things on. Therefore, you know, putting the E and the S together is something that becomes natural. And I think in in clients, and I'm thinking particularly some of the larger clients that we're working with that they would. 

Arguably two functions that sat as very important functions within a brand structure, but didn't necessarily talk too much together, because it was two different things. You know, I know who's responsible for it, but I don't actually talk to them. I, you know, I’ve maybe seen them in the canteen once in the last year and now they're going hand in hand. 

Now they're having to think about policies, strategies. Onboarding of new suppliers in the right way that meets both requirements within the business on doing things in a more joined up way. How can we use one program of work to help us get the information we need for another one? And therefore, they're having to think differently about it because, you know, this takes a lot of investment for companies to actually get down to this level of detail on. 

It's not that they shouldn't be doing it. It's just that. Physically, it's not always possible to do that without passing on significant costs back to the consumer, and no one wants to pay more. They want more information, they want more reassurance, but they want the same price or a cheaper price. And therefore, brands and clients working with us are coming with the challenge of, how do I use my budget in a smarter way to get what I need? 

How can I do this in a way that you can help me actually take three or four boxes rather than one box at a time in terms of the requirements that I have to gather, collate, reassure, you know, my consumers, my stakeholders around, and that's an area where we're seeing a lot of involvement, probably double the involvement than we had even 18, 24 months ago, where, you know, they're looking for experts like LRQA, like our advisory specialist to go in and help them unpack and unravel the problem and put back together a more comprehensive plan that is fit for purpose, more cost effective,  and less risky to them.   

Okay. So we're looking at kind of like a solution model here that kind of addresses several, as we've said, interconnected risks, the E and the S, you know, being a prime example and just something I want to add there actually for our listeners to take away again on this point about the E and the S crossing over.  

Another angle is about a ‘just transition’. I don't know whether you've heard that phrase yourself as well, but it's also something to consider where companies or industries or organisations, any bodies are making changes to address environmental impacts. Sometimes that can have knock on consequences socially as well, we can dive into that topic another time. But again, just another angle to consider with that E and S crossover about achieving a just transition as well. Something else for us to, to navigate. 

The second point I wanted to address was your point about data. And obviously, LRQA, we offer our supply chain intelligence platform called EiQ, which is, you know, a model that uses data to achieve supply chain visibility and transparency, and that includes environmental insights as well. So I wondered if you could unpack that a little bit more for us, the value of data as companies try to navigate the energy transition and achieve net zero, and also how data is coming into investment practices as well, as we see a bigger relationship between financial entities and ESG investment portfolios.  

Yeah, okay. Very practical terms. You know, there are experts that can talk energy transition far better than I can.  I'll just talk very practically here. So let's start with the investment piece, because I think that's a good place to start. We've seen a lot of investors, particularly investment funds, people that are making acquisitions or looking to dispose of assets, actually getting that due diligence in place around the risks that they are either buying or selling. 

Or investing in upfront so they know what they're getting involved in, and they know where they want to put pressure on the board or whoever to actually make some changes. So we've seen quite a lot of data use in terms of, you know, map out my business and show me where the risks are. And the data is also around. 

If you like the pending legislative impacts that we haven't thought through yet, you know, there are lots of regulatory changes that have been announced around the world. There are lots more coming, and there are lots of them that have future dated kind of requirements on businesses and you have to get ahead of that. 

You can't wait till D Day and then start collecting the data to comply. You have to do it beforehand. So we're seeing an awful lot of activity around, you know, I looking at the data to make sure that my risk is really clearly mapped and I know what I'm walking into as an investor or as an acquirer, I looking at the legislative landscapes almost bringing the G into the E and the S to say what else is there that I'm not aware of that I need to be aware of because it's coming down the line like a train that's going to hit me really quickly. 

And how do I make sure that I've got the right plan in place to address all of that? So that's a really massive area in terms of the energy transition. Then again, it's coming down to really understanding my use of energy, really understanding, you know, that the claims that I'm making and, and the, the kind of promises that are being made at board levels and beyond that investor relation level are being met and are being met properly. 

And there are some gaps and a lot of assumptions in that data. And that was okay. A couple of years ago, because I would use the phrase you could get away with it, not necessarily because people were getting away with it, but because they didn't fully understand it, and therefore they weren't as accurate as he thought they were again. 

Legislation is changing everywhere around the world, and there are certain requirements that you can't just get away with now.  Having that data, having the data independently verified, having it verified to particular standards around the world is now absolutely critical and a key part of your, your regulatory reporting. 

You know, it's a key part of a board's accountability and responsibilities now. So again, a lot of data use their final piece just to comment on that just for awareness is that. A lot of companies have a lot of data. What they don't have is a lot of data to compare it to outside of their organisation. 

And I think that's where companies like LRQA come in and EiQ because, you know, that can give you a real kind of reality check on your true risk base and where you have got problems or anomalies. Also when you're better than others in the market, but that's not very often, but it, but it can be the case. 

So I think that is also something to bear in mind, that it's about looking at the data and actually having access to external kind of comparative benchmarks, and that is becoming increasingly important for people as well, so that they can understand how they're comparing against the peers and the markets.  

Thank you, Stuart. I have thrown so many topics at you during this particular episode. I guess it just shows the interconnected nature of this topic with wider ESG considerations. I wonder, do you have any lasting message for our listeners based on what we've discussed today? 

I guess I probably do. I think it's probably, how can I summarise this, Holly? Never underestimate the complexity of your supply chain. Never underestimate the power of getting people in that can help you map that and put a plan together that means that you are getting ahead of the challenges rather than getting behind the eight ball, as it were.  A lot of businesses bring us in when they've come up against challenges, either regulatory or investor or, you know, consumer, and they just don't know which way to turn. 

That isn't the first time they've realised they don't know which way to turn, right? So it's much better to get people, you know, there are lots of companies that do it, but there are experts out there that can just Map your business, map your supply chain, give you a true risk model that we can then work on a plan over the next two to three years off, you know, proper investment on proper change on proper data so that you're actually getting to meet the requirements in a timely manner, rather than being caught, quite frankly, with your pants down. So that would be my message.   

And as always, a fantastic lasting message and quote there. Thank you, Stuart, goodness me. So I will conclude the episode there on that fantastic final note. This really has been a 30, 000 feet view of this topic. You know, we have dedicated experts that could do entire episodes dedicated to hydrogen. nuclear, you know, specific renewable energy sources, as well as, you know, our ESG advisory consultants who can talk about, you know, more consumer brand side as well. So thank you for somehow covering a lot of those areas, just in this quick 20 minute call. 

And you've made the topic really accessible to anybody at any level of an organisation from tactical to strategic insight based on your experience with clients. I want to thank our listeners as well for tuning in, giving us your time, please do visit our homepage or Spotify to stay up to date with new releases,  and find out about our services on www.lrqa.com So with that, thank you very much Stuart. Until next time.  

Thank you, Holly.