Energy, ESG Issues Impacting Supply Chain Disruptions

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by | Jan 20, 2022

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High energy prices and demand as well as an increasing focus on environment, social and governance issues are contributing to a stressed supply chain, and resolving the disruptions will be a process, according to a report by IHS Markit.

Energy implications grew at a rapid pace over the past year and are expected to continue influencing supply chains moving forward into 2022, according to IHS Markit. The report also says increasing focus on ESG objectives and pressure from stakeholders to improve sustainability across supply chains may cause improvements to continue to move at a slower pace.

Prices for coal, oil and natural gas are all higher than a year ago. According to the report, spot prices for gas in Europe and Asia are as much as 350% higher than they were in January 2021. Traded coal prices doubled from what they were last year.

Energy demand was also up 9% globally over the third quarter of 2021. As energy prices and demand continue to rise at that rate, supply chain efficiency will have a hard time keeping up, the report says.

“That’s been scraping up against production capacity, which means supply is relatively inflexible in the short term,” says Jim Burkhard, vice president, oil markets, energy and mobility for IHS Markit.

According to the United States Energy Information Administration, energy prices in 2021 rose more than any other commodity used by industries. They were impacted most by a rise in crude oil and natural gas.

Natural gas actually saw the least growth according to information from the S&P Goldman Sachs Commodity Index but was still up 38% from the beginning of the year. Electricity prices in the US also saw significant increases last year, in part due to rising fuel prices, according to the EIA.

Power issues caused China at one point in 2021 to slow or cut energy output to certain areas in the country, which created fears of supply chain shortages as manufacturing plants could not remain operational.

ESG aspects are also impacting supply chains as investors and other stakeholders begin demanding sustainable and ethical practices across production.

One aspect that can help make improvements in the area is the idea of supply chain traceability systems. They can help track net zero achievements, lead to transparency and help protect against potential disruptions, according to Planet Tracker.

IHS Markit says the ESG impact on supply chains creates a complex puzzle and can impact areas of production where resources aren’t as strong.

“There are two dimensions: direct disruption to supply chains from climate stress and social and governance instability; and regulatory, shareholder and consumer pressure to improve sustainability credentials and protect corporate reputations,” says Nathalie Wlodarczyk, vice president, risk intelligence solutions for IHS Markit.

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