Global energy companies are shifting to ESG investing; but what are the drivers to decarbonise and the innovative approaches being deployed? In this new series, Mike Scott takes the temperature of the industry’s response to date, as well as the challenges ahead that this shift will present.
The energy sector faces a turbulent, transitional autumn, framed by the latest report from the Intergovernmental Panel on Climate Change (IPCC) and the crucial COP26 Glasgow, Scotland, meeting in November.
We’re seeing a growing number of companies divesting their high-carbon assets, as BHP has just done in selling its oil and gas unit to Australian compatriot Woodside. However, investors and campaigners are starting to point out that while this helps the seller to decarbonise, it makes no difference to total carbon emissions – indeed, if you sell to someone less concerned about climate change, you may end up increasing carbon emissions.
The end of coal?
The coal mining sector should give energy companies pause for thought. New research from E3G and Global Energy Monitor shows that the pipeline of planned coal mining plants has dropped by 76% since the 2015 signing of the Paris Agreement, with 84 countries either having explicitly banned new coal power or having no plans to build new coal plants.
And a new sustainable investing initiative may point to the future for the assets that remain – a group of investors, backed by the Asian Development Bank, are planning to work with governments to buy up coal plants and shut them down within 15 years, much earlier than planned but enough time to allow workers to retrain and find new jobs, and to allow countries to switch to renewable energy.
A new Net Zero emissions standard for Oil and Gas
You can be sure that if it works for coal, then it will start to be applied to oil and gas as well. Investors are becoming increasingly vocal and insistent about what they expect from the sector. A new Net Zero emissions Standard for Oil and Gas “sets minimum expectation for what must be included in net zero transition plans from oil and gas companies, to create a level playing field in corporate reporting and meet investor expectations for credible and comparable company net zero transition plans,” the group says.
The standard emerged from discussions between leading investors and major oil and gas companies, and will now be piloted by companies including BP, Eni, Repsol, Shell and Total. It calls for comprehensive absolute and intensity emissions reduction targets, and alignment of capital expenditure and production plans with a net zero emissions target. It acknowledges that ‘winding-down’ is a legitimate strategy, as well as diversifying energy offerings or working through a company’s value chain to reshape demand.
The Standard joins the Net Zero Asset Owners Alliance, the Net Zero Asset Managers Initiative and the Net Zero Insurance Alliance as part of a growing push by investors to target the highest emitting greenhouse gas industries and companies. Aided by growing amounts of high-quality data, this increasingly focused investor pressure is leaving energy companies little choice but to react.
That was evident during a stunning 2021 results season where sustainable finance, ESG investing and ESG investors won shareholder resolutions demanding climate action from companies such as ExxonMobil and Chevron. And the results of these votes are starting to feed through, although there is a tangible sense that companies are struggling to work out how to be socially responsible, as well as how to satisfy both climate change campaigners and the investors who want to continue enjoying the sector’s hefty dividends.
Chevron has just announced plans to spend $10bn in the next seven years on cutting emissions and renewable energy. It is still less than a tenth of its planned capital expenditure, but such a commitment would have been unthinkable even a year ago. Yet its CEO added that the company would rather pay out dividends to shareholders “so they can plant trees” than build more renewable energy capacity. Such defensive statements have often been followed by more ambitious plans a few months later.
Meanwhile, the court case that forced Royal Dutch Shell to cut its emissions by 45% by 2030 has been followed by ABP, one of the Netherlands’ biggest pension funds being sued in an attempt to make it sell its fossil fuel shares.
Shell initially said that it would comply with the ruling but is now appealing. “We agree urgent action is needed and we will accelerate our transition to net zero,” said CEO Ben van Beurden. “But we will appeal because a court judgment, against a single company, is not effective.”
Nonetheless, the sector can expect more climate change litigation in the months ahead.
Mergers and acquisitions 2021
As always, mergers and acquisitions deal activity slowed to a trickle over the summer, but according to Pricewaterhousecoopers (PwC), “global decarbonisation coupled with plentiful capital and an economy emerging from the pandemic will continue to drive strong M&A activity through the rest of 2021. What is now a global transformation to net zero emissions will continue to influence M&A activity and capital project investment decisions.”
There certainly seems to be no shortage of capital available for green investing and clean energy projects. Bloomberg New Energy Finance (BNEF) reported that clean energy projects and companies attracted $174bn in investments in the first half of 2021, the highest first half total ever. The second six months of the year normally produces more deals.
Special purpose acquisition companies (SPACs)
The emergence of special purpose acquisition companies (SPACs) is driving up deal multiples for “technology-centric energy-transition assets”, PwC adds. “Carbon-intensive projects and companies with large ESG risks, on the other hand, are finding it increasingly difficult to obtain finance—as well as insurance.”
Energy Vault, a ‘gravity-based energy storage company’, combined with a SPAC in a deal that values it at $1.6bn, for example, while Britishvolt, the company building the UK’s first battery ‘gigafactory’ has been valued at more than $1bn after its latest funding round, highlighting the growing demand for green energy and energy transition investments.
Tentative green energy growth
Meanwhile, the energy majors’ tentative, but ever more ambitious, steps into the clean energy world continue – Shell New Energies has bought Inspire Energy, a US renewable energy residential retailer while its Ubitricity EV charging subsidiary announced plans to install 50,000 charge points in the UK by 2025, effectively doubling the country’s charging capacity.
Many in the clean energy community welcomed BP’s appointment of Anja-Isabel Dotzenrath, formerly head of RWE Renewables, to lead its low-carbon business, as indicating its commitment to cleaner energy. Adam Vaughan, chief reporter at New Scientist, said that the appointment sends “a clear message on [BP’s] direction of travel away from oil and gas”.
Hydrogen energy becoming a big focus for majors
One sector that has seen stratospheric growth – and that the energy sector is increasingly pinning its hopes on – is hydrogen, which can help lower carbon emissions hard-to-abate industries such as cement, glassmaking and steel. In recent months, the world’s first glass and steel made using hydrogen have been produced, at Pilkington in the UK and Sweden’s SSAB respectively.
“Nearly everything has doubled already this year in the world of clean hydrogen, and we expect the momentum to continue in the months ahead,” said Martin Tengler, lead hydrogen analyst at BNEF.
As the UK government published its hydrogen strategy, including plans to blend hydrogen into the wider gas network, BNEF reported that some 16GW of electrolyser capacity – crucial for making green hydrogen – could come online by 2024. In 2020, global electrolyser capacity was just 200MW.
However, there is no consensus on what the future hydrogen economy should look like. Tony Ballance, of gas network Cadent, called for a mandate for ‘hydrogen-ready’ boilers from 2025, while Jess Ralston, analyst at Energy and Climate Intelligence Unit (ECIU) said: “Hydrogen could be very valuable for cleaning up steel production. But questions remain over whether the government has truly grasped which areas will be most suitable for hydrogen use and which will not.
“For example, the case for hydrogen for home heating is far from proven, particularly hydrogen derived from fossil gas rather than from renewable energy.”
Wind and Solar energy
The UK is also encouraging innovation in other areas, with a £450m fund to accelerate efforts to decarbonise energy networks and turn the UK into the “Silicon Valley of energy”, while its fourth Contract for Difference (CfD) round is the largest ever at £265m and will procure 5GW of renewable energy capacity, double the amount that the third round did.
It includes cash for offshore wind projects, including floating wind, and £55m for emerging technologies. For the first time since 2015, onshore wind and solar energy will also be able to bid.