This month has been eventful for the world of fossil fuels. The International Energy Agency (IEA), a global authority in terms of energy markets analysis, called for the immediate end of new fossil fuel extraction licensing, whilst several oil majors announced key strategic decisions. These further demonstrate (if it wasn’t already clear) that the tide is turning.
The IEA is an intergovernmental organisation that provides information on what future energy demand and supply could look like under different scenarios: these are possibilities, not predictions.
Until recently, the IEA insisted that that their role was purely non-prescriptive. They are such an authority figure, however, that many companies make decisions based on their findings. Their former reports hinted that oil and gas production still had some bright years in front of it, so it is easy to see what interpretation investors might have made of it: that fossil fuels were still worth investing in. A typical example of self-fulfilling prophecy.
But the IEA’s latest report, “Net Zero by 2050” presents a radically different picture. It reveals a comprehensive roadmap for the energy sector to reach net-zero emissions by 2050. Once a representant of the oil industry’s interests, the IEA now assures that:
In summary, the report says that the transition should mainly come from the electrification of transport and heating, coupled with the decarbonisation of power generation (renewables and nuclear instead of gas and coal) and the development of electricity storage. Hydrogen also has a key role to play, especially in industrial processes, as a substitute for natural gas for heating and electricity generation. Finally, an extensive deployment of carbon capture, use and storage (CCUS) is necessary to offset unavoidable emissions. Economies need to immediately deploy all the clean technologies available today on a massive scale, and to give a major global push to accelerate innovation.
The IEA pathway requires all governments to significantly strengthen and implement energy and climate policies, which cannot be achieved without the support and participation of citizens. Another major enabler is financing: under this scenario, the annual investment in clean energy reaches USD 5 trillion, creating millions of jobs and boosting the economy.
The IEA’s narrative shift is a very good reason for hope. They have finally realised that their huge influence and analytic capabilities could make a positive impact! As Ben Parker said, with great power comes great responsibility.
Shell has been ordered by a Netherlands court to cut its global emissions by 45% by 2030, compared to 2019 levels. Earlier in May, investors had voted in favour of Shell’s target to achieve net-zero by 2050, but there is growing shareholder support for activists’ demands to set more ambitious targets – including from Legal & General Investment Management, Britain’s biggest fund manager.
ExxonMobil’s Board of Directors has been massively reshuffled after investors handed board seats to three climate change activist nominees. Ex-Petronas CEO Wan Zulkiflee was also ousted from the board, just four months after his nomination, due to his lack of vision and ambition around energy transition issues.
Chevron also faces increasing investor pressure to do more to curb emissions. A majority of shareholders recently voted in favour of a proposal to report on scope 3 emissions and to “substantially” reduce them in the medium- and long-term. CEO Michael Wirth also hinted the group might consider selling its 20% stake in a Canadian oil sands mine.
BP bought a number of US solar farms with a total capacity of 9GW, increasing its portfolio of renewable energy projects by 60%: a significant step towards its goal of securing 20GW by 2025.
Finally, Total has rebranded into TotalEnergy, in an attempt to demonstrate its growing focus on renewables.
The place of oil majors in the future net zero world is controversial. A common position of the defenders of fossil fuels is that energy companies need the money generated by oil and gas activities to keep millions of people employed and to fund the development of their low-carbon businesses.
Opponents to that view argue that we don’t need oil majors at all. Completely new companies could emerge as leaders of the transition: unencumbered by legacy business models or ways of working, backed by an increasingly climate-aware financial sector, and operated by low-carbon energy professionals as well as reconverted fossil fuel workers. For example, the expertise of oil and gas employees fits well with technologies like hydrogen, CCUS and offshore wind.
Our current economic model, powered by fossil fuels, cannot continue to grow indefinitely. In fact, the production of conventional crude oil peaked in 2008, and while shale oil production is still increasing, it will also peak within the next couple of decades, as it is more and more expensive to extract oil and gas.
What will happen to your business when there is not enough fossil fuel for everybody? Not enough oil to ship all the materials and finished goods, not enough gas to heat all the buildings, not enough electricity from coal-fired plants to keep all the lights and robots on? It will be a zero-sum game for those who get stuck in the old ways.
On the other side, there are huge benefits for those who anticipate the change: for example, Unilever saved over €1bn in costs by improving energy and water efficiency in factories.
Governments and policy-makers finally begin to enact game-changing policies. Full emission disclosure will soon become the norm, and there are few sectors where new bans and mandates haven’t started to disrupt operations.
Last week, the G7 committed to end unabated coal finance, leaving China isolated as the last significant coal funder overseas. The G7 also just announced they will mandate climate reporting for corporates, in line with the recommendations of the Taskforce on Climate-related Financial Disclosures (TCFD). TCFD will also be discussed by the G20 soon, potentially leading to an international agreement ahead of the COP26 climate negotiations in Glasgow in November.
The IEA’s recommendations might not happen immediately, but the exponential increase of new governmental decisions and commitments clearly show that it is the direction the world is taking.
Your customers’ expectations continue to evolve, and they directly impact your market share and bottom line. Unsustainable businesses will find it increasingly difficult to convince customers to buy their products and services.
Your investors are increasingly concerned by their portfolio’s sustainability credentials. Most of them now demand transparency on companies’ performance on environmental and social issues. They might soon refuse to invest in your company if you haven’t prepared for climate-related risks, or if you jeopardise your own market positions by failing to eliminate harmful practices.
Your employees are a key driver of your success, but as public sentiment is shifting, they will increasingly hold you to account over climate change responsibility. Your ability to attract and retain talents, in particular amongst younger generations, might be directly affected by your sustainability strategy and roadmap.
Finally, even if you still aren’t convinced, more and more of your competitors are. You may not remain relevant very long, regardless of your sector, without a serious sustainability strategy.
There is a bright side, of course. With any risk comes a new opportunity. GM will only sell electric vehicles by 2035; British Gas is upskilling engineers to install heat pumps; BlackRock is massively pushing for its dedicated sustainable investment solutions. Sustainable businesses selling clean products and services will unlock huge value pools.
But it takes time to transform an organisation, and to adapt its entire operations and supply chain to the new world. If you want to stay relevant and capture new market opportunities, you need to act now. Why don’t you give Avieco a call, so we can work on it together?
more than a word.