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Nov 15, 2022

ESG and the energy sector: Investors and executives step up clean-energy transition

But sentiment is split on ability to meet emissions-reduction goals, finds new study by Womble Bond Dickinson

Energy sector investors and corporates are upping their game on energy-transition strategies, with more than 70 percent of both groups saying they have changed their strategies since 2021. 

On average, more than 50 percent of investors and 45 percent of sector executives are accelerating the adoption of renewables, natural gas and decarbonization technologies, according to research from Womble Bond Dickinson (WBD). 

The research – which surveys 137 industry leaders and investors in the energy sector, including C-suite executives, business and operation managers, investors and in-house legal counsel – notes that prolonged market upheaval and geopolitical shifts have prompted the sector to reassess priorities around ESG issues. 

WBD’s 2023 Energy Transition Outlook Survey Report points out that investors and executives alike are turning to legacy fuel sources such as oil and coal, though it notes there is a stronger preference for cleaner energy resources.

‘Given the uncertainty of the times, energy leaders seem to be trying to extend the life of coal as much as they can, as a hedge,’ says Jeff Whittle, global head for the energy and natural resource sector at WBD. ‘Still, the use of renewables is clearly on the rise across the board.’

Mixed picture

In the US, the Biden administration set goals to reduce greenhouse gas emissions by at least 50 percent by 2030 and to decarbonize the entire US electricity sector by 2035.

Report findings show the majority of investors surveyed hold a degree of optimism about their readiness to meet emissions reduction targets by 50 percent over the next eight years, with 34 percent ‘very prepared’ and 37 percent ‘moderately prepared’, very much in line with responses in 2021. 

But only 20 percent of investors believe their portfolio companies are moderately on track to meet emissions reduction targets, down from 41 percent in 2021. More than half of the investors surveyed also think the companies they are investing in are only slightly prepared or not prepared at all.

Commenting on the sentiment split, the report states: ‘Industry operators are deeply entrenched in the daily operations of their business and could have a positive bias on their ability to meet their goals. Investors, however, may be more skeptical by nature and receive only periodic reports from their portfolio companies.’ 

As for the decarbonization goal, 23 percent of investors and corporates feel it is very unlikely the power sector will be carbon-free by 2035, up from 13 percent in 2021. But a similar 22 percent considers the goal very likely to be met, up from 14 percent in 2021. 

The top three reasons for the lack of confidence in both groups are the cost-prohibitive nature of compliance (37 percent), the unrealistic nature of the goal (30 percent) and a lack of appropriate infrastructure (30 percent). 

Views on ESG policies 

WBD says 70 percent of energy executives surveyed say they have implemented ESG policies or are in the process of doing so, up from 57 percent last year. According to the report this might be because companies are reacting to stakeholder and investor demands or because they are paving the way to build ‘long-term value-creation strategies’.

Interestingly, the report notes that this year, the link between board pressures and the rising implementation of ESG policies is weaker. In fact, less than a third (32 percent) of executives say board pressure is the reason behind ESG initiatives, compared with 47 percent last year. 

The report also shows 40 percent of executives saying regulatory pressure has accelerated their policy adoption, down from 47 percent in 2021, while 33 percent say the fact ESG policies are part of a larger CSR strategy has pushed them to implement such policies.

Almost a third of corporates surveyed (32 percent) say meeting industry standards is one of the main reasons for ESG policies adoption, up on 2021.

Lisa Rushton, co-head for the energy and natural resource sector and head of renewable energy subsector (US) at WBD, notes: ‘While some consider ESG a potential hindrance to profits, energy companies that implement ESG programs aren’t just setting the stage for the energy transition; they’re also ensuring their organization’s long-term access to both public and private capital.’