ESG in the energy sector: Investors more concerned than corporates about challenges

Energy sector investors place greater weight on challenges to a new-energy transition than do corporate executives, according to research from Womble Bond Dickinson (WBD).

Despite being the sector that is arguably under the biggest ESG spotlight, researchers from the international law firm describe the ESG mindset of the energy sector as being in the ‘early days’.

But the research – which surveys 170 industry leaders in the energy sector, comprising corporate executives, investors and in-house legal counsel – shows that views have been rapidly changing. It also highlights the complexities of the new-energy transition. ‘This survey’s findings paint a picture of what has always been a dynamic industry now beset by overwhelming and, in many ways, existential challenges,’ say the writers behind the firm’s 2022 Energy Transition Outlook Survey Report.

Although surveyed executives come across as being generally optimistic about their place in the transition, with investor views broadly matching them, when you dig into specific challenges, investors show more concern than their investee companies. Perhaps unsurprisingly, the vast majority (85 percent) of energy sector investors also say their focus on ESG is set to increase over the coming two years.

The corporate focus

The area of energy transition that is already a focus for more corporates in the sector is pollution-neutral consumption (41 percent say it is already a focus, 38 percent say it is a consideration), while 51 percent are currently considering carbon-neutrality (26 percent say it is already a focus).

‘Carbon-neutrality initiatives go well beyond simple energy efficiency bottom-line concerns and reflect a larger shift driven by societal expectations, changing investment approaches and, of course, grassroots activism,’ says Jeffrey Whittle, WBD partner and energy & natural resources sector co-lead in the research.

Despite the assertion that the ESG focus of the sector is in its early days, WBD says the ‘embrace of climate goals by industry leaders is matched by their reported levels of preparation to meet them’. The firm asked executives: ‘To what extent is your organization prepared to address a commitment to a reduction of more than 50 percent in methane and CO2 emissions by 2030?’ On CO2, 36 percent consider themselves very prepared and 37 percent moderately so, with figures of 43 percent and 34 percent, respectively, for methane.

What is interesting is how these findings largely match the investor view, though just 27 percent of investors think the energy companies they are invested in are very prepared to meet methane reduction targets.

Whittle notes the drastic change that has taken place across the industry. ‘Five years ago, it would have been difficult to believe that three quarters of energy executives would feel this well prepared for carbon and methane reductions – and that investors would feel the same way about their portfolio companies,’ he says.

The view from the buy side

WBD says that on the corporate side, no one challenge stood out for executives considering the energy transition, with Lisa Rushton, WBD partner and energy & natural resources sector co-lead, noting that it is still early days for the sector, which could play a part in the general optimism.

‘The industry’s current openness to the transition may be due in part to the fact that the technological and market path forward is still open, and winners and losers have not been identified,’ she says. ‘Even players that are entrenched in current markets and technologies have the opportunity to pivot and capture value going forward.’

On the investor side, however, there are more concrete concerns, with energy sector investors seeing challenges as being more serious ‘across the board’. Compared with their ‘counterparts on the front lines of the transition’, investors are more concerned about stranded assets (67 percent vs 43 percent), the availability of federal incentives (49 percent vs 37 percent), the challenges posed by intellectual property (47 percent vs 34 percent) and the complexity of the required infrastructure (56 percent vs 48 percent).

Years in the making

WBD points out that fossil fuels represent 80 percent of current global energy consumption, with the market for them exceeding $6 tn per year. And despite a growing focus on ESG and energy transition, ‘the use of fossil fuels continues to expand faster than the rate at which renewable energy can be deployed’.

Researchers also point out, however, the ‘noticeable move on the part of financial institutions and investors when it comes to their evaluation of investments. This highlights a distinct shift from what was once almost a pure assessment of a rate of return on investment to a landscape where more than 76 percent of investors today place at least a moderate emphasis on ESG issues when making investment decisions.’

WBD cites recent events related to climate change, social unrest and Covid-19 as all playing a part in pushing ESG concepts to the forefront for ‘investors, customers, employees and most corporate stakeholders’.

‘A lack of ESG strategy will ultimately affect a company’s access to public and, increasingly, private capital,’ notes Rushton.