At a time when fossil-fuel-focused energy businesses are under huge pressure to decarbonise, investors might be expected to be running scared. However, new research from law firm White & Case suggests many investors in the industry are focusing on the opportunities of decarbonisation, rather than planning an exit.
Indeed, capital providers determined to work with the energy sector to help it decarbonise comfortably out-number those who want to sell up. In White & Case’s research, 45 per cent say they engage with emissions-intensive portfolio companies with the aim of lowering emissions, against 34 per cent who say they divest. This mirrors the view taken by energy businesses themselves: 42 per cent want to decarbonise their emissions-intensive operations rather than sell them off.
Carrot, not stick
For John Moon, Head of Morgan Stanley Energy Partners, this view represents the best way to make progress towards climate change targets such as net zero. “We should work to decarbonise carbon-emitting industries, rather than vilify them,” he says. “Good engagement means accountability, and this requires good measurement – holding [companies] accountable for specific decarbonisation goals is part of the trick.”
Certainly, there are financial risks in staying invested. Among those who do plan to divest from White & Case’s research, 49 per cent of capital providers cite their fear of stranded assets – getting stuck with investments rendered increasingly worthless by efforts to mitigate climate change – while 26 per cent fear such holdings could expose them to reputational damage.
Still, many investors worry that divestment means giving up a seat at the table from which they can influence the pace of decarbonisation. They also recognise the significant opportunities that the energy sector’s transition will bring, and are reluctant to miss out.
Not least, investors are looking at potential returns from investing in solutions reflecting the reality that the use of fossil fuels is likely to continue for some time. In White & Case’s research, 42 per cent of capital providers say they now want to invest in low-carbon technologies that will help to reduce emissions and speed up the decarbonisation process; 33 per cent want to invest in portfolio companies that are reducing their carbon emissions.
These are also priorities for energy businesses themselves, with 41 per cent planning investment in carbon-reduction technologies. Carbon capture and storage projects, which extract carbon dioxide from major industrial emitters, or directly from the atmosphere, are one focus, says Jay Cuclis, a partner at White & Case. “We are seeing significant and increasing activity in the CCS space, both in the US and globally, as this is viewed as one of the most effective ways of reducing the environmental impacts of continued use of fossil fuels and achieving the world’s net-zero goals for 2050,” he says.
Targeting clean energy
Equally, both investors and energy providers are also determined to identify fully fledged clean energy investment opportunities, which can run in parallel to mitigation initiatives. Among providers, for example, 45 per cent are exploring the potential of new greenfield renewable projects.
Interest in such projects is particularly heightened in the Americas, says Annette Clayton, CEO of Schneider Electric North America. “The US hasn’t really invested in infrastructure in decades,” she says. “So we’re now seeing and embarking on this unprecedented investment in US infrastructure to modernise and digitise it, to make it more resilient to climate impacts and to make it more sustainable.”
In Europe, meanwhile, the energy company Enel points to an initiative to give a second life to 23 thermoelectric power plants and a former mining area that would have been shut down to achieve carbon neutrality by 2040. “The goal of the Futur-e initiative is to valorise the energy potential of the sites with renewable, storage and, when necessary for the grid’s needs, gas technologies,” explains Salvatore Bernabei, CEO of Enel Green Power.
As for investors, 39 per cent have plans to acquire renewable energy assets, and 35 per cent intend to acquire emissions-intensive assets with the intention of greening them. “As the need for renewables increases, there is tremendous opportunity in that asset class,” says Mary Nicholson, Head of Responsible Investment at Macquarie Asset Management. “But we’re also looking beyond renewable energy generation to the technology that will enable the transition. That could be clean grids, battery storage, electric vehicles and more – they will all be as equally important as clean energy generation in the future.”
Nicholson, like other investors who are still committed to the energy sector, is determined to play a role across a broad range of areas where transition is necessary. And while some capital providers will inevitably feel uncomfortable with retaining exposure to the industry – fearing either financial or reputational risk – the pace of change for those who remain invested now appears to be accelerating.
