The Energy industry is undergoing a “once-in-100-years” transformation. At the confluence between the fourth industrial revolution, climate change, and heightened stakeholder awareness, how we think about energy is at a crossroads. In the past 18 months we have witnessed an amplification of the climate debate. The language has become more urgent, commentators have gone from discussing “climate change” to declaring a full-scale climate emergency. The plea of 16-year-old Greta Thunberg at the UN Climate conference is still ringing in our collective conscience, damning us for not acting sooner.
For directors and executives of energy companies, the climate agenda has turned the spotlight on established business models, forcing many to reinvent themselves as they grapple with the challenges of satisfying the demand for affordable, abundant energy within a low carbon agenda. How do boards balance the tension between meeting the energy demands of an expanding modern economy with fears for the survival of humanity?
1. Insist on Radical Transparency
Transparency is ultimately a governance issue; however radical transparency is the only way to bridge the trust gap between the industry and its increasingly vocal critics. Companies that do not act quickly to communicate climate-related risks and opportunities in clear and unambiguous terms expose themselves to reputational harm. In this regard, boards play a critical role in providing support to management by insisting on accurate reporting to measure key sustainability metrics and then using that data to inform investment, operational decisions and engagement with capital markets.
The recommendations of the G20’s Climate Financial Disclosure Task Force (TCFD) have led to increased scrutiny from analysts and investors who want to know not only that their funds and portfolio companies are ready to respond and adapt to climate change, but equally, whether their investments are part of the problem or the solution. Encouragingly, the CDP (formerly the Carbon Disclosure Project), reports an upswing in companies’ willing to add to the CDP’s comprehensive collection of self-reported environmental data (representing over $35 trillion in market capitalization) which is used by a network of policy makers and investors to make decisions. This commitment to unprecedented voluntary levels of environmental disclosure is a first step that will separate the winners from the losers in the sustainability stakes.
Transparency is also necessary to ultimately agreeing on a price point on carbon emissions. Anyone who attended CERAWeek 2019 observed a paradigm shift among energy executives who are clearly engaged with finding workable solutions to a rapidly escalating problem. Not only from a risk and reputation perspective, but from an acknowledgement that the tipping point may be closer than we think; and carbon reduction, capture and sequestration—all three—are now urgent priorities, and also present interesting opportunities. What is less clear is how net carbon reduction will actually be achieved and by when. While data-driven discourse is vital to authentic progress, it is critical that the dialogue is based on scientific rather than political or short-term commercial considerations. However, it is also clear that company action must go deeper than just robust reporting.
2. Embed Sustainability within Corporate Purpose
If “purpose” is the defining justification for a company’s existence, then only a purpose driven approach will ensure that sustainability becomes part of a company’s DNA to the point where it is embedded within the culture of the organization. This can only be driven from the top down. Companies willing to radically adjust their operations and policies to be at the forefront of sustainable practices, are in a stronger position to attract capital, talent and customers. This level of commitment is only possible if sustainability becomes the yardstick by which companies measure every business decision, from investment and capital allocations through to supply chain, logistics and recruitment. This perpetuates ‘bottom-up’ engagement. Put the other way around, there can be no sustainable returns on capital in an economy disrupted by catastrophic climate failure.
At the moment, the impetus to take part in ESG reporting is often driven by outward-facing departments, such as investor and stakeholder relations. However, on the matter of carbon reduction for example, getting disclosure platforms such as the CDP to work in your favor requires a deep commitment to setting and achieving major sustainability metrics within the company. Therefore, energy companies that elect to weave sustainability into their purpose should embrace being evaluated at least partly on their willingness to make net carbon reduction a key performance metric internally. These include:
• Linking remuneration of top executives to verifiable, net CO2 reduction targets.
• Providing significant financial investment for low and no-carbon, next generation energy initiatives and technologies.
• Leading the way in decarbonization through the innovation of traditional operations.
• Practicing radical transparency internally as well as externally.
• Setting internal prices on carbon to incentivize innovation and reductions.
3. Champion Collaboration and Innovation
As a species, we have little more than a decade to slash CO2 emissions by 45% from 2010 levels in preparation for zero emissions by 2050. Failure to achieve this will result in a new set of climate conditions that confound the models and make nonsense of long-term strategic planning. For the energy sector, this means focusing increased efforts on developing products, processes and policies that lead the way to substantially and aggressively reduce, extract and sequester carbon from the atmosphere.
Unprecedented situations call for unprecedented solutions and meeting the 2030 deadline will require high degrees of multi-sector and multi-agency collaboration on a previously untested scale. Energy companies need to take the lead, venture beyond traditional stakeholder groupings and engage with a wider audience, such as NASA, citizen scientists and innovative start-ups dedicated to a circular economy. This complements industry examples of collaboration such as the Oil & Gas Climate Initiative (OGCI) championed by 13 major, integrated oil & gas companies and NOC’s, to invest in non-carbon means of producing energy. Companies should also commit to collaborating with their industrial customers on this journey.
Not surprisingly, much of the necessary collaboration and innovation will be driven by employees. The ability to achieve high levels of employee engagement is an essential C-suite quality in the current operating environment. Boards can help by creating a culture that amplifies and rewards innovation and collaboration as drivers of sustainable business practices. Management should be empowered to make decisions that are pro-planet and not solely pro-profit.
4. Support Science and Embrace the Moral Imperative
Business must publicly and loudly support science. In the era of “fake news”, business has a critical role to play in supporting a key pillar of our working democracy and economy. Facts and science should be communicated in the same way profits and loss are. A commitment to sharing unambiguous data is the best weapon to combat a narrative that pits companies, capital and citizens against each other.
And yet, of greatest importance is the moral imperative. The idea that sustainability is at the core of human endeavor was profoundly articulated by Cardinal Turkson at the Second Vatican dialogue, “The Energy Transition and Care for Our Common Home”, whose participants were 70 executives from among the world’s leading oil & gas producers, global investors, scholars of Climate Science and high-level representatives from the academic world.
The final press release rightly noted that moments of crisis are also moments of opportunity for discoveries, advancement and growth. In this regard, the Cardinal noted that, “humanity did not transit from the stone age to the copper and bronze ages because it ran out of stones. It was because advancement and growth required it. So must it be with fossil fuel. Energy transition and the care for our common home must not only be a response to the need to fully humanize the energy industry. It must also respond to the demands of the advancement and growth of a vital sector of human civilization.”
In the final analysis, it falls to the chair, directors and executives to embrace and embed a mindset that informs the culture of the modern, sustainable energy company. We are witnessing a phenomenon in our time that is unprecedented, the significance of which is difficult to overstate. To truly embrace sustainability in our corporate, collective and individual lives, we must rise above the material and seek to cultivate the belief that the criticality of finding sustainable ways to work and live transcends the material and goes beyond our own lives.
As Winston Churchill said: “The destiny of [humanity] is not measured by material computations; when great forces are on the move in the earth, we learn we are spirits and not animals. There is something going on in time and space, and beyond time and space, which, whether we like it or not, spells D.U.T.Y.”
It’s time for resolve—and action.