Revving up for a net zero future?

By Andrew Adie

Post COP the question that hangs in the air for business is how do we deliver a net zero transition, particularly in sectors that are hard-to-abate or environmentally toxic?

This week has delivered a number of interesting announcements that may seem unrelated but offer a partial glimpse at that future.

Royal Dutch Shell (soon to lose both the ‘Royal’ and ‘Dutch’ parts of its name) has announced it is simplifying its corporate structure, losing its dual listing and moving its HQ to London as a UK incorporated business. Part of the rationale for this is that it enables the company to restructure its assets and operations more easily for a net zero future.

Under pressure from activists, Shell wants to invest more in renewable energy assets and is being challenged to separate ‘brown’ and ‘green’ assets for future disposal.

While as a fossil fuel company Shell sits on the global environmental naughty step it, like other big oil majors, is on a transitional journey that seems likely to result in it emerging as one of the world’s largest renewable energy companies in the future. The interesting point though is whether disposal of ‘brown assets’ actually delivers any real environmental benefits.

With demand still high for oil and gas (as the rest of the economy and consumers continue the slow transition from the Black Gold) any assets disposed of will find ready buyers from organisations that will, arguably, not be as troubled by ESG oversight and the demands of activists and shareholders as companies like Shell.

The pressure to divest for a net zero future will continue but we need to be careful what we wish for when it comes to those assets. Divestment needs to go hand-in-hand with political frameworks that force the adoption of alternative energy, and with meaningful changes in demand away from fossil fuels and towards renewables.

Aligned to this, the story of SSE is also interesting. Also facing calls from activists to break itself up, SSE has announced it will instead invest around £1 billion a year in wind farms and flexible power generation, arguing that it has a highly focused business model enabling it to deliver a faster transition to renewable power and a net zero future.

Some investors seem to see more value in the sum of its parts than in the whole business – a temptation that will stretch ESG investors’ moral authority pretty thin. As the value of companies that lead in the net zero economic space grows (we only have to look at the spectacular IPO of EV manufacturer Rivian which this week has grown in value to be worth more than the VW Group) then the temptation of fast money now vs supporting a net zero transition will be a hard call for some.

As business digests what COP26 means, and starts to focus on the journey to COP27 next year, which will only increase the pressure to transition to a net zero model, then securing the buy-in of all stakeholders is going to be increasingly challenging.

Activist investors, NGOs, the public and politicians all want the same and different things from business. Most want to see a viable route to a net zero future, most will agree that it brings significant economic opportunities for business but whether investors, governments and activists have the patience to allow business leaders to drive that journey in a planned way is a moot point.

As valuations rise, as sanctions against polluters increase and the opportunity for a fast buck vs supporting a just transition test the moral mettle of all those surrounding businesses, so the calls for divestment, break-up and strategic realignment will grow.

We thought 2021 was a busy year for ESG and environmental business, 2022 could be even more turbulent.