Managing energy and resource transition challenges

In that short span, while they keep their current businesses running, most will begin reinventing themselves as businesses that also move the world closer to a sustainable, low-carbon future – through carbon capture, usage, and storage (CCUS), for example.

Some investors are betting against them, shifting money from these incumbents to new companies that have less baggage and appear to be more innovative and more capable of solving the world’s most important issues.

But it would be a mistake to count the incumbents out. These industries have already helped drive monumental shifts over the past century, delivering reliable and affordable energy that powers the world’s markets, supplying raw materials that make the consumer economy possible, and ensuring a steady food supply that feeds billions.

Even so, many energy and natural resources (ENR) companies that transformed the world may be caught on the wrong side of a storyline, legacy players in a sector that’s ripe for disruption. The question being asked in boardrooms is:

How do we fix that?

One way is to change our thinking about the role of energy and natural resources companies in this transition. The industries under the most pressure to change are the same ones that have the experience and organisations necessary to transform the world’s use of energy and resources. Their achievements underscore their unique capabilities and also serve as the foundation for their next phase of growth.

The adversarial stance we’ve grown accustomed to between many stakeholders (investors, customers, community members) and these companies defined the necessary changes and spurred governments and industries into action.

The Covid-19 pandemic introduced another element to the discussion: the determination to build back better. Now is the time to work collaboratively, develop partnerships, and address the immense challenges inherent in the energy and resource transition.

Under scrutiny and squeezed for capital

ENR firms face two related challenges. One is that greater scrutiny from the public over sustainability and greenhouse gas (GHG) emissions is making it harder to obtain capital for expansion. The second is that capital is flowing to their insurgent competitors, which are disrupting these industries and beginning to take market share.

Attention to the carbon and GHG emissions from ENR industries poses a challenge to existing business models, one that’s more serious than in previous cycles of scrutiny. Weather events and wildfires are occurring more often and with greater intensity, and that’s made climate change appear more imminent to people who once saw it as a far-off threat.

As the links to emission-intensive industries and their products become clearer, public pressure mounts and investment capital for future projects becomes more difficult to obtain. ENR firms need to find ways to respond while continuing to provide the materials and services necessary for consumers to enjoy the same level of personal consumption.

At the same time, these firms must meet the needs of investors who control the price and flow of capital.

Innovation, impact, and economics

Progress over the next five years will set the course. Incumbent players in energy and natural resources will either become leaders or continue to lose the public’s faith and the support of the capital markets.

Companies are showing early signs of effectively making the transition when they get three things right: innovation, impact, and economics.

1. Innovation – Energy and resource firms are constantly innovating to create changes in society and markets, such as improving extraction methods to draw more hydrocarbons out of stubborn rock or developing more sophisticated plastics. Now they’re investing in innovation that will change their operations, supply chains, and products, moving toward a more sustainable, lower-carbon future.
2. Impact – Pressure is increasing on nearly every company to reevaluate its role in the local and global communities, and to become better corporate citizens. For ENR firms, most of the scrutiny focuses on emissions and other ESG issues like water use, waste, recycling, and transparency. In the long-term, however, they’re likely to be assessed on a broader scorecard that includes their impact on native lands, environmental justice, and issues of diversity, equity, and inclusion. Most will need to retrain their workforces for a more automated future.
3. Economics – You can’t change the world if you can’t fund the change. But forming the capital for new investments in the energy and resource transition increasingly requires not just hitting your marks on performance and earnings, but also telling a credible investor story, showing real leadership and the potential to create new value.

Meanwhile, the funding and underwriting bars are rising. Banks are pledging to provide financing only to zero-carbon projects by 2050, and combined they have set aside trillions of dollars to fund green projects. Major insurers have balked at underwriting coal projects, and coal companies are reporting higher debt costs. Oil sands players are also reporting challenges getting insurance.

With more reporting requirements related to climate risk, and more discussions about stranded costs, the challenges in forming capital in fossil fuels will continue to grow.

Eric Beranger, partner, Bain & Company, Middle East; and Joe Scalise, partner, Bain & Company San Francisco