The Future of Risk: Energy

“According to data from the TPI, the energy sector is also falling behind others in its response to the Paris Agreement. Of the 50 energy firms considered by the TPI, 39 were not aligned with the Paris Agreement, 9 had not made disclosures and only 2 had committed to the Paris Pledges, putting the sector well behind other carbon-intensive industries.”

Within the divestment movement, there are groups that are taking a more constructive approach to the climate challenge.

Other pressure groups, such as the Transition Pathway Initiative (TPI), are focused on encouraging industries to sign-up to decarbonisation. A significant strand of the initiative is looking at global oil subsidies and financial support, from both governments and banks. Global energy subsidies are significant and the TPI is putting pressure on governments and financial institutions not to fund new oil and gas projects. This could see further sources of financial support for the sector dry up.

The Church Commissioners in the UK, which manages a USD 10.3 billion investment fund, are shareholders in ExxonMobil for example. Rather than comprehensive divestment, they have instead opted for partial divestment and investor activism that is pushing the firm to engage with the issue of climate change.

Other pressure groups, such as the Transition Pathway Initiative (TPI), are focused on encouraging industry to sign-up to decarbonisation. A significant strand of the initiative is looking at global oil subsidies and financial support, from both governments and banks. Global energy subsidies are significant and the TPI is putting pressure on governments and financial institutions not to fund new oil and gas projects. This could see further sources of financial support for the sector dry up.

According to data from the TPI, the energy sector is also falling behind others in its response to the Paris Agreement. Of the 50 energy firms considered by the TPI, 39 were not aligned with the Paris Agreement, 9 had not made disclosures and only 2 had committed to the Paris Pledges, putting the sector well behind other carbon intensive industries. As such, it seems highly likely that energy will continue to be a target for divestment and pressure on subsidies and financial support.

Fortunately, there are alternatives to rising divestment. Perhaps the most obvious answer for energy firms is a search for combinations with the power sector and an increase in renewables. Typically, firms with greener credentials are less of a target for divestment, but they do need to pay more than lip service to decarbonisation in the face of possible shareholder activism.

Investors are looking for firms to decarbonise, but also to diversify their income streams. Alternatives such as hydrogen and renewables will do exactly that and there is an opportunity for existing energy infrastructure – such as using petrol station forecourts as electric car charging points or converting LNG facilities to carry hydrogen – to propel the decarbonisation agenda forward.

Rising levels of divestment are apparent across Europe, making it increasingly challenging for energy firms – particularly those at the carbon-intensive end of the spectrum - to source capital.

By 2030, government will need to reflect on commitments made in Paris and milestones reached. It is likely that there will be an acceleration in climate policy, as governments seek to set global temperatures on the right path. This will lead to greater pressure to divest, ‘green’ the system and meet climate change targets.

It is likely that we will begin to experience more severe impacts from climate change if we remain on the current 3C pathway, forcing firms to consider the material financial impact of climate change on their balance sheet.