Why A “No Regrets” Decarbonization Approach Won’t Work for the Energy Transition. By Hassan Mirza, Clareo
In March, an environmental law firm and shareholder of Shell sued Shell’s Board of Directors “for failing to properly prepare for the net zero transition.” This is not the first time that Shell has faced legal action in response to its climate strategy and net zero efforts. Just last year, the Dutch court ordered the company to reduce its emissions by 45% by 2030, relative to 2019 levels.
The International Energy Agency (IEA) warns that the pace of the energy transition is too slow, noting that investments in renewable energy will need to increase threefold by 2030 if the world’s climate pledges are to be met. In our view, one major hurdle to increasing the pace of the energy transition is companies’ adoption of “no regrets” decarbonization initiatives – meaning that regardless of how markets play out, they’ll be rewarded for implementing the solution or technology. Conceptually, this approach makes sense as a way to incentivize adoption of new methods. However, in practice, it has a critical flaw in that it focuses solely on investor returns.
Shell is just one example of a company failing to deliver on its climate strategy. The World Wildlife Fund reported that as of mid-2021, only 13% of S&P 500 companies had a plan to implement or were actively implementing approaches to reach its targets.
Part of the problem
Part of the problem is that many companies use “no-regret” criteria as a key component of their prioritization of projects and investments. This approach is failing to drive the change that is both necessary and promised, meaning these companies will not only fail to meet these critical energy transition targets, but will also have to grapple with damaged brand reputations and greater mistrust.
Collectively, heavy industrial sectors – such as oil & gas, mining, power & utilities, and manufacturing – account for more than 50% of global emissions. Despite committing to meet decarbonization targets, according to a recent Forbes survey, only half of executives and managers felt their organization had effective strategies. Simply put, leaders are not confident in the approaches to develop and execute on science-based roadmaps, especially those designed to reach net zero by 2050.
Companies are also struggling to operationalize ideas and solutions at a larger scale. A variety of factors contribute to this, ranging from lack of trust in solution capability and asset downtime avoidance, but it’s critically impacting innovations that will help companies reach energy transition goals. Companies are struggling just to integrate low-hanging opportunities to improve energy efficiency and conservation. They also face steep challenges to adopt new technologies like carbon capture, robotics, and automation.
What to consider for an efficient energy transition
Industry leaders need to find new ways to add value through their decarb approach. Additionally, current business cycles should be compressed, moving more quickly from strategy to action in order to achieve a sustainable impact from their decarbonization efforts. To do so, senior executives should consider the following:
- Take a “clean-sheet” approach to develop and align decarbonization value levers, moving from compliance-based strategies to ones that create competitive advantage. This is a paradigm shift for most companies, and must be leadership-driven in order to permeate throughout an organization, ensuring that incentives are aligned;
- Understand and adopt operating models that increase social license to operate and brand equity, such as actively engaging with impacted communities as early in the process as feasible;
- Invest in new growth opportunities that will enable the business to thrive in ESG-friendly environments, and clearly link ESG and sustainability costs and risks to the organization’s financials;
- Continually tie business strategies to the capabilities required for closing any execution gaps;
- Adopt a multi-stakeholder approach to sharing and developing ideas, seeking perspectives from outside traditional industry sources;
- Take a balanced-portfolio approach, lining up quick wins while progressing towards long-term initiatives to achieve strategic goals.
Companies must align their climate and operations strategies to the collective appeal of civil society, not solely their investors. The ones who fail to do this will continue to face legal action and dilute their brand credibility. More importantly, if we hope to create a low-carbon future, we must adopt a different approach – one that embraces ambiguity, places small bets in a smart way to de-risk the portfolio and maximize returns, and creates momentum towards achieving larger decarbonization goals.
Keep reading the latest energy news at Energy Capital Media.
