The great row-back: are corporates giving up on the energy transition?
When ExxonMobil announced its acquisition of Pioneer Natural Resources last week, CEO Darren Woods insisted that that deal wouldn’t stop the oil major from going green.
“As long as the world needs oil and gas, we’ll all be focused on making sure that they have the most efficient, effective and responsible operator making and producing oil and gas, and doing it with the lowest carbon intensity,” he told the press.
The $59.5bn deal, which will allow Exxon to more than double its output from the Permian Basin, isn’t reflective of the kind of energy transition that some of Exxon’s shareholders demanded back in 2021.
Hailed as one of green finance’s greatest triumphs, the Reenergise Exxon campaign saw three new independent directors elected to the company’s board, against its wishes, but with the backing of some of its biggest shareholders. Engine No.1, the activist investor that spearheaded the campaign, said the new expertise would help Exxon start “gradually but purposefully repositioning [its] businesses for the energy transition”.
While the three board members remain in place, the economics of the energy transition have changed since their initial election, and Exxon is not the only big company not pivoting its business to achieve it.
The CEO of Canadian energy giant Suncor told a parliamentary committee in Ottawa this week that its recent decision to sell off its wind and solar business and continue to pursue oil production were compatible with its plans to become net zero by 2050.
"For us to be a part of the solution for the long term, we have to do today's business very well,” Rich Kruger said, reiterating his plan to decarbonise Suncor by making fossil fuel production more energy efficient.
BP and Shell have also made headlines for softening their commitments to the energy transition over the past year, becoming less bullish on renewable energy.
Vicky Sins, who leads the World Benchmarking Alliance’s climate and energy transformation work, notes “some decline” among oil and gas companies when it comes to net zero. According to the NGO’s sector benchmark, fossil fuel firms’ average progress has slowed in the past two years.
Beyond oil & gas
But a number of large green energy providers have also axed renewables projects over recent months.
Over the summer, Orsted warned of potential write-downs, in a move that caused its share price to fall by nearly a quarter in a single day. Speaking about the decision on LinkedIn at the time, the firm’s head of tax, Karl Berlin, blamed a “perfect storm” of supply chain delays, increasing interest rates and government support for fossil fuels.
Shell’s vice president for the global business environment, Laszlo Varro, also took to social media to discuss the trend, saying: “When a transitioning energy company such as Shell expresses concerns about the challenging economics of renewable projects, the sustainability community is quick to jump into conclusions: ‘Sliding back to fossil fuels!’ ‘Their net zero target is only greenwashing!’ ‘I thought it was worth engaging them but it is clear that they don’t want to align with the Paris Agreement’.
“Maybe so, but Vattenfall as well as Orsted and Iberdrola, both of which also cancelled large renewable projects recently, should be above any reasonable suspicion in this respect… From time to time, they came to the same sad conclusion as us.”
These kinds of expressions of frustration about the realities of the energy transition aren’t just coming from the energy sector itself.
In September, the CEO of German airline Lufthansa said that switching to green fuels would consume half of Germany’s electricity supply.
Carsten Spohr reportedly made the comments during an aviation conference, adding: “I don’t think [German energy minster] Mr. Habeck is going to give me that”.
And in finance – the sector that has been the most vocal about its net zero ambitions – the CEO of Goldman Sachs, David Solomon, recently told audiences at the American Energy Security Summit in the US that “we are all going to continue to finance traditional [energy] companies for a long time.”
What’s driving the trend?
Luke Sussams, head of ESG and sustainable finance at London-based investment bank Jefferies, notes that, when it comes to net zero, “the number of dissenting companies has definitely increased recently, suggesting something has changed”.
He believes that, on top of stubborn inflation and political pushback against ESG in the US, the cost of living crisis and a political shift to the right across Europe is contributing to the trend.
“People's willingness to pay for low-carbon products is less than they said it was, or at least, they’re less prepared to pay green premiums in the current environment,” Sussams says. “So there’s an emerging consumer backlash to the net zero agenda, which is giving rise to new political rhetoric about protecting people from climate policy.”
This political swing has been visible in Germany this year, where massive pushback against the government’s plans to ban new gas boilers from 2024 has been cited as the reason for a slump in the green party’s approval ratings, from 24% to 13%. The rule has been watered down as a result.
In the UK, the government recently pledged to cut back laws that penalise motorists, including bans on the internal combustion engine.
Sussams also believes “some people are losing faith in big initiatives like GFANZ, because they're holding companies to a standard that’s increasingly impossible”.
GFANZ, or the Glasgow Financial Alliance for Net Zero, is a huge collection of investors and financial institutions that have committed to ensure their portfolios are aligned with temperature rises of below 1.5°C, with little or no overshoot.
“Put all of those things together and you have some major headwinds that corporates are picking up on,” says Sussams. “And it’s giving them cover to roll back and water down their climate ambitions.”
He adds that, while the trend “really tests that old adage that sustainability is only for the good times,” most companies are still publicly pursuing a net zero goal.
But Olivier Elamine says he hopes the balance shifts.
“The fact that more and more companies are saying these kind of things about the climate transition is probably a necessary evil,” says the CEO of German-listed real estate investment trust Alstria.
“It isn’t about companies walking back because they’re realising it’s not longer feasible. It’s about the fact that the net zero narrative, at corporate level, has always been a marketing stunt.”
That marketing stunt, Elamine argues, is getting more risky as legislators, shareholders and consumers start to clamp down on greenwashing through regulation and the courts. So companies are being more honest about their limitations.
He’s hoping that, as more firms follow suit, “there will be a collective realisation that we’re not going to be get [to net zero by 2050] if governments don’t take responsibility and step in with an organised framework.”
“These statements call politicians’ bluff: they show that you cannot rely on corporates to make the climate transition happen, because it’s not the huge financial opportunity we’ve been sold,” he says. “And as an executive, you can express your personal views on this issue at the voting booth, but when it comes to running your company and allocating money, the lack of political will means we should all assume it isn't going to happen and consider that when we make decisions.”