Investors more concerned than corporates about some energy sector ESG challenges

Energy sector investors place greater weight on some challenges posed by the new-energy transition than do corporate executives, according to research from law firm Womble Bond Dickinson (WBD).

Despite being the industry that is arguably under the biggest ESG spotlight, researchers from WBD describe the ESG mindset of the energy sector as being in the ‘early days.’ But the research – which surveys 170 industry leaders in the energy sector, comprising corporate executives, investors and in-house legal counsel – shows that views have been changing rapidly. It also highlights the complexities of the new-energy transition.

‘This survey’s findings paint a picture of what has always been a dynamic industry now beset by overwhelming and, in many ways, existential challenges,’ say the writers behind the firm’s 2022 Energy Transition Outlook Survey Report.

Although surveyed executives come across as being generally optimistic about their place in the transition, with investor views broadly matching them, when it comes to certain specific challenges investors show more concern than their investee companies.

The area of energy transition that is already a focus for more corporates in the sector is pollution-neutral consumption (41 percent say it is already a focus, 38 percent say it is a consideration), while 51 percent are currently considering carbon-neutrality (26 percent say it is already a focus).

‘Carbon-neutrality initiatives go well beyond simple energy efficiency bottom-line concerns and reflect a larger shift driven by societal expectations, changing investment approaches and, of course, grassroots activism,’ says Jeffrey Whittle, WBD partner and energy and natural resources sector co-lead in the research.

Despite the assertion that the ESG focus of the sector is in its early days, WBD says the ‘embrace of climate goals by industry leaders is matched by their reported levels of preparation to meet them.’ The firm asked executives: ‘To what extent is your organization prepared to address a commitment to a reduction of more than 50 percent in methane and CO2 emissions by 2030?’ On CO2, 36 percent consider themselves very prepared and 37 percent moderately so, with figures of 43 percent and 34 percent, respectively, for methane.

However, energy sector investors see challenges as being more serious ‘across the board.’ Compared with their ‘counterparts on the front lines of the transition,’ investors are more concerned about stranded assets (67 percent vs 43 percent), the availability of federal incentives (49 percent vs 37 percent), the challenges posed by intellectual property (47 percent vs 34 percent) and the complexity of the required infrastructure (56 percent vs 48 percent).

Perhaps unsurprisingly, the vast majority (85 percent) of energy sector investors also say their focus on ESG is set to increase over the coming two years.

Whittle notes the drastic change that has taken place across the industry. ‘Five years ago, it would have been difficult to believe that three quarters of energy executives would feel this well prepared for carbon and methane reductions – and that investors would feel the same way about their portfolio companies,’ he says.

WBD says that on the corporate side, no one challenge stood out for executives considering the energy transition, with Lisa Rushton, WBD partner and energy and natural resources sector co-lead, noting that it is still early days for the sector, which could play a part in the general optimism.

‘The industry’s current openness to the transition may be due in part to the fact that the technological and market path forward is still open, and winners and losers have not been identified,’ she says. ‘Even players that are entrenched in current markets and technologies have the opportunity to pivot and capture value going forward.’

WBD cites recent events related to climate change, social unrest and Covid-19 as all playing a part in pushing ESG concepts to the forefront for ‘investors, customers, employees and most corporate stakeholders.’

‘A lack of ESG strategy will ultimately affect a company’s access to public and, increasingly, private capital,’ Rushton notes.