The actors have been a couple for over a decade
The next five years will bring an intense period of change for industries in the energy and natural resources sector ― oil and gas, utilities, chemicals, mining and agriculture ― as many reinvent themselves to tackle climate change and navigate the energy and resource transitions. Some investors are betting against them, shifting money from notable incumbents to new companies with less historical baggage. Bain’s first-ever Global Energy and Natural Resources Report argues it would be a mistake to count these incumbents out.
“Shareholders and activists have made it clear that they want energy and natural resources companies to act now. Standing still in the sustainability movement is no longer an option,” said Joe Scalise, head of Bain & Company’s global Energy & Natural Resources practice. “If we are going to be successful in the energy transition, we need the big incumbents to lead the way.”
This new research points to the experience, capabilities and scale of incumbent energy and resources companies as necessary levers for the energy transition. But to lead the way, these companies must invest in innovation, redefine their impact to maintain the social license required to operate in the world’s most vulnerable places and tell a credible investor story to secure the capital necessary for new investments.
Securing capital to build a net-zero world
Energy companies are under pressure, not only from activist investors who want them to emit less carbon, but also from a broader pool of investors increasingly backing insurgents to bring about change.
“In recent years, we have seen capital flow out of the energy and natural resources sectors into areas like tech, financial services and consumer products. However, Environmental, Social and Governance (ESG) investors leaning into the energy incumbents can arguably have a greater impact than those sitting on the fence or disinvesting,” said Peter Parry, chairman of Bain & Company’s Energy and Natural Resources practice. “This rapid shift in capital comes at a critical time where the energy and natural resources sectors must reinvest and retool to create low-carbon and sustainable solutions for their customers, their investors and for all of us.”
“Bain’s new report explores how the relationship between ESG investors and energy companies may be approaching an inflection point, with ESG investors’ initial strategies of confrontation now resulting in a proliferation of ESG targets across the energy and resources sector. The report suggests the next phase will be one of collaboration, where energy and resource companies may draw on the strength of their traditional businesses to secure funding for capital expenditure in new assets and infrastructure that supports the energy transition. This will include supports such as carbon capture and sequestration, renewable power generation, hydrogen electrolysers, electric vehicle charging infrastructure and waste recycling,” said Eric Beranger-Fenouillet, Partner at Bain & Company leading the Energy and Natural Resources practice in the Middle East.
Despite this promise, Bain’s new research shows that investors have been more attracted to other sectors over the past decade. In 2010, companies in energy, utilities, materials and the industrial sector made up 30 per cent of the S&P 500; by the end of 2020, their share had fallen to 16 per cent. The top five oil and gas supermajors together have lost about $200 billion in market capitalisation since 2015. And institutional investors who have approved more climate proposals hold smaller investments in energy and natural resources.
ESG investors could support this sustainability momentum by turning from adversary to advocate, leaning into incumbent companies that demonstrate a good change trajectory and rewarding others that make tangible steps to reducing their carbon emissions at scale. In some cases, ESG investors could go further by helping public companies go fully or partially private for a spell, to speed up transitions that could be much more difficult under public ownership.
Half of all energy and natural resources companies have put the energy transition at the center of their strategy. Although many of these companies have announced net-zero ambitions 25 or 30 years into the future, oil and gas, mining, and energy utility companies still trail other industries in their climate commitments. It will be imperative for the companies that lead the way to set a realistic path with verifiable signs of progress and to adopt specific resolutions, such as linking executive compensation to ESG outcomes.
Realising the promise of low-carbon hydrogen
It is becoming clear that traditional abatement strategies will not achieve the goal of net-zero emissions alone. To achieve net-zero emissions in a timely manner, additional innovations will be required. The most promising innovation, at the moment, is low-carbon hydrogen.
Bain’s research estimates that the current market for hydrogen could more than double by 2050 — from about 115 million metric tonnes to 300 million metric tonnes — with the low-carbon component growing from virtually nonexistent to taking over most of the market’s supply.
The actors have been a couple for over a decade
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