Race to de carbonization: Convergence to financial goals is the key

The iconic global company, British Petroleum (BP) made a very interesting move recently by selling off its coveted petrochemicals business and opting to play only in the energy businesses – oil and gas.

In its Q2`20 results announcement, BP`s strategy statement under its new CEO, says that it will reshape BP`s business as it pivots, from being an international oil company focused on producing resources, to an integrated energy company focused on delivering solutions for customers. 

In pursuit of its new strategy, BP aims to reduce it oil and gas output, in the next 10 years, by 40% from the present levels, with emphasis on low carbon technologies especially on renewables - bioenergy, hydrogen and on CCUS (Carbon capture, utilization and storage). Clearly BP is moving towards the global wave towards greener world and sustainability, with the better stock market valuations as the key objective.

Similarly, the other global oil major Shell has also announced similar moves to a zero carbon future as a part of its “Our response to Climate Change” report and is moving on the same lines as BP.

Stakeholders on common platform – boost for sustainability initiatives

Sustainability and climate change has become an integral strategy of all the global firms, especially in the energy and downstream area, thanks to public pressure as well as due to sustained efforts of think tanks and activist organizations like Greenpeace. 

In fact, unlike the past when the global firms were reluctant to engage with the pressure groups, there is an increasing acceptance by the global firms to engage and shape their sustainability strategies with activists like Greenpeace.

Recently, in a virtual discussion forum shared by Shell, Greenpeace and Green Alliance[1], the convergence was very visible with the statements of the senior executives of these 3 organizations. The welcome sign, that was very evident, was a rising acceptance to work together to achieve climate actions goals. 

Gone is the acerbity that used to cloud such discussions and debates in the past.

Higher financial returns for sustainability investments

Environment, Social and Governance (ESG) investing has taken a big leap in the last few years and the trend has been given a further boost especially with the recent Covid pandemic. 

Data published recently by FE analytics show that in the last 3 years, socially responsible investments have generated about 7% more returns as compared to benchmark indices and about 11% more returns than non-socially responsible investments. 

Global investments in socially responsible assets is at present estimated to be at about $45 trillion as per a JP Morgan report.

 

Green bonds – huge inflows in last few years

Green bonds, which raise money for climate and environment projects, had a very slow start when they were first launched in the year 2007. However, in the last few years, green bonds in various forms have seen a huge interest with about $258 bn of investments in the year 2019 – a 51% increase on a year on year basis.

As per Morgan Stanley Capital Index, about 70% of the green bonds issuance are in alternative energy (38%), green buildings (17%) and sustainable transport (15%). Renewables energy has accounted for a bulk of the alternative energy investments over the last few years. 

Thus, the rise and convergence of financial incentives to the environment and social aspirations of all stakeholders, has led to a change in approach, thinking and business strategies in the last few years towards decarbonization and environmental goals.

What are the incentives for all the stakeholders ? 

Global firms see better market valuations, government authorities visualize lower pollution and emissions while activists, like Greenpeace, gain more traction and funding with their contributions for global wellbeing.   

  

What can be done in India?

India, like any developing country, is faced with a dilemma of balancing development vs environmental concerns. Like China, India too is plagued by issues like high air and water pollution, some of which can be attributed to the high usage of fossil fuels like coal, diesel, etc. 

Some of the initiatives that can be pursued by the Indian authorities:

1. Alternate Fuels :  Push towards cleaner sources of energy needs to be incentivized for greater penetration. The shift towards solar power was given a boost with the financial incentives to the producers. Installation costs crashed by about 80% between 2010 and 2019 which helped Indian capacity to about 31GW from 2.6 GW in 2015. Indian solar power prices, at present, are estimated to be one of the lowest in the world. Hence, the government needs to continue such an approach not only to solar power but also to other alternative energy sources.
2. Electric vehicles (EV`s), have been sustained in the western nations, with government incentives. Charging stations are required for higher penetration of EV`s. Indian government needs handhold the auto industry to manage the transition to EV`s through tax breaks especially support the charging station infrastructure development.
3. Incentivize companies to reduce carbon footprint with regular audits and tax breaks to support such initiatives.
4. Hydrogen as a clean fuel is being actively pursued in China and other western nations. India can adopt hydrogen quickly and leapfrog in its adoption. 

     

   

 

 Convergence of financial and aspiration goals is important to make any sustainability, climate action and environmental initiatives work by making it an economically sustainable model.The recent global shift in this direction is an encouraging move which will lead to benefits for the global society as whole.

         Let’s hope for the best!

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[1] Posted on the website Thinkunthink : https://www.thinkunthink.org/latest-unthinking/2020-07-28-oil-giants-and-sustainability-campaigners-the-new-common-cause

Thinking the Unthinkable - A new world beckons us

As we entered the new decade 2020`s, my thoughts flashed back when we entered 2000`s and 2010`s. I tried to analyze and judge as to how this decade can be different from the previous two decades.

The 2000`s was epitomized by the boom and bust cycles. The dot com boom and bust in early 200`s, the commodity boom and bust from 2003 till and 2009 and mainly the financial market boom and collapse. A very beneficial and painful decade indeed! 

The 2010`s was decade of the advent of technology which changed the way business was done and potent signs for the workforce for the future. The rise of FANG (Facebook, Apple, Netflix, Google) kind of firms which have influenced business and political views, the advent of blockchain, IOT which changed business dynamics and the advent of artificial intelligence which blew away jobs. The decade also saw unexpected political events like the election of Donald Trump and Brexit and a stock market book. Again, a volatile period of prosperity and uncertainty!

What will the 2020`s be. One thing for sure is that the world will be more and uncertain and volatile if the recent trends are extrapolated. It will be difficult to make any predictions, with a certain degree of certainty, beyond 3-4 years leave alone 10 years!!

During one of my recent travels I had the privilege of meeting the well-known ex- BBC journalist Nik Gowing and as we started talking our discussions went to a wide range of topics affecting the geo politics from USA – China trade wars, Climate change, events in India and many others.

Nik was kind enough to hand me a copy of his recent interesting book titled “Thinking the Unthinkable” which he has co -authored with Chris Langdon. They main point emphasized is that in the highly VUCA (Volatile, Uncertain, Complex and Ambiguous) world, the standard, normal tools and processes that have been used to address and resolve problems will be proved irrelevant and redundant in the new age as can be seen from many events in the near past. 

By presenting a context to the challenges, they drive the point that a new set of tools, frameworks and processes which can help managers to address and successfully take on the challenges of the new world. Some of their major observations are:

ü  The pace of change in the world is furious but isn’t necessarily bad but the results can be far reaching. The #MeToo movement caught up with such a frenzy that it engulfed a celebrity producer like Harvey Weinstein which was unthinkable. Facebook`s growth was unstoppable at one point of time in the mid 2010`s but suddenly got engulfed in the fake news scam and its share price dropped steeply. It took a good amount of management time, including the Senate hearing of Mark Zuckerberg, to address the shortcoming.

ü  Even though fitting a framework to address these challenges are difficult, the authors suggest a five-step sequential process, through which an organization can travel to address the change process– status quo, audit the external reality, audit the internal reality, address the challenges and thrive on changes.

ü  Leaders and managers today are too consumed by short termism and many times are so much in a comfort zone that they don’t see signals of the future. Governments too are blinded by short termism. The water crisis in the South African city of Capetown in 2018 is a good example. In early, 2018 the water crisis became so acute that a “Zero day- when the city would run out of water” was envisaged on 12^th April which was averted by severe water rationing. In 2007-08, predictions were made of the impending water shortfall in the city but was avoided due to water rationing and good rainfall in 2013-15. Signals from subsequent rain shortages were met with no counter measures and political tangles at government level, ensured no effective actions, and hence leading to the crisis in 2018.

ü  Managers who have built their careers on conformity and not adapting to changes will find it difficult to cope up. Career Limiting Moves (CLM) which hamper managers career progress needs to be addressed so that they don’t become an impediment for managers to take decisions to adapt to changes. Some of the common symptoms affecting managers are Multiple intense pressures, Institutional conformity, willful blindness, group think and risk aversion.

ü  Apart from the standard Black Swan and Black elephant events, to describe the events which can be disruptive, the authors introduce the concept of black jellyfish events. Like a jelly fish which lurks somewhere and emits toxins, the jellyfish events are those which are simultaneous events which converge with innovation. An example is the like the Russian meddling in the US elections by which they subtly used the social media to plot news against Hillary Clinton without anybody realizing it. 

ü  Some of the changes and trends may not be ethically and politically correct but can change the way people think and act. In the 2016 USA elections, all analysts believed Hillary Clinton won all the three presidential debates but, yet she lost. She claimed that she ran a conventional presidential campaign, but Trump ran the elections shows like a reality show. He was also helped by the Russian meddling using the defamed UK firm Cambridge Analytica. Trump was not the conventional presidential candidate, but he won using questionable tactics. People voted for him!

ü  Senior managers need to look up to the millennials for their thoughts as well as advice. Millennials are not only concerned about the financial performances of firms but also the values and ethical conduct. The movement against climate change is a prefect example where teenage activitists like Greta Thunberg have caught the attention with their actions.

ü  The biggest challenge to leaders today comes from the technology especially from artificial intelligence which will change the nature of jobs as well as the ability to blow away existing jobs. Hence the challenge for the leaders would be to not only how to compete with the challenges of artificial intelligence but how to accommodate artificial intelligence to work with humans and importantly how to control the malicious intents of artificial intelligence. One of the important trends is that these technological advances can weaken the position of a conformist and non-adaptable leader.

ü  Hence firms need to build up cultures, behaviors and mind sets to address these challenges. Some of the traits that very important for managers for the future are having a sense of purpose, value systems, courage and humility.

ü  The way, the famed company Pepsi, addressed the change due to backlash against its “unhealthy” products is a great example. Its CEO, Indra Nooyi, drove the company`s performance with the slogan “Performance with Purpose” and deliver “sustainable long-term growth while leaving a footprint on the society and environment”. 

   

  The company addressed the issue by reducing the amount of sugar, salt and high saturated fat levels in its products. It also lessened its dependence on the Colas and moved towards everyday nutrition products that provide positive nutrients such as grains, fruit and vegetables, and protein, plus products that are naturally nutritious such as water and unsweetened tea. Secondly, it addressed the "guilt-free products" segment that includes everyday nutrition products plus diet beverages and other beverages.

Taking cue from the book, I was inclined to think what the challenges for could be the next few years- Technology march, Artificial intelligence, geopolitical uncertainty- the list is endless.My thoughts were shaken in the first 2 weeks of the year 2020- the assassination of Qasir Suleimani, Putin`s putsch in Russia, have shown what to expect in the next years. 

Can we predict what’s going to happen? Very difficult, though! However, we can be prepared for it by taking cue from the findings of “Thinking the Unthinkable” as slated by Nik Gowing and Chris Langdon.

References:

1.     Thinking the Unthinkable – Nik Gowing and Chris Langdon

2.     Thinking the Unthinkable website - https://www.thinkunthink.org/

3.     https://www.pepsico.com/