Climate concerns are driving an acceleration in the global transition towards environmentally sustainable energy sources, with signficant implications for emerging markets as they seek to keep pace with high demand growth over the long term.
In a sign of the growing influence of environmental, social and governance (ESG) standards on the energy industry, three of the world’s energy majors recently experienced significant developments that could dramatically change the way they do business.
In a landmark ruling, on May 26 a Dutch court ordered Royal Dutch Shell to reduce its carbon emissions by 45% – as measured against 2019 levels – by 2030.
The lawsuit was filed by seven groups, including environmental organisations Greenpeace and Friends of the Earth Netherlands, on behalf of 17,000 Dutch citizens, and claimed that the company was threatening their human rights by continuing to invest in fossil fuels.
Although Shell, which had previously unveiled a carbon reduction plan, has pledged to appeal the ruling, the decision is nevertheless indicative of the growing pressure on energy majors to improve their climate credentials.
On the same day as the court ruling, shareholders of US energy giant Chevron voted in favour of a proposal to cut emissions generated by the use of the company’s products, while one day later, on May 27, the hedge fund Engine No.1 was successful in unseating two of Exxon Mobil’s board members as part of a bid to change the company’s efforts towards climate change.
While these latter two developments do not contain concrete steps towards decarbonisation, they do highlight investor appetite for more stringent ESG standards and a faster transition to renewable sources.
Indeed, many financial analysts believe that banks will face new capital requirements in the future based on how exposed their loans are to climate change. While regulators have not yet released binding rules, European Central Bank guidelines released in November last year instructed banks to factor in climate risks when assessing capital requirements.
Furthermore, in an example of governmental developments, on May 25 G7 climate and environment ministers agreed to end direct government support for coal power generation by the end of this year and pledged to ban fossil fuel subsidies by 2025.
These efforts to improve sustainability come amid the release of detailed carbon-neutral climate plans for the energy industry, which accounts for around three‐quarters of global greenhouse gas emissions.
In mid-May the International Energy Agency (IEA), a Paris-based intergovernmental organisation, released the “Net Zero by 2050” report, the first comprehensive energy roadmap detailing how the energy sector can achieve net-zero carbon emissions by 2050.
Featuring 400 milestones to achieve the target, the report calls for an immediate ban on investment in new fossil fuel projects globally, along with the prevention of sales of new internal combustion engine passenger cars from 2035.
To meet demand, it foresees a massive rollout of renewable energy, which, according to the roadmap, would account for almost 90% of electricity generation by 2050. For example, it outlines a 20‐fold increase in solar capacity between now and 2050, and an 11‐fold expansion for wind power.
While solar would become the single largest source of energy under the plan, fossil fuels would fall from current levels of almost four-fifths of global energy supply to slightly more than one-fifth.
Acknowledging that the roadmap is ambitious, the IEA places huge responsibility on governments to promote environmentally sustainable technologies and forms of energy to meet the net-zero goal.
“Making net‐zero emissions a reality hinges on a singular, unwavering focus from all governments – working together with one another, and with businesses, investors and citizens,” the report states. “All stakeholders need to play their part. The wide-ranging measures adopted by governments at all levels in the net-zero pathway help to frame, influence and incentivise the purchase by consumers and investment by businesses
This push for carbon neutrality and improved environmental sustainability places a unique set of pressures on emerging markets.
For example, the IEA report states that emerging markets will account for the majority of electricity demand over the coming decades as economies industrialise and grow. Perhaps equally as challenging is the fact that many of the world’s large oil and gas producers are emerging markets in the Middle East and Africa.
In an indication that oil producers are adapting to the new demands, in early May Qatar and Saudi Arabia joined Canada, Norway and the US in establishing the Net-Zero Producers Forum, a body designed to come up with long-term strategies to reach global net-zero emissions.
Saudi Arabia, the world’s largest oil producer, has particularly ambitious plans to become a leader in the energy transition. The country aims to derive 50% of its electricity from renewable sources by 2030, a dramatic increase from 0.05% in 2018.
Towards this end, in April it unveiled the 300-MW Sakaka solar plant, the country’s first utility-scale renewables project, which was followed by the announcement that deals for seven new solar projects – with a combined capacity of 3.7 GW – had been signed.
While the energy transition will undoubtedly require significant economic restructuring from countries that derive large portions of GDP from oil and gas, there are also considerable economic benefits to be gained.
The IEA estimates that while some 5m jobs will be lost globally in the shift away from fossil fuels, some 14m are set to be created as a result of the development of and investment in renewables.