We found that environmental, social, and corporate governance (ESG) goals are important, and every company must bring a compelling story to the table. Investors expect companies to reduce carbon emissions, particularly scope 1 and 2 emissions that they largely control. Most investors we spoke with are not placing fixed limits or exclusions in portfolios based on their carbon emissions, but that could change.
Ensuring that strategy – and the execution of the strategy – remains aligned with evolving capital market expectations is a critical and increasingly central task for executive teams.
|Meeting Southeast Asian capital and energy needs, Photo Le Toan |
Electrification plays a leading role in achieving a net-zero future, and utilities worldwide stand to benefit. Investors and analysts believe in the long-term growth potential of the utilities sector, and they are looking for management teams with the strategy and execution capabilities to capture the moment.
Investors want leadership teams that can capture opportunities from the growth in renewable power generation, accelerate electric vehicle adoption, and maximise returns for every dollar of capital deployed.
To do this, executive teams need to mitigate three critical risks: customer affordability, reliability of service and intermittency issues, and regulator and stakeholder risk.
The investors we interviewed believe in the utility sector and the stability of the utility model. The most commonly cited factor determining investment decisions was management credibility (93 per cent).
Over the past 18 months, the oil and gas sector has witnessed a landmark set of shareholder votes, a critical court ruling directing Shell to accelerate carbon reductions and the expansion of net-zero financial alliances. At the same time, commodity prices have surged, pressures to expand production have intensified, and oil and gas company share prices have outperformed broad indices.
In this dynamic environment, three core messages emerged from our discussions with investors and analysts. Firstly, investors and analysts are clearly looking for oil and gas executive teams to remain focused on cash generation and maintain the disciplined deployment of capital. Of the 10 factors we tested in our conversations, oil and gas production growth was the least important factor in determining investment decisions.
Next, investors see both opportunities and risks associated with how oil and gas companies respond to the energy transition. They see the potential to use the industry’s capabilities in new, lower-carbon markets, but they are also concerned about how capital is allocated. Demonstrating how strategy and execution respond to these perspectives should be central to oil and gas strategies. Lastly, investors are open to oil and gas companies participating in lower-carbon markets. With uncertainty about the pace and shape of the energy transition, there is value in showing investors the company has plans for growth in a lower-carbon world. We have been wondering about carbon emissions and whether they play a consistent role in portfolio construction. We are specifically interested in potential portfolio rules governing carbon emissions and efforts to target and reduce them.
We learned that nearly 20 per cent of utilities investors and 13 per cent of oil and gas investors have fixed, emissions-based guidelines that use limits or exclusions in their portfolios to set parameters for what they can own. When asked about carbon limits or reduction targets in portfolio guidelines, 13 per cent of utilities investors and 6 per cent of oil and gas investors reported already having such goals. In both sectors, 16 per cent of investors are considering limits or reduction targets.
While carbon limits are not a determining factor in portfolio decisions today, we found it important to learn that some investors are considering it, across several sectors.
The investors we spoke with are giving ESG prominent consideration in their investment decisions, but there are differences in how important they believe these factors are and how they use ESG ratings in their portfolios. More than 70 per cent of investors across utilities and oil and gas described ESG as either very important or important.
The path forward
Our research with Rivel shows that the energy transition is increasingly central to how investors and analysts view energy and natural resources. For utilities, this is the time to be on the front foot with investors and to deploy bold, innovative strategies to enable more investment in their jurisdictions. Oil and gas companies, on the other hand, will want to manage and evolve their investor value propositions carefully. Investors are looking to the sector to generate cash, and some companies may exploit near-term demand for oil and gas to build capital. Investors are waiting to see if the capital will be returned or used for transformative change. For executives in both sectors, embarking on any new, low-carbon energy businesses will require a clear connection to principles of the core business. Now more than ever, they will need to show how their capabilities, expertise, and customer relationships make them the best owner of the new business.
These findings are a snapshot. The capital markets and energy transition landscapes remain dynamic. How will asset managers in net-zero financial coalitions incorporate ESG, carbon, and science-based targets into their investing? Will certain companies become less investible as a result?
Executive teams should stress-test their strategy and decisions against the answers to these questions while keeping a close watch on developments in capital markets.
(*)Wong Chung Yen-Associate Partner, Singapore Debra McCoy Partner and global lead for Capital Markets, Sustainability, & ESG San Francisco Grant Dougans Partner, Washington DC Bain & Company.
| ||Capital conundrum in energy |
A clear power policy and early publication of new power planning are urgently needed for Vietnam to attract private capital in energy infrastructure, as explained by various leaders and organisations at last week's Vietnam Business Forum.