Over the next five years, oil and gas companies will definitely see less investment as the world’s biggest institutional investors are increasingly looking at the environmental credentials of the companies in their portfolios
As the global drive toward sustainability accelerates, the world’s biggest institutional investors are increasingly looking at the environmental credentials of the companies in their portfolios. The pressure on Big Oil and all other oil firms, coal miners, and even gas project developers is growing to show they can adapt to the energy transition and stay relevant in net-zero economies.
The environmental, social, and governance (ESG) trend is drawing more investors to reallocating capital to sustainable companies and green projects, while capital going toward oil and gas and related infrastructure could become increasingly tight in coming years.
Over the next five years, oil and gas companies will definitely see less investment, Salim Samaha, a partner with Global Infrastructure Partners, an investment fund dedicated to infrastructure assets, said at a panel at the CERAWeek by IHS Markit.
This trend will put further pressure on oil and gas firms to explain to investors how they plan to navigate their fortunes in the energy transition. The ESG trend is also changing the way companies look at future exploration opportunities and projects—they will want to show investors plans for low-cost oil barrels with shorter timelines of returns, alongside measures to mitigate the carbon footprint of those projects.
In an energy-transition world, the oil and gas sector will need to show investors that they are still worth investing in, because of transparent climate reporting, increased investment in low-carbon energy solutions, and clearly set targets to curb their own emissions and the emissions their products generate. So, not every mega oil and gas project promising massive returns will fly in the net-zero pledges. Top Institutional Investors Say Climate Risk Is Investment Risk
The world’s largest asset manager, BlackRock, “will begin to make very specific commitments around certain types of investment, which just won’t happen,” Jim Barry, chief investment officer of BlackRock Alternatives Investors and Global Head of BlackRock Real Assets, said at the CERAWeek by IHS Markit panel, as carried by Energy Intelligence.
“I think we’ll begin to see more of that. And where BlackRock goes, others will follow,” Barry said.
BlackRock is demanding transparency from companies as it sees climate risk and the energy transition as an investment issue.
“Given how central the energy transition will be to every company’s growth prospects, we are asking companies to disclose a plan for how their business model will be compatible with a net zero economy,” BlackRock’s chairman and CEO Larry Fink wrote in his 2021 letter to CEOs.
But BlackRock still holds investments of over US$84 billion in the coal industry, a group of dozens of NGOs said in a report earlier this year.
This doesn’t stop the top money manager from pledging to incorporate climate considerations into its capital markets assumptions.
Sustainability To Become Core Of Oil & Gas Investment Decisions
As pressure from institutional investors is piling on, companies in the upstream oil and gas sector will attract money more easily if they have “a clear and transparent ESG strategy as sustainability increasingly shapes strategic decisions,” Wood Mackenzie said at the end of last year.
“To continue to attract capital, portfolios have to be built around core advantaged assets – low-cost, long-life, low carbon-intensive barrels,” said Andrew Latham, Vice President, Global Exploration at WoodMac.
Still, the industry as a whole will not be starved of capital, Wood Mackenzie says, because the world will need oil and gas for decades, net-zero emissions or not.
But companies will need to show investors they are still investible and preparing to thrive—not only survive—in the energy transition. Yet, those companies will continue to invest in oil and gas simply because oil and gas will still be needed for the foreseeable future. In fact, upstream oil investment will need to rise in the coming years to stave off a supply crunch as early as in the middle of this decade.
Big Oil will continue to do business in oil. Still, it is pledging increased investments in renewables, carbon capture, hydrogen, EV charging networks, and other low-carbon energy solutions, also in response to investor pressure.
Some Investors Blindly Chase Energy Transition Opportunities
Institutional investors are flocking to bankroll opportunities in the energy transition, but not all may have realized that green energy will entail increased mining of battery metals, for example, Jan Laubjerg, Global Head of Natural Resources at HSBC, said on a CERAWeek by IHS Markit panel.
“Capital provisions from the traditional capital markets [have] still to get comfortable with the economic realities that copper mining is required, that cobalt mining is required” for the energy transition, Laubjerg said.
Risks would be greater than the return of capital in the next few years, but this will not stop investment flows into low-carbon energy solutions, according to Laubjerg.
But whoever wants to invest in energy transition opportunities must realize that the materials needed for that same transition will have to come from mining.
The supply chain for the energy sector is moving from liquids to gas to solids, CERAWeek panelists said.
One of the unexpected consequences of the energy transition push is the absolute quantity of materials required per energy unit delivered to society, which has soared about 1,000 percent, Mark Mills, Strategic Partner at Cottonwood Venture Partners, said.
“The quantity of materials being moved out of the earth will be unprecedented in human history,” Mills noted.