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IEEFA: Postcard from 2030. Energy is clean, finance is moral, wish you were here

December 22, 2021
Tim Buckley

In the abiding issue of our time, decarbonisation, there are slivers of hope and grave concerns.

In an ideal world in 2030, capitalism has been redefined and companies that destroy the environment cannot operate. Here are the questions and answers that should define a decade of positive change.

What was the financial market response to energy transition by 2030?

The financial risks of climate change have played a huge part in redefining attitudes in global financial markets. Over the past 10 years, weather-related disasters have changed investment behaviour. Governments realised the extreme cost of inaction, while high carbon-emitting companies understood that they could see swathes of their operations become uninvestable and uninsurable. Without insurance, high emissions business activity is virtually impossible.

In financial services, these changes started to gain traction back in 2021, following the former Bank of England Governor, Mark Carney’s net-zero emissions finance alliance. This was a pledge by more than 450 institutions, then with $130 trillion in assets, to steer the global economy towards net-zero emissions and a 1.5° C limit. In 2030, net zero goals are entrenched across all mainstream financial sectors.

The energy transformation intensified the risk of stranded assets for fossil fuel companies. Today, many younger investors haven’t even heard of some of the oil companies; they have fallen out of the top indices and headed into terminal decline. This is not true for all energy companies. Some transitioned fast, with change led by a new CEO, chair or board. For example, the CEO of BP, Bernard Looney, on his appointment in 2020 announced a radical climate alignment.

In 2030, many younger investors won’t have even heard of some global oil companies that went into terminal decline

Strong independent leaders implemented new stakeholder engagement policies that were open about the company’s core business having no future. They were brave enough to say: “We are in terminal decline, we will clean up the mess we spent over 50 years creating, and we won’t just fob off to someone else the rehabilitation liabilities our firm created.”

The legal system has also played a key role. In the early 2020s, there were landmark legal cases, including in Holland and Australia, that established governments and energy companies owed a fiduciary duty of care to young people to not cause physical harm from climate change. These cases took evidence from the Intergovernmental Panel on Climate Change to stop the expansion of the fossil fuel industry, recognising that their decisions would have consequences for future generations.

Judges decided that, in the absence of any leadership from politicians, they would institute court-imposed leadership predicated on intergenerational equity.

What financial instruments or initiatives influenced clean energy investment during the decade?

The most impactful has been the emergence of the now universal price for carbon. Back in 2015-20, a globally accepted high carbon price seemed fanciful – particularly here in Australia, where the mere idea was politically toxic, and a repeated Prime Minister killer.

The EU introducing first the Emissions Trading Scheme (ETS) and then the carbon border adjustment mechanism in the 2020s changed everything. This EU and U.S. border tax on high carbon imports meant companies throughout the world had to reassess their global supply chains. Now in 2030, it’s the global norm that we have a carbon price of $150/tonne and it has been one of the best performing commodity indices.

Another important change was earlier this decade when both the EU and the U.S. mandated that key development banks cease funding fossil fuels. The only subsidised funding for fossil fuel development came from Chinese banks. Even this has been in massive decline in recent years, with President Xi’s China maintaining its world leadership in clean energy and its relaunch back in 2021 of its Green Belt & Road Initiative (G-BRI).

A carbon price of $150/tonne, the global norm, will be one of the best performing commodity indices

The G-BRI has been a huge success, helping developing countries across the Middle East, Eurasia and Africa and allowing two billion people to leapfrog the now obsolete fossil fuel energy and transition to cleaner, domestic energy centred on rooftop solar, batteries, electric scooters and microgrids.

In Australia, the government and financial community have had to introduce policies and take risks to catch up with the clean energy leaders. Australia was a clean energy laggard, sitting in the naughty corner along with a few recalcitrant Middle Eastern and Latin American countries.

Change came with the states selling out of fossil fuels and new federal legislation making it illegal for fossil fuel companies to lobby governments, to “greenwash” and/or to divest their way out of the clean energy challenge. This gave many of Australia’s leading companies the confidence to invest in new energy.

We forget that it was only in this past decade that Australia became the world’s largest exporter of seaborne traded green ammonia and green iron ore. It’s soon to be the largest in green hydrogen, the “blue” hydrogen figleaf having been retired as the desperate last roll of the dice by the fossil gas industry.

How did banks and rating agencies develop solutions and risk assessments for cleaner energy?

The financial community was asleep at the wheel in the early days of the energy transition. Trillions of dollars of capital were at risk from stranded assets, yet the central banks in the early 2020s complacently accepted that the large financial risks just had to be accommodated. The major rating agencies were buying up independent ESG and climate risk analysis firms to get skills in evaluating climate risk on property, businesses, fires and flooding and in satellite tracking of methane leaks. It then took a long time for that analysis to be integrated into their financial products and indices to remove the greenwash-related investor deceptions.

Today, climate change and clean energy are an integral part of financial risk assessment, as modern slavery was back in 2021, and tobacco the decade before that. What was once niche is now fundamental to good corporate governance, with companies required to report under the Task Force on Climate-related Financial Disclosures and the global sustainability accounting standards as a pre-requisite for access to global capital markets.

In this new energy world of 2030, what is the role of activists?

In 2030, environmentalists are no longer actively campaigning on climate change; they have stopped chaining themselves to the buildings and heavy machinery of recalcitrant companies getting away with massive environmental harm. Boards gave in when their young staff would just leave to join the protesters, and the police were too busy locking up corrupt politicians to worry about protesters – like the now Swedish Prime Minister Greta Thunberg – altruistically working for the public good.

Companies have had to stop and listen, with social licence becoming critical to their right to operate once we had the redefining of capitalism that McKinsey called for back in 2020. In 2030, you cannot operate a company that destroys the environment or doesn’t treat workers of all ages, genders and races respectfully – and in many countries you cannot legally build new fossil fuel infrastructure due to the now legally mandated “intergenerational equity” protections.

Companies have realised their brands were bound up with their workforces’ values: sustainability, respect for the environment and operating within our planetary boundaries.

Tim Buckley is Director, Energy Finance Studies, Institute for Energy Economics and Financial Analysis 

This article first appeared in KPMG 30 Voices on 2030: The Future of Energy

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Tim Buckley

Former Director Energy Finance Studies, Australasia, Tim Buckley has 25 years of financial markets experience, specializing in equity valuation, including as a top-rated analyst and as co-founder and managing director of Arkx Investment Management.

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