NEW YORK – The next five years will bring an intense period of change for industries in the energy and natural resources sector―oil and gas, utilities, chemicals, mining and agriculture―as many reinvent themselves to tackle climate change and navigate the energy and resource transitions. Some investors are betting against them, shifting money from notable incumbents to new companies with less historical baggage. Bain‘s first-ever Global Energy and Natural Resources Report argues it would be a mistake to count these incumbents out.
“Shareholders and activists have made it clear that they want energy and natural resources companies to act now. Standing still in the sustainability movement is no longer an option,” said Joe Scalise, head of Bain & Company’s global Energy & Natural Resources practice. “If we are going to be successful in the energy transition, we need the big incumbents to lead the way.”
This new research points to the experience, capabilities and scale of incumbent energy and resources companies as necessary levers for the energy transition. But to lead the way, these companies must invest in innovation, redefine their impact to maintain the social license required to operate in the world’s most vulnerable places and tell a credible investor story to secure the capital necessary for new investments.
Securing the capital necessary to build a net-zero world
Energy companies are under pressure, not only from activist investors who want them to emit less carbon, but also from a broader pool of investors increasingly backing insurgents to bring about change.
“In recent years, we have seen capital flow out of the energy and natural resources sectors into areas like tech, financial services and consumer products. However, ESG investors leaning into the energy incumbents can arguably have a greater impact than those sitting on the fence or disinvesting,” said Peter Parry, Chairman of Bain & Company’s Energy and Natural Resources practice. “This rapid shift in capital comes at a critical time where the energy and natural resources sectors must reinvest and retool to create low-carbon and sustainable solutions for their customers, their investors and for all of us.”
Bain’s new report explores how the relationship between ESG investors and energy companies may be approaching an inflection point, with ESG investors’ initial strategies of confrontation now resulting in a proliferation of ESG targets across the energy and resources sector. The report’s authors suggest the next phase will be one of collaboration, where energy and resource companies should draw on the strength of their traditional businesses to secure funding for capital expenditure in new assets and infrastructure that supports the energy transition. This will include supports such as bio feedstock production, renewable power generation, hydrogen electrolyzers, electric vehicle charging infrastructure and waste recycling.
Despite this promise, Bain’s new research shows that investors have been more attracted to other sectors over the past decade. In 2010, companies in energy, utilities, materials and the industrial sector made up 30% of the S&P 500; by the end of 2020, their share had fallen to 16%. The top five oil and gas supermajors together have lost about $200 billion in market capitalization since 2015. And institutional investors who have approved more climate proposals hold smaller investments in energy and natural resources.
ESG investors could support this sustainability momentum by turning from adversary to advocate, leaning into incumbent companies that demonstrate a good change trajectory and rewarding others that make tangible steps to reducing their carbon emissions at scale. In some cases, ESG investors could go further by helping public companies go fully or partially private for a spell, to speed up transitions that could be much more difficult under public ownership.
Setting a realistic path to decarbonization for the energy and resources sector
Half of all energy and natural resources companies have put the energy transition at the center of their strategy. Although many of these companies have announced net-zero ambitions 25 or 30 years into the future, oil and gas, mining, and energy utility companies still trail other industries in their climate commitments. It will be imperative for the companies that lead the way to set a realistic path with verifiable signs of progress and to adopt specific resolutions, such as linking executive compensation to ESG outcomes.
Realizing the promise of low-carbon hydrogen
It is becoming clear that traditional abatement strategies will not achieve the goal of net-zero emissions alone. To achieve net-zero emissions in a timely manner, additional innovations will be required. The most promising innovation, at the moment, is low-carbon hydrogen.
Bain’s research estimates that the current market for hydrogen could more than double by 2050—from about 115 million metric tons to 300 million metric tons—with the low-carbon component growing from virtually nonexistent to taking over most of the market’s supply.
Reaching into new markets for value creation
Leading resources companies will need to balance the needs of their existing core business while building new sources of growth that meet customers’ evolving needs. Examples include:
- Transitioning from vehicle exhausts to batteries: The transition from internal combustion engines (ICEs) to electric vehicles is causing ripple effects across supply chains. In chemicals, volumes may have peaked for the exhaust systems used in ICEs, which rely on chemical catalysts. Until now, stringent regulations have required automakers to use more chemical catalysts, resulting in a higher value per average vehicle. In fact, the total value of chemical catalysts in exhaust systems grew 7% per year since 2010. Over the coming five years, however, growth is expected to slow to 2% per year, and the global market may shrink afterwards. The total ICE market is estimated to peak by 2028, as battery electric vehicles grow to 35% of the global fleet by 2040.
- Responding to a changing diet: Land-based animal proteins take a toll on natural resources, accounting for about 14.5% of greenhouse gas emissions in agriculture and 80% of all food-related GHG emissions worldwide. These land-based animal proteins, in total, use about one-fourth of the water and 80% of the land dedicated to food production. Innovations in protein production, such as plant-based dairy and meat alternatives, could reduce that resource intensity over time. It is likely that the future of protein will heavily incorporate new technologies, and as they become more cost-competitive, protein-alternatives may replace about 15% to 35% of animal protein in the US by 2030 to 2035.
Tapping next-generation talent and technology to transform energy supply chains
Frontline workers in energy and natural resources are becoming more technically savvy, by necessity. As the new systems they develop become more sophisticated, workers are being retrained to understand and work with the digital systems that maximize productivity.
Bain research found that more than half of energy and natural resources executives are not satisfied with the accuracy of their demand forecasting. Advanced forecasting and more sophisticated demand models will promote accurate planning and reduce the carbon footprint of supply chain operations. Likewise, a new wave of smart automation employs artificial intelligence and Internet of Things systems to manage difficult, dangerous or precise tasks more flexibly. The shift promises to enable more automation in energy and natural resources industries, which are often in more open and variable environments.