Leaving behind the ‘E’ in ESG in the global energy crisis

Figure 1: Energy prices

Leaving behind the E in ESG?

Not even one year after the important COP26 Climate Conference held in Glasgow, where over 140 countries pledged to achieve net-zero emissions, Russia’s subsequent invasion of Ukraine turned the difficult task of reducing the world's reliance on fossil fuels into an even more challenging one. Net Zero by 2050 was an ambitious target on its own for many countries without any added burdens. Now governments are scrambling to balance their pledges and commitments to sustainable energy practices alongside their need for energy security.

We are already starting to see countries back-sliding on their original commitments to carbon emission reduction, with countries like the UK and Germany authorising the decommissioning of old coal-powered power stations. The UK is even considering temporarily halting the green energy levy embedded in energy bills to reduce some pressure on consumers’ pockets. 

While recommissioning dirty energy such as coal sounds like a terrible idea on paper, the story changes significantly when looked at holistically. Sustained higher energy prices feed directly into shipping, transport, and industrial production. These, in turn, result in second-round price hikes on food and beverages, hospitality, and several other industries. All this ultimately reduces the purchasing power of households, negatively impacting the economy in the long run.

When looking at the entire picture and ESG as a whole, it does appear that governments around the world are temporarily sacrificing “E” for the sake of preserving “S” in the long run during this time of transition.  

A key takeaway

It is worth noting that Russia is currently the world's second-largest oil and natural gas producer. Further to this, it is the second largest exporter of oil and the largest exporter of gas. Figure 2 below highlights European dependency on Russia for its energy needs:  

Figure 2: European dependence on Russia

The takeaway from all that has happened over the last six months is the need for countries to ensure geographic diversification from oil majors. Additionally, over-reliance on one form of energy is unsustainable, damaging to the global economy, and risky to climate change ambitions.

Looking Forward 

Basic economics dictates that as long as Russia continues its invasion of Ukraine and faces significant sanctions on its exports, energy prices will continue to rise until demand equals supply. Since energy usage is a part of everyday life around the globe, it exhibits significant price inelasticity, meaning that it's highly likely that prices will continue to rise for the foreseeable future.

Raised energy prices across the board over this period have meant large windfall profits for Energy companies across the globe. Brazilian Petrobras, British BP, and Dutch Shell, to name a few, have all generated either close to or outright record profits. At the same time, the International Energy Agency expects income in the global oil and gas sector to jump to $4 trillion in 2022, more than twice its five-year average. These significant profits present what could be considered a once-in-a-lifetime opportunity for governments and companies to invest in a meaningful transformation of their economies and businesses towards delivering on their clean energy and energy security commitments.

In South Africa, continued energy price increases could devastate our local economy. Government and key stakeholders need to use this time of windfall profits and taxes to work at aggressively transitioning to more sustainable forms of energy production. If not, South Africa risks not just leaving the “E” behind in ESG but the “S” as well. DM/BM

By: Michael Temple – Analyst and ESG committee member at Prescient Investment Management

Disclaimer:

• Prescient Investment Management (Pty) Ltd is an authorised financial services provider (FSP 612).
• The value of investments may go up as well as down, and past performance is not necessarily a guide to future performance.
• There are risks involved in buying or selling a financial product.
• This document is for information purposes only and does not constitute or form part of any offer to issue or sell or any solicitation of any offer to subscribe for or purchase any particular investments. Opinions expressed in this document may be changed without notice at any time after publication. We therefore disclaim any liability for any loss, liability, damage (whether direct or consequential) or expense of any nature whatsoever which may be suffered as a result of or which may be attributable directly or indirectly to the use of or reliance upon the information.
• The forecasts are based on reasonable assumptions, are not guaranteed to occur and are provided for illustrative purposes only.
• Supervised representative.