There is now a blurring of boundaries in the energy sector between oil and gas, renewables, and utilities. Across all categories, we are finding opportunities to work on carbon reduction.
One energy company, for example, is transitioning its portfolio toward a zero-carbon future by building new businesses—including a zero-carbon energy business (hydrogen) and a “negative carbon” offset business—alongside the existing hydrocarbon core. Done well, this could see the new businesses match the existing in terms of revenue and EBIT by the end of the decade, with accelerating growth beyond.
These are rapid-growth and fast-moving spaces, though. So how those businesses get there is as much a part of the secret sauce as what they’re building. The new businesses must face—and outpace—different competitors, test and learn with customers, rapidly deploy capital, and attract different talent and funding. Their operating model and capabilities are designed to do that at speed, while leveraging the advantages of the parent company, including certain technologies, partnerships, and customer relationships.
In a world moving toward increased electrification, utilities and renewable energy providers of course play a leading role in the energy transition. For many participants, capturing that potential requires a full-company transformation. Utilities, for example, have had to move from an engineering mindset, focused on building power supply at the lowest possible cost, to customer-centric capital planning geared to developing support among a broad group of stakeholders. Because policy determines the pace of energy transition and what it will look like, and policy is shaped by stakeholders, we have spent much of the last decade helping utilities across the US and in other parts of the world integrate stakeholder considerations into their operations, while also accelerating the pace of execution to meet the needs and opportunities of the energy transition.
Recently we worked with a number of partners to develop a detailed roadmap for decarbonizing the Danish economy by 70% by 2030. This can be done through a combination of phasing out coal, natural gas, and oil; capturing carbon; reducing plastics; cutting the carbon emissions of other industries, including transportation and manufacturing; accelerating the renewable energy production of wind, solar power, and biogas; and strengthening the power grid.
In addition, we worked with a range of industry leaders along the hydrogen value chain to design the basis of a national climate strategy. With the help of energy suppliers, distributors, and users, we identified 10 key levers to accelerate Denmark’s hydrogen market, a crucial element of meeting this ambitious goal.
Financial services companies have a critical role to play in accelerating the carbon transition through their lending and investing activities.
To meet its ambition to reduce carbon emissions in line with 2030 goals set out in the Paris Agreement, Dutch multinational Rabobank must decarbonize its loan portfolio. Bain analysis shows that higher sustainability correlates with fewer loan defaults and lower credit risk, even when controlling for company size, profitability, and riskiness, and even between companies starting from the exact same risk rating. Therefore, in addition to its environmental benefit, decarbonization could also increase financial stability for Rabobank’s customers and improve the credit risk of the bank’s portfolio.
Loan portfolio decarbonization is a complex undertaking. It requires determining the baseline of emissions today, effectively capturing sustainability data, setting the appropriate decarbonization pathway, and engaging clients in mitigation. At the scale of an organization like Rabobank, estimation is a necessary part of the process, and through our analytical work we have helped develop reliable approximation techniques for parts of the portfolio with the least carbon transparency. In addition, we provided evidence that customers with better sustainability performance have a substantially lower default rate, even when correcting for a number of potentially relevant factors. This promising analysis allows for further investigation and could trigger strategic portfolio decisions.
The investment portfolios of many private equity firms include companies in various industries with different decarbonization challenges and opportunities.