More than 35 countries around the world have declared a state of climate emergency, with many jurisdictions, among them Sweden, the UK, France, Denmark and New Zealand, having legislated net-zero emissions targets.
The International Energy Agency’s (IEA) recent “Net Zero by 2050, A Roadmap for the Global Energy Sector” report confirms the critical role the sector plays.1 Currently the sector is the source of around three-quarters of greenhouse gas emissions, yet also holds the key to averting the worst effects of climate change. Based on the IEA’s scenario, deep emission cuts until 2030 must come from existing commercially available technologies. This will require the deployment of all available clean and efficient energy technologies and a massive scale up of solar and wind technologies. In addition, hydropower and nuclear, the two largest low-carbon sources available today, will be an essential foundation for the transition. After 2030, the biggest innovations and opportunities will be found in advanced batteries, hydrogen, electrolysers, and direct air capture and storage.
Other key Sustainability and ESG (SESG) issues affect the energy and natural resources sector (ENR) in profound ways and environmental factors are only part of the picture: social and governance elements are also key drivers of success. For some companies, protecting human rights, protecting a watershed, and considering long-term impacts on local communities is crucial. Actions such as linking executive remuneration to delivery of SESG targets is currently best practice and demonstrates commitment. The spectrum of issues is broad and the geographic location and specific asset characteristics essential. The risks themselves are also dynamic and non-linear, introducing additional challenges in identifying and addressing them ̶ unless they are viewed through an integrated sector lens.
Accelerating the transition to a decarbonised, climate resilient economy also comes with an essential requirement: a just and fair transition. This ‘’just transition’ needs to support affected workers and vulnerable communities, so no one is left behind.
Our Sustainability and ESG team within the ENR sector is well versed in these complexities. We understand that each company's needs differ enormously, depending on sector, strategy and context. We can address those challenges and provide tailored advice in areas of sustainable finance, climate change, corporate PPAs, human rights, worker protections, supply chains and community inclusion. We know that companies are seeking to demonstrate that they are incorporating SESG into their strategies and operations and that they recognize the hazards and material risks which may arise from inadequate prioritization of SESG concerns.
The transition to a net-zero economy means renewable energy solutions are in high demand. However, for renewable energy companies, climate change issues are only part of the story. Even renewable energy can be unsustainable if it does not adequately integrate SESG factors. Aspects such as supply chain management, data security, human rights and materials sourcing, among others, need to be carefully considered. For instance, supply chain issues for solar projects are substantial: panels may be manufactured in another country, even in another hemisphere, and then shipped around the world to the solar park location. Similarly, developing wind farms often means constructing and maintaining facilities in remote locations, and therefore addressing health, safety and employment issues, in addition to environmental and supply chain concerns. A recycling plant can be a great initiative, but is it sustainable if the waste trucks run on diesel fuel and the drivers are paid below the minimum wage? The need to consider SESG exists throughout the life cycle of a renewable energy project, be it in planning, developing, operating or decommissioning.
Oil and gas
The energy transition aims to transform the global energy sector from fossil-based to net-zero greenhouse gas emissions by 2050. We are witnessing major integrated oil and gas companies committing to aligning their portfolios with the Paris Agreement goals, with many energy majors investing more and more in their renewable energy offerings.
Forward-thinking companies in the industry understand that being sustainable means reviewing all parts of the business, including health and safety issues on rigs, product design to ensure the safe and effective transportation of substances at all stages of the process, and transparent risk mitigation and management.
When we advise energy majors on sustainability issues, generation of energy from renewable sources is a benefit, yet by no means the sole element of the approach to sustainability.
For the mining sector, transitioning to net-zero emissions is also a key element. Mining operations need to be taken into account, but so do the indirect emissions that occur in the value chain, including both upstream and downstream. In addition, businesses will need to improve their collaboration with customers to become resource efficient and to reuse and recycle energy-intense commodities and minerals, such as steel and copper.
Furthermore, the ever-growing demand for new technology components and energy storage solutions means that the mining sector is experiencing a shift in demand toward higher production of key minerals. This change comes hand in hand with environmental and social impacts that need to be mitigated and managed appropriately and transparently. Human rights and local community engagement are vital elements of sustainability.
Shifting investor and consumer expectations are also a key driver. Investors are increasingly calling for reporting and transparency requirements regarding a company's material ESG factors and how these integrate into the company's governance, strategy, risk management, metrics and targets. Access to capital and the cost of capital are also being progressively linked to ESG performance and impacts.
Building water resilience and providing for water security are essential issues around the world. A product's efficient use of water over its lifetime as well as the water footprint of its production are factors that will grow in prominence as water shortages, climate perils and chronic impacts of climate change increase.
Another aspect of industrial consumption of water arises from water pumping and distribution, which generate significant levels of emissions. Using renewable energy for these operations will become important for the water sector. Payment for ecosystem services and nature-based solutions (aiming to help protect watersheds and secure access and supply) are policies that are already gaining traction in large jurisdictions such as the European Union.
1IEA, Net Zero by 2050, A roadmap for the Global Energy Sector (May 2021)