Roundtable 'From Fossil Fuels to Renewable Energy': CO2 targets are necessary and challenging

July 27, 2023

^{This report was written in Dutch. This article is an English translation.}

The CO₂ targets entail quite a few challenges. The energy transition is not that easy to realize and 2030 is getting closer. Yet the transition from fossil fuels to renewable energy also offers many new opportunities.

During the Roundtable 'From Fossil Fuels to Renewable Energy', seven experts led by Don Gerritsen discussed the opportunities and possibilities.

This is part 1 of the report.

By Ronald Bruins

Moderator Don Gerritsen, Director and Responsible Investment Leader at Deloitte, kicks off. He likes to hear about the big picture from the participants in the Round Table. How do they view fossil versus renewable energy? 'We see a lot of new regulation, a lot of net-zero ambitions from companies with and without intermediate targets until 2030 or 2050, and also divestments from fossil fuels. What are your considerations on this subject?'

Over a video link, Pete Labbat replies, 'From renewable energy infrastructure, including solar and wind farms, to carbon capture, recycling and circular economies, we've seen North America's investment opportunities for renewable energy just get even better, boosted by the recent US government tax incentives included in the Inflation Reduction Act. They stimulate this energy transition enormously and as a result we are now experiencing an acceleration.'

If tax incentives fall, will the technology survive? Is it still an investment case? Government support should help pull the technology through the valley of death.

Another investment case?

Angeles Toledo responds on behalf of Blue Sky Group: 'We want to help make the transition from fossil to renewable energy possible. It is an important investment case, but the transition itself is not that simple. I want to put on the table that unfortunately the world is still very dependent on fossil fuels and the solutions for a scalable, rapid decarbonisation of the most polluting sectors - agriculture, steel, cement and transport - do not yet exist. That is why we need everyone for the transition: investors, governments, companies and consumers.'

Mark van Baal, whose organization is known for its long-term activism during shareholder meetings, responds: 'Net zero in 2050 is too non-committal. Climate scientists who made the IPCC reports don't give us that much time. It is also too easy to stick to 2050. Then we will all be retired. I'll be in my eighties then. The bar for companies must be higher.'

Arij van Berkel draws attention to the importance of a thorough analysis in the renewable energy market. 'In addition, there must also be an analysis of the tax incentives that governments offer. If these disappear, will the technology survive? Is it still an investment case? Government support should help pull the technology through the valley of death.'

We must enact the transition to renewable energy along with society in such a way that we get people on board and that no social unrest arises. That is a challenge in itself.

2030 is very close

Olena Reznik is part of an investment team that looks at business cases in the energy transition on a daily basis. 'It is one of the oldest teams in this field and we manage one of the largest funds in renewable energy. I think it's important that we have clear priorities on this topic and build momentum. Because 2030 is very close. So what should we do to achieve the ambition? And what should we do first?'

In the Paris Climate Agreement, 195 countries have agreed to limit the rise in average global temperature to well below 2°C by 2050 and, if possible, to 1.5°C. Companies themselves often have a derived objective from this. For example net zero. An organization's total greenhouse gas emissions are less than or equal to the emissions it removes from the atmosphere.

Gerritsen: 'To net zero within seventeen years, as some financial institutions have set the target, is ambitious.' Mark Gilligan: 'In addition, we have to make the transition to renewable energy together with society. In such a way that we get people on board and there is no social unrest. That is a challenge in itself.'

DSM has its roots in the exploitation of underground coal reserves in Limburg. That company has now been converted into a health and nutrition company that has performed very well in that transition. I envision those kinds of transformations.

Real impact

As an investor, Marc Hutten wants to go for real impact in the real economy, in the field of climate change and the energy transition, instead of cosmetic interventions in investment portfolios. 'How you do that is the question. Through indirect or direct markets? Are you going for an engagement strategy or an inclusive approach? I notice that pension funds are struggling with such questions and are looking for how they can shape the change in concrete terms.'

Hutten also objects to the label 'fossil company'. 'We're not just talking about oil companies. Every company must make the transition to 100% renewable energy and renewable materials. If we want to get inspired, we can look at DSM. The letters stand for De Staats Mijnen and the company has its origins in the exploitation of underground coal reserves in Limburg. That company has now been converted into a health and nutrition company that has performed very well in that transition. I envision those kinds of transformations. As institutional investors and committed shareholders, we can help companies navigate that path.'

Investors and Investors

Van Baal makes a distinction between the terms 'investors' and 'investors'. 'As an investor you only own one share. You don't invest in anything, but you can influence a general meeting of shareholders. You stay put because you can force a company to make a change. Use that power as an investor.'

Achieving the climate goals requires huge investments, including in the supply chain and infrastructure for the use of renewable energy.

Toledo notes that sustainability objectives are gaining more weight and relevance for companies as a result of the SFDR legislation for investors and CSRD legislation that companies must comply with in reporting year 2023, but also due to the new Pension Agreement in the Netherlands. 'This agreement gives employees who are members of a pension fund more insight into how their capital is invested. And sustainability is closer to the participant than other, more investment-technical concepts.

I myself see a risk-adjusted return going hand in hand with sustainability objectives, also because investments become more valuable in the long term if they integrate sustainability and are in line with the Paris Agreement.'

She continues: 'Sustainability goals are also challenging for companies. The world is still dependent on oil and gas. This applies to plastic manufacturers, agricultural, steel and cement companies. We do not yet have clean, scalable solutions and a lot still needs to be done for that transition. Think of innovation, investments and the right support from governments. Large investors can play a role in the transition and enter into discussions with companies to help make the transition to a greener world possible.'

Short period of time

'We are dealing with a short time frame, especially when we look at the March IPCC report,' said Reznik. 'If we take that as a benchmark, we should be half of emissions by 2030. United Nations Secretary-General António Guterres also recently emphasized the seriousness of the situation. If we want to achieve this target, huge investments are required.

The European Commission recently introduced its Net-Zero Industry Act. It aims to promote the use of clean technologies in the EU and to prepare the EU for the clean energy transition. The Net Zero Industry Act aims to create better conditions for setting up net zero projects and attract investment in Europe. Huge investments are therefore required to achieve these goals, including in the supply chain and the infrastructure for the use of renewable energy.'

Gilligan recognizes the pressures on the success of climate ambitions. 'Never in the history of humanity have we had to go through such a rapid transition in such a short time. You eventually come to the conclusion that oil companies will have to leave gas and oil in the ground and that they are stranded assets. How effective will oil companies be in the transformation to renewable energy? That's a big question. In that game you will have winners and losers. Losers are then the parties that continue to milk their fossil business model for too long. Perhaps new players will emerge who will surpass the oil companies with their strategy based on renewable energy.'

Part 2 of the Roundtable 'From Fossil Fuels to Renewable Energy' can be read here, part 3 can be read here.