Video
The next five years are going to be critical for energy and natural resources companies to reinvent themselves for a sustainable future. In this video, Peter Parry and Joe Scalise, respectively the chairman and the global practice leader of Bain's Energy & Natural Resources practice, discuss how companies in these industries can keep their current businesses running while remaking themselves for a low-carbon future.
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Read a transcript of the video below:
PETER PARRY: My name is Peter Parry. I'm the chairman of our Global Energy and Natural Resources practice here at Bain & Company. With me is my colleague, Joe Scalise, who's our global practice leader.
We're going to share with you some of our ideas and thoughts around harnessing the energy and natural resources transition, a critical subject for all of us and one which we at Bain & Company have been focusing our time and attention on over the last several years. But now, we've reached a time in which the progress made and the opportunity in front of us is huge.
We need to think about the next five years. We need to think about the way in which the companies in our energy and natural resources sectors will perform, the way in which the investors will support those companies and help drive them forward, and the way in which they can deliver the right products, the right solutions, and, most importantly, the sustainable performance that is required by society.
It's a time when investors need to lean in. It's a time when companies need to start to demonstrate even more results, even more progress, even more potential in what it is that they are doing to drive low carbon and sustainable solutions for their customers, for their investors, and for all of us.
What I'll do is I'll talk a little bit about some of the challenges that those companies face, how they're beginning to address them, where is it that investors can lean in and play a supporting role, and in some instances, maybe even a driving role. Joe will take us through some of our thoughts on the degree to which we need to get very specific about the impact, about the influence, about the economics of our businesses and how they will perform. Then I'll come back and talk to you a little bit about the conclusions and the way forward.
Some parts of our energy and natural resources landscape are more challenged than others. Certainly, in the oil and gas sector, in chemicals, and, to some extent, in agriculture, we've seen some struggles. We've seen more progress, perhaps, in mining and utilities, where their path to sustainability might be clearer. Those companies in those areas where the pathway is clearer have attracted more capital and have seen better performance.
Some investors are betting against them. Certainly, in the last couple of years, we've seen capital moving away from some of the energy and natural resources sectors into areas like tech and consumer products, financial services elsewhere, whilst energy and natural resources have declined in value, wherein the challenges that customers and society present to them around decarbonization in particular, but sustainability in general, are becoming more and more evident. And this comes at a critical point where the energy and natural resources sectors need to reinvest, to retool in a way that's going to make a sustainable future possible for all of us.
As that capital becomes more difficult to obtain, we've seen ESG funds and collaborations of funds now build very, very significant positions around the way in which they want to interact with companies they invest in, and vice versa, how companies want to communicate with their investors around the direction they're taking, the strategies they have in place, and the results they're beginning to deliver.
It helps that the opportunities in these sectors are compelling. The scale at which capital needs to be deployed is huge. The range of opportunities, from investing in electric infrastructure, in low-carbon solutions, in bioproducts, are all there. And the industries which serve us today are arguably going to be a major driver of retooling industries we need tomorrow.
So what's holding back some of those energy and natural resources companies in their capacity to really lean heavily into the transition? Well, I think it's simple. It's to do with the relationship they have with investors.
The availability of capital, the flow of capital at the required scale, is something that many are finding challenging. They've struggled through previous commodity price cycles, fluctuating share values, fluctuating market capitalization, fluctuating profitability, certainly. But today, we're looking at a future where the threat from carbon is even greater than those commodity price fluctuations.
So what is needed here is a concerted effort from the companies to demonstrate sufficient impact at sufficient scale. That then attracts capital to them in order to enable them to get to the next level. That next level is an industrial scale of deployment. How is it, then, that we can enable that change to take place rapidly and that the next five years are seen as a success, not as a drag on our progress?
It would be a mistake to count the incumbents out, to disinvest in those sectors which are arguably in the best position to drive change. Certainly, there are new players emerging onto the scene. Certainly, there will be disruptors coming and changing the way we think about energy and natural resources.
But many of the global companies that operate in those sectors today perhaps have the best and strongest capabilities to drive change, and perhaps the best and strongest capabilities to create the kind of infrastructure, the kind of products, and the kind of assets that we'll need in a low-carbon and sustainable world.
What we've seen over the last couple of years is the emergence of something of an adversarial relationship between investors and companies, particularly ESG investors and ENR companies. And that's to say ESG investors pushing companies to act more forcibly, to put in place more procedures and practices, to deliver stronger results in driving forward their ambitions around sustainability, and particularly, in the area of low carbon.
While companies may generally be happy to operate under a greater level of scrutiny, what could help really drive change is that adversarial position moving to a much more collaborative one, one where companies are leaning further in to explaining how they're going to start to deliver on their plans and ambitions, where investors are leaning further in and acting sooner to help calibrate the direction and the economic results of those changes are likely to deliver.
The good news is that there is progress already. A number of players have put in place impressive programs. They have put in place new measures. They have started to link executive compensation to results. And these things are all beginning to illustrate how the world is going to have to work in the future. But that collaboration needs to go up several notches to be effective.
I'm going to turn over to my colleague Joe Scalise now, who's going to take us through some thoughts on how companies can innovate, think about the impact they have, both socially and for their investors, and also the economics of the transition. Joe.
JOE SCALISE: Thank you, Peter. Well, as Peter was saying, shareholders and activists have made it clear that they want our industry and our companies to act. Standing still is not going to be an option. And if we're going to be successful in the energy and resource transition, it has to be our companies that act. And if not us, really, who? That is, truly, now is the time.
So with that in mind, as I look back, as I look at the industry broadly, the track record on which we have to stand is enviable—100 years, 150 years of innovation, and harnessing the world's resources for the benefit of humanity, and the billions of people that have been lifted out of poverty over time. The role of the energy and resource companies are a huge part of that. And I'm excited about what's to come and the opportunity ahead of us as we continue this journey.
It's hard to say it's early days on this topic. It simply is not. But the pace has absolutely quickened in the last 12 to 18 months. At Bain, we have over 1,000 partners across the globe, with almost a quarter of them working in the energy and natural resources space and increasingly so in sustainability broadly across industries.
And what we thought we would do today, building on Peter's introduction, is talk a little bit about what we are seeing those companies that are making the most progress on this front, what we're seeing in common, what they really have, and what they're doing collectively. And as we've looked back and reflected on the last several years, and the last 18 months in particular, we see really those making progress focused on three things, all right, and three things in equal parts.
First, innovation, the raw physics of what we do in the energy and resources sectors, whether it is focusing on increasing crop yields, to the conversion of raw sunlight into electricity. That focus on innovation is absolutely critical to drive forward in the energy and resource transition.
But importantly, it's focusing on what we do with that innovation. It's not just the mere science and physics, but the engineering of it, and the ability to divine and tell the difference between the novel and the truly scalable, and what's going to be fit for purpose, fit for the purpose to deliver things, not on a kilowatt-hour scale, but on the gigawatt-hour scale.
The ability to take those technologies and deploy them at the scale that we need, that knowledge is really only resident in today's large incumbents and today's large companies. So we see a focus there on innovation, all right, and deployable and scalable technology.
The second area of focus is on impact and the notion of social license, the communities in which we operate, and where we get the legal charter, if you will, to exist as businesses, to provide, and whether that is the notion of mitigating damage on a resource site or mitigating the impact of our operations as the world changes around us.
I'm here in California, where wildfires, as they've happened, have become an incredible part of the operations of the state's utilities and, to some degree, an existential threat to the business. The focus on social license, and not being merely compliant with the requirements, but being seen as stewards of the natural resources and working hand in hand with policymakers to deliver on their collective ambition and for our communities.
The third one—and forgive me for stating the obvious, but I think too often it goes unsaid in these environments, or rather, outside of these environments and other ones—but is the ability to form capital. You can't change the world if you can't form the capital to bring the resources together to deploy them on our collective benefit and for the benefit of our shareholders.
There's going to be no reprieve on the quarter-in and quarter-out earnings cycle required to deliver for today's shareholders. But increasingly, and ever more importantly, is the ability to be compelling and visionary about where the world is headed, and the company's role in that world, and how they're going to bring innovation together with the aspirations of the community to deliver. And importantly, the ability to deliver credibly on that. It's not just a vision. It's the credible delivery day in and day out.
We can't do number one and number two without forming that capital. And it's up to today's companies, today's business leaders, to carry that message forward, that we can make the change, we can drive the change, that we know where the world is headed and are prepared to lead, and we know how to do it in a way that is economic and efficient for all.
Any one of these topics is enough to fill the day of an individual executive. Balancing all three is truly the challenge of this generation of leadership. So we see teams coming together on these topics in ways that are truly new muscles for many executive teams. But with that focus and energy in doing that, they're making real progress.
PARRY: So the task ahead may appear daunting. The scale of change required, shifting from an adversarial to a collaborative relationship between companies, investors, and the degree to which we need change in terms of results, absolutely, these are daunting things. But if we are able to focus on the three things that Joe has been speaking about, we have a pretty good chance of making that world change and deliver in the way that we want it to.
Just to remind those three things—innovation. Innovation is at the heart of driving change. We need to innovate to get the future that we're looking for. Without innovation, we're just going to be repeating some of the mistakes of the past, and we're not going to be taking full benefit and full opportunity of the great minds and the great ideas that are coming from the future.
The next generation will start to have a big impact in what we do and how we think. Their creative minds, their inquiring ideas, and their push are going to force the energy and natural resources industries and their investors to be really innovative.
Secondly, impact. Impact is not about the next 20 and 30 years. Yes, that's important and necessary, but the next five years will be vital. Can we get on the right trajectory? Can we start to deliver the right kind of social and sustainable and economic impacts that we need?
But what drives this? Ultimately, good economics will drive quicker, bigger, and more lasting change. So this isn't necessarily about just shifting one business model to another, about shifting one approach and replacing it with another. It's about driving positive change and driving good economic efficiency while we do it.
That's where the companies-investors collaboration will become reinforcing in nature. We'll start to see them work more closely together. We'll start to see, for the best companies, very good results, and for those others, new aspirations being set. So we're very positive about the next five years. We're very excited about the opportunity that this creates. We're very realistic about the scale of the challenge ahead.
Harnessing the Energy and Resource Transition
Energy and natural resources companies are uniquely qualified to address the challenges of the world’s most important issues.
First published in julho 2021