We need to bring biodiversity to the Bloomberg terminal
Both bp and Shell recently announced a doubling down on fossil fuels. Exxon and Chevron never stopped being doubled down. Total, the last hold-out for an oil and gas company led energy transition, will soon follow. These strategic shifts have resulted in shock and anger being directed towards these companies, perhaps even a sense of betrayal. For a snapshot of what many are feeling, look at the linkedin comments under recent communications for bp or Shell. Shell’s CEO even received a letter signed by 8000 dismayed employees deploring that Shell’s desire to be a ‘leader in the energy transition’ was now in tatters. Oil and gas companies are doubling down when we need to phase down.
But we should not be surprised that legacy oil and gas companies will back pedal on their commitments to net zero. This is for a handful of interrelated reasons but boils down to a simple fact: today and for the foreseeable future, clean energy is not as profitable as fossil energy. To follow the cascade of decisions that are playing out in the board rooms of the majors right now:
Renewables just have a lower ROI than oil and gas – upstream oil and gas projects typically expect an IRR of 20-25%, while offshore wind, where oil and gas companies claim to have specific logistical and engineering advantages, IRR’s come in at well below 10%[1]. To even come close to upstream oil and gas project IRR’s, these companies will need to own the entire value chain, even setting up their own retail electricity distribution co’s. And these are quietly being shuttered down as we speak, Shell recently selling its retail energy business to Octopus. Diverting capex into renewables vs oil and gas is a big opportunity cost.
Super majors are constrained by a high-cost base – salaries at oil and gas companies are higher than in renewables. For an electrical technician in the North Sea, it can be a £20k difference[2]. It’s very hard to start paying everyone less. And final salary pension schemes are immensely expensive to maintain.
These companies are ‘cash machines’ for their shareholders – since the Paris agreement was signed in 2015, shareholders in bp and Shell have earned a total of £131bn[3]. Shareholders expect to be rewarded handsomely for their investments. When they are not, the shareprice of these companies tank.
This is the simple explanation for bp, Shell’s and Total’s (future) pivot back towards oil and gas. The directors of a company are legally obliged to act in the best interests of the shareholders, which really means doing things that increase the financial value of the company. This situation is particularly acute for publicly traded companies, such as bp and Shell, where board decisions are rapidly ‘valued’ by the markets. So, when bp announced its was scaling back its energy transition plan in February this year, the share price jumped by 8%. bp or Shell has no desire to be a leader in the energy transition, unless it’s the best way to deliver shareholder value. If it’s not, it doesn’t matter.
Think about the rash of net zero targets that companies have signed up too. Consider this a miracle in itself! Most companies are not doing this because it is ‘the right thing to do’ but because the board decided that it was in the interest of the shareholders, not the planet, to incur the costs of planning and committing to (and then executing) a net zero target. The only thing that really matters to a board when setting a net zero target is whether the company will be more valuable as a result.
So, in this light, bp’s refocusing on its core fossil business was just a rationale response to market signals. In immediate hindsight it has seemed remarkably prescient – renewable energy supply chains (especially offshore wind) are creaking to breaking point, funding long-term capex has become massively more expensive, and wavering politicians in bp’s core markets are giving little confidence in the grid upgrades needed to deploy renewables at scale.
The company’s strategy has no moral compass other than that imposed on it from outside from regulation and reputation, nor should we expect it to. Unfortunately, an unintended consequence of the ESG movement is that oil and gas companies are being asked by their shareholders to double down on fossil fuels, as ESG-conscious European investors’ holdings are acquired by less judicious US investors. Formerly state-owned Total, the last supermajor with ambitious renewable targets, now answers to a majority of US investors who have given the CEO 6 months to prove that the renewables business can match the ROI of the fossil business, or it gets sold off. Unfortunately, we’ll be hearing from Total too in 2024 as they refocus on oil and gas.
The supermajors will continue to pursue oil and gas, and they will continue to dabble in renewables at the bottom of each oil cycle as ROIs converge. But they cannot be leaders in the transition. Their legacy business is too profitable, their cost bases too high, and the expectation of their shareholders is that they continue to be cash machines. These companies should be wound down over time and any renewable assets spun off into newco’s without the parent company’s liabilities (including salary expectations!). Orsted chose to do this a decade ago with the luxury of state backing. We will have to do this by voting in politicians who remove subsidies for oil and gas projects and increase support for the energy transition.
And for us at Systemiq Capital, at the core of it all is investing into and supporting this generations most outstanding founders build and scale the clean energy super majors of tomorrow.
Special thanks to co-contributor Louis Millon
Drones and other remote sensing systems can also overcome logistical issues accessing biodiverse ecosystems. I took this photo during my time working with land managers in Sumatra in 2019/2020.
This ability to cost-effectively measure biodiversity will be a gamechanger for scaling private sector financing into activities protecting and restoring biodiversity. There is significant appetite in the financial sector to differentiate investments supporting biodiversity. Momentum is powered by regional regulation, such as the European Sustainable Finance Disclosure Regulation, but also global industry consensus driven by groups such as the Taskforce on Nature-related Financial Disclosures (TNFD) and Science Based Targets for Nature (SBTN). To date, a lack of data has prevented effective action: in a recent survey conducted by Credit Suisse, 70% of investors cited lack of data as a key barrier to making investments supporting biodiversity[2].
Two emerging data streams will enable financiers to rapidly and accurately assess their portfolio’s impact upon biodiversity. Firstly, data from corporates, who are deploying biodiversity monitoring technology at their physical assets in response to pressure from their financial stakeholders and organisations like the TNFD. And secondly 3rd party remote sensing data and analytics, increasingly used by algorithms trained on ground-truthed biodiversity data to accurately predict species distributions across large areas. Existing biodiversity datasets will also play a role (with efforts underway to improve their accessibility). Investors can therefore choose to allocate capital to companies with lower biodiversity risk profiles, and companies are incentivised to invest into reducing their biodiversity risk. And secondly, project developers responding to emerging demand for ‘biodiversity outcomes’ can quantify biodiversity gains they achieve, enabling them to package and sell these outcomes to customers wishing to manage reputational or regulatory obligations.
Assessing biodiversity impact seems conceptually simple, but quickly gets complex. One approached pioneered by Nature Alpha is to start by using existing spatial datasets to assess a physical asset’s proximity to a recognised biodiversity hotspot, and perhaps including the asset operator’s ability to manage their impact upon adjacent biodiversity. This data can be complemented by employing communities living alongside biodiverse ecosystems and physical assets to record timestamped and spatially explicit biodiversity and asset data, such as flaring or blasting intensity, using tools like CyberTracker (a simple app with over 500k downloads enabling local communities to record biodiversity data). However, bringing this data together coherently quickly gets complex: different species, habitats and ecosystems need different weighting in a final ‘score’, different data collection methods have different human biases, data on asset mitigation activities is difficult to obtain and compare like-for-like, and how often and how fully to measure biodiversity change over time will inevitably be a finely balanced trade-off between cost and completeness.
Complex biodiversity data streams will need to be dramatically simplified for use by non-specialist financial decision makers. Developing simple metrics that adequately describe biodiversity impact and yet are comprehensible for financial decision making is critical to bringing biodiversity to the Bloomberg terminal. For carbon, developing an agreed upon metric was relatively straightforward: tonnes of CO2 either avoided or removed (albeit determining whether those outcomes have been achieved has been far more complex). For biodiversity, attempts to simplify biodiversity to habitat indicators, such as that developed by the UK’s Department for Environment and Rural Affairs, are a helpful development but risk missing presence of rare or key stone species. Future developments must acknowledge biodiversity’s immense complexity, our rapidly increasing ability to collect biodiversity data, and the need for metrics to be simple to use. Opwall’s biodiversity indicator, which acknowledges a local approach to setting specific biodiversity targets, is a strong start.
Collecting biodiversity data needs to be as simple as possible. Despite requiring a sophisticated laboratory and bioinformatics, collecting and filtering eDNA from water is remarkably straightforward. Photo credit NatureMetrics.
Biodiversity impact data that can be understood and compared by non-specialist actors also unlocks a new and essential business model: protecting and restoring biodiversity directly. Such a company was inconceivable a decade ago, but pioneers over the past decade have been quietly building momentum restoring forests and other landscapes, funding themselves through the sale of carbon to voluntary purchasers. In the last couple of years the voluntary carbon market has exploded, but many buyers have struggled to differentiate the true impact of various carbon credits available. Immense and necessary effort is flowing into quantifying the true carbon impact of a carbon credit, and carbon credits with higher integrity ratings command higher prices. Biodiversity impact will be next. Using biodiversity metrics to add a quantified ‘biodiversity premium’ or for a separate biodiversity credit goes necessarily beyond competing marketing montages of orangutans and elephants, to a metric that buyers can understand as they purchase carbon credits at scale. It also offers a direct path to recognising the critical contribution of the local communities to protecting and restoring biodiversity in a carbon project. It is the beginning of a market for biodiversity outcomes, with fair and equitable compensation for local communities driving these outcomes. For these project developers, proving that biodiversity is returning is the product – and therefore they have every interest in measuring it.
Biodiversity monitoring technology needs to be ‘blitzscaled’ to halt and reverse the 6th extinction. Without it, private sector financing critical to stemming the tide of biodiversity losses will not flow at the scale or with the precision required. Bringing together massive advances in eDNA, bioacoustics, satellite and drone based imaging and the interconnecting algorithms can unlock deep quantification of biodiversity. This will enable financiers to allocate capital to companies which are effectively managing their biodiversity risks, including those which demonstrate net positive biodiversity gain. Managing biodiversity cannot be done effectively without creating mechanisms that incentivise local community participation in the monitoring and protection of biodiversity. TNFD, SBTN and eventually regulatory developments will accelerate this trend. Venture capital has a defining role to play in bringing these solutions to market, now. The next climate unicorn may be a unicorn from nature.
Special thanks to co-contributors Cameron Frayling, Dan Morris, Douglas Flynn, Floor van Dam, Georgina Fleming, Jessica Stewart, Katie Critchlow, Maximilian Bucher, Mitch Reubin, Scarlett Benson, Vian Sharif and Zoe Balmforth.
[1] https://www.wildlabs.net/community-announcement/state-conservation-technology-2021
[2] https://www.credit-suisse.com/media/assets/microsite/docs/responsibleinvesting/unearthing-investor-action-on-biodiversity.pdf