Carbon emissions are driving corporate strategy

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Activist investors and environmentalists make strange bedfellows, but both are like the hordes at the citadel gates of the oil majors.

In the US, activist investor Engine No. 1 forced at least two and possibly three directors onto the board of Exxon Mobil. In doing so, it aims to force a change in direction for the world’s largest oil company away from oil and gas and toward a lower-carbon future.

What is remarkable is Engine No. 1 drove through the imposition of new directors despite holding a mere 0.02% stake (or $54 million) in the company. It won the backing of state pension funds, like that of New York state, and asset managers such as BlackRock, Vanguard and State Street, the Financial Times reported.

Investor action was driven by chronic underperformance. That’s not just at Exxon but across the oil and gas sector, the post reports. It should be seen as the market’s growing demand for the oil business to address the challenges of the future and reposition itself for a world in which the markets demand issues seen as existential threats, like carbon emissions, are addressed in a meaningful way.

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Carbon emissions at the forefront

Action inspired more by environmental ideology than financial was meanwhile happening simultaneously in the Netherlands.

The Financial Times reported a court ruled Dutch oil major Royal Dutch Shell should accelerate its strategy for energy transition by making steeper and quicker cuts to greenhouse gas emissions than it had planned.

The ruling will likely spur legal cases against other oil and gas companies. It could also spur cases against other big corporate polluters, like steel mills, metal refiners and cement works.

The ruling requires Shell to cut its net carbon emissions by 45% by 2030 against 2019 levels on an absolute basis. The court said the company had violated a duty of care obligation regarding the human rights of those affected by climate change.

The future of pollution and metals industry implications

Regardless of one’s personal position on the issue of climate change, the takeaway here is the world is changing fast.

The impact is going to be widespread.

The fossil fuel industry is not going to disappear overnight. Nor are major industrial activities that have a heavy carbon footprint, like steel production.

But the drivers of those business models, the economics, are already on the move. There will be winners and losers.

Among steel producers, electric arc furnace (EAF) mills clearly have a significant advantage. While steel producers using traditional blast furnace technologies can be protected by governments from carbon taxes through the issuing of permits, they cannot be protected against investor activists worried about the long-term future of the business or courts responding to environmental activists.

Polluters are caught in a pincer movement that will almost certainly result in higher costs in the medium term. As such, it could result in market-distorting change.

Interestingly, some in the aluminum industry are addressing issues of carbon emissions as an opportunity rather than a threat.

Rusal, for one, is aggressively pushing its low-carbon hydroelectric power sources as a brand-enhancing feature. In time, it will enjoy a price premium for its near-zero carbon aluminum over its competitors.

This wasn’t just a happy accident.

Rusal did have a proportion of coal-fired power sources. However, it has actively closed them and invested in enhancing its hydroelectric power.

Of course, many aluminum and nearly all steel mills do not have access to hydro power. But a blend of power source and technologies will be a key feature among winners and losers in both industries in the future.

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