Reducing emissions, driving opportunities

The world’s energy transition has come into sharp focus this year as countries and companies grapple with a spike in energy prices. At the same time as nations and businesses try to secure energy supplies, climate impact is growing, and new technologies are emerging.

To understand how businesses in the energy sector are responding to seemingly conflicting pressures, HSBC has worked with Kantar to ask 300 energy companies, in over 15 countries, how they are approaching the transition and where they are on their net zero journey.

The survey marks the launch of a new HSBC Transitions Pathways programme looking at the decarbonisation of ‘hard-to-abate’ and carbon-intensive industries. The programme draws on the scientific roadmaps developed by the International Energy Agency, the Energy Transitions Commission and others, combined with insight from industry experts, HSBC thought leaders and real-world examples of low-carbon initiatives.

Transition plans are becoming the new normal and, in an increasing number of markets, a regulatory and disclosure requirement for both corporates and financial institutions. Transition plans demonstrates action and practical steps against ambition and show regulators, financiers, investors and customers how an organisation intends to reach net zero, often by 2050, across its operations and value chains.

As we know, the roadmap for energy transition will take time. When looking at Bloomberg NEF’s recent analysis on various scenarios, total energy supply investment into all technologies ranges from US$40.2-US$114.4 trillion by 2050. Fossil fuel supply spending greatly reduces by 2050, with coal nearing zero beyond 2030. For 2016-2020, the low carbon to fossil fuel investment was 0.7:1 and in 2022 0.9:1.

Over the next decade, this is set to change significantly as economies lean into carbon emission reduction and rebalance energy supplies. Bloomberg NEF analysis shows that to get on track for net-zero, the investment ratio this decade needs to reach roughly 4:1 on average, meaning for each dollar invested in fossil fuel energy supply, four would be invested in low-carbon energy supply. And, beyond 2030, the ratio of low carbon to fossil fuel energy supply investment rises to 6:1 for 2031 to 2040 and 10:1 for 2041 to 2050¹.

The survey found that energy companies see the transition as business positive and believe that the drive to net zero is picking up speed. Almost all (95%) respondents view net zero as a significant contributor to business growth and a similar number (88%) say the transition is one of their top three business priorities. Given market demands and commercial outcomes, net zero is the number one business priority for more than half of listed companies. However, pressure is also coming from within, as energy companies say that employees are a bigger driver of net zero plans than customers or external stakeholders, giving a nod to the talent they need to attract and retain to unlock implementation.

Beyond the business opportunity, a range of externalities are accelerating the transition. While there have been concerns that the recent energy crisis and subsequent efforts by countries to improve their energy independence would delay the transition to renewables, over half (52%) of surveyed companies say energy security considerations are in fact accelerating their transition.

Even though recent events have put an acute focus on immediate energy security, a very high percentage of companies see macro events as a driving force for the transition and net zero as a commercial imperative. It’s clear there is an opportunity for this group of businesses to use the current elevated commodity prices and security agenda to invest in low-carbon initiatives that will become a significant source of future growth.

Other crucial accelerators include technology availability, market and investor demands and reputation.

Energy companies recognise the important role that their industry must play in the energy transition, and three quarters believe that it is making a larger contribution to the achievement of a global transition than other sectors. They are taking their part seriously, with a significant majority (84%) of energy companies stating they have a dedicated reporting plan and are reporting on their progress. A similar number believe that the broader industry has a plan to reach net zero.

However, there is some concern that plans may not be ambitious enough. Opinion is evenly divided between those who think that the industry has a clearly defined plan to transition fully to net zero (42%) and those who think that only the near-term steps are well-defined (41%).

Indeed, energy companies are investing in the transition. Almost a third (31%) are already investing more than 10% of their capex in the pursuit of net zero, and about half (49%) plan to do so within two to three years. In the oil & gas sector, a small group (8%) are going even further, investing 25% of their current capex in net zero initiatives: 20% of the oil & gas companies in the survey expect to reach that level in the next two to three years.

Seb Henbest, Group Head of Climate Transition at HSBC, is encouraged to see companies dedicating investment towards decarbonisation.

“Already we can see that a significant amount of capital is being committed to transition initiatives, and the direction of travel here is undeniable,” he said. “We are poised for a significant ramp-up in the amount of capital allocated to net zero goals over the next two to three years, which is encouraging as it suggests companies aren’t just talking about climate, they are starting to seriously implement their transition plans and invest larger amounts of money in solutions.”

Renewable energy, business lifecycle assessments and the electrification of transport are the top priorities for energy companies’ current capex allocation. Almost four in ten established oil & gas companies are investing in renewables, while younger businesses are less likely to do so, in part down to these types of businesses having fewer legacy portfolios that need to be diversified. Instead, they are more focused on electric mobility and driving emission reduction through their own operations.

There is no such ambiguity around the need for greater ambition on emissions targets. While half of energy businesses have set net zero targets for Scope 1 and 2 emissions (direct emissions such as from power generation), just 17% have done the same for Scope 3 (indirect emissions such as those from fuel consumption).

Scope 3 emissions pose a particular challenge for oil & gas companies, and the data reflected this: only 14% are targeting net zero across their indirect emissions.

Renewable energy investments top the list of activities to reduce Scope 1 and 2 emissions, followed by investments in more sustainable processes.

Established power companies are pursuing a range of activities, especially upgrading and retrofitting electricity grids (40%) and investing in carbon capture (33%). While established oil & gas companies are investing in renewable energy sources (33%), improved use of sustainable construction and implementation methods (31%), and carbon offsets (25%) presently.

For complex Scope 3 emissions, energy businesses are pursuing a range of strategies to support reduction. The largest companies – typically those with the most influence over the supply chain – see pricing strategies, capital provision and procurement policies as the most effective levers. Given that Scope 3 emissions account for the bulk of the carbon footprint for the oil & gas sector, these actions are likely to have considerable implications for smaller businesses as the drive to net zero accelerates.

She adds: “I’m excited by the opportunity we are able to support with regards to the businesses and supply chains of today and tomorrow. Those that spot holistic value-creation now, will have first-mover advantage. It’ll be these firms, anticipating the needs of transition and ways to tackle Scope 3 emissions with the likes of IoT, partnerships and finance, that will grow their profits, market share and also attract talent and investors.”

Energy companies also recognise that collaboration across the value chain and with a range of partners – both financial and technical – will be critical to scaling up their energy transitions.

Governments and technology partners were identified as the most significant sources of external support. Indeed, 45% of large energy companies receive meaningful support from technology partners, and more than a third value the support of industry bodies and environmental consultants.

Energy companies also see technology developments as the top accelerator of the net zero transition over the past 12 months. Businesses in the Middle East were especially confident about the technology picture: 88% believe the key technologies are already available, and more than half are already adopting them. “We are seeing the transition play out differently in different parts of the world. Confidence in availability of key technology from Middle East firms may reflect their strong focus on cost competitive solar and wind energy, whereas the new technology focus in other parts of the world may be on earlier stage, less established solutions,” says Seb Henbest.

Financing is a huge hurdle. Almost half (47%) of companies that have yet to commit to a transition plan state that high costs are holding them back. Even energy companies that identify themselves as progressive, with a dedicated reporting plan, are held back from further action by high costs and the lack of availability of financing.

The preferred source of funding depends on the type, size and location of the company. For power companies, public funding is especially important, likely to support the upgrade of power grids to better handle the increased use of renewable energy. Businesses in Asia and the Middle East are also more likely to rely on public funding.

Private equity and venture capital is especially important to the biggest businesses: half of the largest energy companies in the survey say PE and VC funding is important for their net zero plans.

“The role of innovation in the energy transition is absolutely paramount,” Henbest says. “The sector needs to mobilise early stage funding to bring new technologies to market, as well as project and infrastructure finance to deliver those at scale. What’s encouraging from the survey is over 40% of larger US$2.5bn revenue corporations are also funding vertical innovation streams through PE and VC to incubate and bring these technologies online as part of their portfolio, which should add market value, alongside carbon reduction.”

Banks are also a valued source of funding and support for transitioning companies, particularly for fast-growth companies, with sustainable finance supporting broad transition plans (43%) and business transformation (39%).

Energy companies see funding for the transition as the most important service they receive from banks – and many expressed strong interests in wider sustainability-related financing, including trade instruments and sustainable supply chain financing in the near future. Non-financial services are also becoming more relevant: larger businesses are notably interested in exploring research, advisory services and the majority of business interested in new value-add transition tools.

“Financial institutions need to work in partnership with their clients to support the net zero transition and decarbonise their own portfolios, across financing, facilitation and risk mitigation,” explains Blyth.

She sees banks playing a larger role in the energy transition as businesses push towards their own net zero goals. “Banks will need to go beyond financing, but support businesses – particularly Small to Medium-sized firms – with value-add services, such as carbon calculators, disclosure services and supply chain integration through data services and certification.”

Partnerships are emerging as a crucial component of the sector, as firms, governments and banks highlight that collaboration is key. HSBC has committed to solving some of the hardest challenges in the sector with commitments in partnerships. For example, our involvement in Breakthrough Energy Catalyst, where we’ve invested US$100m to support the investment and scale-up of those really important climate technologies - direct air capture, clean hydrogen, long-duration energy storage, and sustainable aviation fuel – and more broadly supporting entrepreneurs solving for the transition.

Today we finance a number of industries that significantly contribute to greenhouse gas emissions. We have a strategy to help our customers to reduce their emissions and to reduce our own. For more information visit www.hsbc.com/sustainability.