Wall Street is going through a radical transformation because of concerns about global warming and the consequences of unsustainable business models. In fact, analysts estimate that during 2021 approximately 77% of institutional investors will stop investing in companies that are not, in some way, sustainable. The so-called “ESG boom” (Environmental Social and Governance) is taking place, and while it surely looks like it is for a better future of our planet, we should still look at market valuations, fundamentals, and financial stability. Patrick Pouyanné, chief executive of Total SE, one of the world’s biggest oil and gas companies, recently shared his concern about the risks related to the current market valuations of most renewable energy companies. In a wide-ranging interview, he told the Financial Times that “there is a bubble” in the renewables sector and that valuations that are often up to 25 times earnings are “just crazy today”. Meanwhile, Total has planned to invest billions in renewables in the coming years, targeting net-zero emissions by 2050, and the board of directors proposed renaming the company TotalEnergies. This radical conversion is mainly driven by institutional investors, who are threatening to sell their oil and gas assets, without realizing the paradox they are generating in the energy industry. In fact, because of the sudden frenzy of “green” mania, valuations of renewable assets have skyrocketed, making most of the green investments unattractive for oil and gas companies, that are obliged to buy at incredibly high prices in order to prevent investors from ditching their stocks.
During the interview, Total’s chief executive, referring to a specific deal on a lease of offshore wind farms in the UK, stated that “I will not buy, but I think I would not be surprised to see one of my European peers spending money. A banker came to me (about another deal) and said ‘If you don’t buy it, BP (British Petroleum) will buy it’. I said, OK, but at this price, why should I buy that? Explain it to me.” The point is, that not every renewable energy asset is necessarily a good investment, especially at current prices. Sustainable assets, according to Morgan Stanley, already account for US$ 17.1 trillion in value and are expected to grow enormously in the next years globally, but that does not justify buying renewables at any price nor is a guarantee of future revenues. Another common misconception is that divesting from oil and gas companies will solve the climate crisis; because the general public does not realize that if American and European oil and gas majors start dumping their traditional assets, other market players like the Chinese, the Saudis, or the Russians will take them and generate profits without caring. In a world where there is still a huge demand for oil and gas, a shift to green only makes sense if it is an internationally coordinated action, otherwise, it’s just a competitive disadvantage for those countries who tried to go green. As we have already mentioned in our previous article “How will the Biden administration impact US oil and gas production?”, a hasty shift to renewables combined with severe regulatory policies targeting the oil and gas industry, could ultimately result in cheap and worse quality oil coming in from OPEC countries, a competitive disadvantage for American companies, and a loss of jobs, without really tackling global emissions. Some countries, whose wealth is in great part a result of fossil fuel exports, like Saudi Arabia or Russia, realize the magnitude of the threat that a green economy is posing to their economies; and while they might be trying to diversify public investments, they surely are not ready to cut production because of some climate target.
Also, some of the biggest investments in renewable energies come from the traditional oil companies, that are using profits generated from fossil fuels to finance expensive projects. Total, for example, is planning to spend more than US$ 2 billion this year on electricity and clean energy, despite the net loss of US$7.2 billion in 2020 as a direct consequence of low commodity prices due to the pandemic; while Shell just reached an agreement with Amazon to provide renewable power from its offshore wind farm to the e-commerce giant’s European facilities, in order to accomplish Amazon’s aim of becoming a net-zero emission company by 2040. However, new green energy projects come with a high cost, which is inevitably going to be paid by consumers. A radical conversion of the energy industry doesn’t come for free after all, but new technologies should become cheaper as they become largely implemented.
Ultimately, we can say that there is something wrong with the political debate and the general public’s conception of renewable energy policies. We need an energy transition, but it must be a wise one, a shift that also looks at reality, fundamentals, and that preserves our economies and consumers. The real challenge for the future of green energy will be to become more attractive than fossil fuels in a context of a free market, without the need for government subsidies and giving the chance to many countries to become energetically independent.
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