In November all eyes turned to COP26 in Glasgow and its implications for climate action and the potential for further divestment away from fossil fuels. While COP26 has put in place the foundations needed to progress the transition to a low carbon economy, it still leaves a substantial gulf between current commitments to decarbonize and what is needed to deliver on the Paris Agreement. It is however apparent that momentum – and pressure – is increasing among financial institutions, corporations and governments to decarbonize.
At the start of 2021 – when we launched the Future of Risk: Energy - we said that the pace of divestment away from fossil fuels had increased following COP21 in Paris in 2015. It looks likely to ramp-up still further following COP26, although there are still headwinds.
And it is apparent from this year’s Global Risk Management Survey – Aon’s biennial survey of 2,300 risk decision-makers across 60 countries globally – that energy firms see the threat of climate action to their operations as significant.
Divestment After COP26:
A Deepening Challenge
OVERVIEW
Global Risk Management Survey
Divestment after cop26
1. This includes all private investment decisions, but also all spending decisions that countries and international financial institutions are making as they roll out stimulus packages to rebuild economies from the pandemic.
Divestment After COP26: A Deepening Challenge
Supply Chain Management: Building Resilience
Future Talent: Diminishing Returns
The growing pressures to shift away from fossil fuels are likely to have an increasingly significant impact on the ability of oil and gas companies to attract and secure future investment – unless they can show a positive path to decarbonization. Should progress on transitioning fail or prove too slow, these companies run the risk of investors divesting.
We said at the start of 2021 that “pension funds and other institutional investors are now looking to quantify, understand and mitigate their exposure to climate risk and – in varying, but growing, degrees – are starting to divest away from those industries with a significant carbon footprint.” This has now become an unavoidable imperative under the language set out by COP26.
According to DivestInvest – which has acted as a major pressure group since the Paris Agreement – 1,497 organisations have now committed to divesting away from fossil fuels, accounting for $39.88 trillion of assets under management, and have pledged to divest $14.6 trillion away from fossil fuels as of 2021 – up from $13 billion in 2020.
What Kind of Institutions Are Divesting?
Divestment after cop26
Business Interruption
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Divestment after cop26
Energy firms need to see COP26 as a watershed moment, where they can harness the growing support of financial institutions to decarbonize their operations and be agents of profound and positive change within the global economy.
COP26 is looking to mobilize transition finance and energy firms have the opportunity to access “private finance to fund technology and innovation, and to help turn the billions of public money into trillions of total climate investment”. This is exactly the funds that will be needed to bridge the divestment gap and fund the green revolution.
This growing pressure has implications for the operations of oil and gas companies right across the world and we are already seeing a change in their investment profile in places like Europe – with a general reduction in fossil fuel investments, a shift away from exploration and production, and an emphasis (where investments are occurring) on refining.
All these changes are pushing energy companies to get increasingly serious about their decarbonisation ambitions if they are to secure future finance. Many are looking to expand their renewable energy capabilities, as a way to retain and attract new investors, as investors increasingly focus on decarbonisation and whether to divest from fossil fuels.
Many fossil fuel representatives sought to stall progress on decarbonisation initiatives at COP26, as opposed to embracing this change, against a backdrop of funding levels for fossil fuels that continue to far outstrip those available to renewables.
Localized vs. Systemic Risk
The Suez Canal blockage also acts as an example of localized risk rapidly turning systemic. The canal’s susceptibility to closure has long been a concern for global trade. Yet this incident hit a supply chain already battered by a pandemic, stretched by congested ports, railyards, and distribution centers, straining vessel shortages and delaying shipments.
The canal is vital for oil supplies and allows for a direct shipping route between Europe and Asia. Ten percent of global oil passes through the canal and an associated pipeline network, with 1 million barrels of oil and 8 percent of global liquefied natural gas passing through the canal each day[2].
Lloyd’s List data estimate that the blockage held up $9.6 billion of trade each day, and it was blocked for six days and seven hours. In total, 367 vessels were delayed, including containerships, bulk carriers and tankers. Some vessels chose to reroute around the Cape of Hope, adding more than a week of additional sailing and fuel costs. The disruption cost the canal authorities alone $95 million in revenue.
For energy, there are pipelines and other shipping channels that could have an outsized impact on logistics[3]. The Bosphorus Strait, Strait of Hormuz, Gulf of Mexico and Straits of Gibraltar plus the SUMED, Druzhba and Keystone pipelines could dramatically impact the movement of oil around the world.
Changing Priorities
As energy firms have struggled with global supply chain disruption and drastic fluctuations in demand, many discovered they lacked a diversified and robust supply chain. Prompt delivery, just-in-time operations and wide distribution were key priorities of supply chain management pre-pandemic. However, firms have been forced to prioritize understanding and solving how supply chains handle delays, source supply shortages, and overcome a lack of visibility.
Organizations will not underestimate the potential for localized disruptions to become systemic again. To comprehend the magnitude of difference between the two, one needs only to compare the impact of previous SARS and MERS epidemics to the COVID-19 pandemic.
While dual sourcing is important for managing supply chain risk, it primarily addresses a localized disruption to supply, such as an epidemic. It doesn’t guarantee supply if both/all suppliers are disrupted (pandemic) or if there is a global shortfall in the commodity/service (endemic problem). An acute example is the power shortage in Texas, where more than 4.5 million homes and businesses were left without power, some for several days. Although power stations were abundant, they were all exposed to the same issue, resulting in a huge shortfall.
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Driven by increasing regulatory scrutiny and sociocultural pressures, the energy transition continues to demand rapid evolution from energy firms. As firms decarbonize, attracting and retaining talent will be critical for operational sustainability.
In 2020, Aon’s Future of Risk: Energy report listed talent as a key risk facing energy firms in the immediate- and long-term.
According to the 2020 Global Energy Talent Index (GETI) report, the oil and gas sector is facing a skills crisis. Cuts to graduate recruitment initiatives and apprenticeships have had a significant impact on the talent pipeline, with 40 percent of survey participants believing that a talent crisis had already hit the industry and a further 28 percent expecting it to take hold in the next five years .
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A European perspective
1
Current Risk
Rank
Commodity Price Risk / Scarcity of Materials
2
Regulatory / Legislative Changes
3
Economic Slowdown / Slow Recovery
4
Environmental Risk
5
Cyber Attacks / Data Breach
6
Accelerated Rates of Change in Market Factors
7
Climate Change
8
Cash Flow / Liquidity Risk
9
Political Risk
10
Commodity Price Risk / Scarcity of Materials
1
Business Interruption
2
Cyber Attacks / Data Breach
3
Accelerated Rates of Change in Market Factors
4
Climate Change
5
Future Risk
Rank
Climate-related issues appear in the energy industry’s list of top ten risks, including regulatory/legislative change (3); environmental risk (5); climate change (8); and political risk (10). They also appear under climate change in the top five future risks (although, perhaps surprisingly at number five).
All of this points to significant challenges linked to responding to climate change, and the commitments made at COP26 will heap further pressure on the energy sector.
Already we know that 20 countries and institutions – including the US, the UK and the European Investment Bank – have agreed to halt all fossil fuel investments overseas.
And there is potential for other countries to join this growing club.
There is also explicit support for the transition in some of the COP26 language, including a statement that “every financial decision needs to take climate into account”.
The agreement went further adding:
Source: UN Climate Change Conference UK 2021
Source: DivestInvest
2. Companies need to be transparent about the risks and opportunities that climate change, and the shift to a net zero economy pose to their business.
3. Central banks and regulators need to make sure that our financial systems can withstand the impacts of climate change and support the transition to net zero.
4. Banks, insurers, investors and other financial firms need to commit to ensuring their investments and lending is aligned with net zero.
Latin America appears unprepared to leave oil and gas behind and transition fully into renewables. There is still scope for the development of oil and gas opportunities in the region, even as clients have started to embrace the energy transition and regard it increasingly as a matter of when not if. And they are keen to understand how they can build ESG, energy transition, carbon emission and carbon footprint improvements into their storytelling.
We see ESG having different drivers across regions and geographies. In Latin America, progress is likely to be driven by a combination of reputational risk and access to capital.
The biggest energy companies in the region are state owned, which means that claims related to third party or environmental damage will inevitably be in the spotlight. Brand and reputation are driving forces in the region – and when significant losses occur, oil and gas firms are starting to be questioned about due diligence, ESG and the energy transition more forcibly.
Latin American investment is underpinned by international banks and funds, so access to capital is critical for the sector. Lender requirements with an increasing emphasis on ESG will be a key driver of firms’ willingness to embrace the energy transition.
Regional spotlight: Divestment Pressure
in Latin America
Divestment after cop26
In Latin America, the energy industry relies heavily on international re/insurance markets, because local insurers don't have the appetite or the capacity to write oil and gas (with the exception of Brazil). Much of this capacity is found in London – often up to 80 percent - and as such the industry will be compelled to follow Lloyd’s and the market’s lead on the energy transition.
Divestment Headwinds
Firms are starting to feel the pressure to divest assets. Clients are focusing on carbon emissions, investing in renewable energy and diversifying their portfolios. Regional players are looking to the global giants to understand the blueprint to reduce their carbon footprint.
In Chile, companies have already started to talk about hydrogen, while Brazil is the first country in Latin America to start developing offshore wind projects. Latin America’s geographic locations have enormous potential for the development of renewables. Political risk and infrastructure remain potential problems. The energy transition is not just dependent upon investing in renewable energy sources, it also relies upon investment in developing electricity networks and broader infrastructure.
Our Predictions
Back at the start of 2021 we made predictions regarding likely future ‘Divestment pathways’ on a five, 10 and 20-year horizon. It is apparent following COP26, that these pathways have the potential to shorten.
5 Years
10 Years
“Rising levels of divestment are apparent across Europe, making it increasingly challenging for energy firms – particularly those at the carbon-intensive end of the spectrum - to source capital.”
We are now seeing divestment apparent on a more global and accelerated level following COP26 and energy firms are already facing challenges accessing capital – and risk transfer solutions – for carbon-intensive operations globally.
“By 2030 government will need to reflect on commitments made in Paris and milestones reached. It is likely that there will be an acceleration in climate policy, as governments seek to limit global warming and achieve the aims of the Paris accord, as the alternative is climate catastrophe. This will lead to greater pressure to divest, ‘green’ the system and meet climate change targets.”
At COP26, countries agreed to monitor commitments and milestones reached on an annual basis. This is likely to concentrate minds at the international level and apply additional pressure to energy companies as progress is made towards decarbonising the global economy.
In its early days, COVID-19 vastly reduced global demand for motor and air fuel. However, as lockdown measures eased, 2021 saw a rebound, with natural gas and oil almost doubling in price to roughly $80 per barrel[1].
Like many of the things it has so recently endured, the world was unprepared for these acute fluctuations in price and demand, which have created uniquely challenging distortions in the global economy.
In the past year, COVID-19 and subsequent events such as the blockage of the Suez Canal, the impact of power rationing on China’s manufacturing sector, and petrol pumps running dry in the UK, all starkly demonstrate the need for supply chain resilience and visibility.
True Foresight
At the start of 2021, we spoke with Aon Energy experts and identified the urgent need for global resilience in supply chains. Our forecast, captured in The Future of Risk: Energy, has since been validated by findings from Aon’s 2021 Global Risk Management Survey.
Supply Chain Management:
Building Resilience
supply chain management
The Suez Canal Blockage
The Suez Canal blockage also acts as an example of localized risk rapidly turning systemic. The canal’s susceptibility to closure has long been a concern for global trade. Yet this incident hit a supply chain already battered by a pandemic, stretched by congested ports, railyards, and distribution centers, straining vessel shortages and delaying shipments.
The canal is vital for oil supplies and allows for a direct shipping route between Europe and Asia. Ten percent of global oil passes through the canal and an associated pipeline network, with 1 million barrels of oil and 8 percent of global liquefied natural gas passing through the canal each day[2].
Lloyd’s List data estimate that the blockage held up $9.6 billion of trade each day, and it was blocked for six days and seven hours. In total, 367 vessels were delayed, including containerships, bulk carriers and tankers. Some vessels chose to reroute around the Cape of Hope, adding more than a week of additional sailing and fuel costs. The disruption cost the canal authorities alone $95 million in revenue.
For energy, there are pipelines and other shipping channels that could have an outsized impact on logistics[3]. The Bosphorus Strait, Strait of Hormuz, Gulf of Mexico and Straits of Gibraltar plus the SUMED, Druzhba and Keystone pipelines could dramatically impact the movement of oil around the world.
An average end-to-end containership passage involves 30 organizations, more than 100 people, and over 200 information exchanges, according to Lloyd’s List. Supply chains of this complexity require real-time access to data such as bills of lading, trade bills, waybills, dock receipts, packing lists and invoices. Unfortunately, to date, most of this information has been stored and shared via a mismatch of paper, fax, excel spreadsheets and email.
Firms will now also need to more closely consider ESG within their supply chain, with firms having to strategize not only for themselves but right across their supply chain. Firms will move beyond evaluating simply rates to considering suppliers, contractors and subcontractors from an ESG perspective.
Leaders now appreciate that they need a deeper understanding of their supply chains, and the demand for flexible, accurate supply chain logistics is increasing. This has prompted a realization that supply chain due diligence cannot exist without data-driven technology – tracking goods in transit and potential downstream impacts of delay.
The Future of Risk: Energy
Accoriding to recruiters and companies.
Leading Causes of Skills Shortage in the Industry
82%
Future of Risk: Energy Report
Insights shared as part of Aon’s Future of Risk: Energy report support these findings; education, training and succession planning are the primary drivers of the skills shortage.
Failure to build, buy or borrow the skills needed to drive decarbonization ventures will leave firms unable to fulfil net zero commitments, with real-world implications extending far beyond commercial stagnation. Amid the climate-responsibility imperative, inflating operational costs and diminishing productivity, oil and gas firms must continue to invest in talent.
Skills shortage
Skills Gap
Apprenticeships
Targeting women to join the Industry
Targeting transferable skills from other industries
Training and development of existing workforce
Partnering with colleagues
Changes to retention and recruiting practices
How are energy firms addressing the skills gap?
28.9%
22.6%
36.2%
64.7%
29.4%
28.5%
According to recruiters and companies
Leading Causes of Skills Shortage in the Industry
Experts across the sector acknowledge that attracting and retaining skilled talent is critical to meet growth plans as part of the energy transition. Commitment to building a sustainable talent strategy needs to become a leadership priority.
“For change to resonate at all levels of the organisation, responsibility cannot exist within the HR teams alone; it’s got to be a leader-led identity change.”
Tamsin Lambert, Talent Excellence Advisor, Shell
Bringing retirees back
15.7%
Driven by increasing social, regulatory and investor pressures across Europe, oil and gas firms are beginning to invest in renewables to build a more sustainable operating model. Firms which are actively addressing their ESG commitments have an opportunity to find their future purpose. By contributing to a greener future, energy firms across Europe are positioned to and engage with their workforce– both existing and prospective – with a new narrative to attract and retain top talent. Talent retention is one of the key risks when it comes to Latin America.
Generally, the biggest oil and gas operators in the region are state-owned companies that hire a large part of the workforce in any particular country. Smaller private companies will always be challenged, and competition will always be fierce. Industry benchmarking is vital as companies are keen to understand if they have got remuneration right. Paying in U.S. dollars is hugely attractive, and currency devaluation in each country might affect how talent is retained.
Global Talent
Despite not directly ranking within the top ten industry risks in the 2021 Global Risk Management Survey (GRMS), the critical role of talent as a conduit for change has been reflected in the elevation of other risks such as ‘accelerated rate of change in market factors’.
Regulatory, commercial and sociocultural pressures will continue to evolve.
By embracing new technologies, articulating environmental, social and governance (ESG) commitments and addressing workplace culture with a focus on diversity, equity and inclusion (DE&I), firms will evolve their talent strategy to support long-term business growth and development.
Regional Spotlight: The Talent Challenge in Europe and Latin America
future talent
Our Predictions
In 2021, industry experts made several predictions on how the talent challenge will evolve across the energy sector over the next 20 years.
“The shift towards renewables, and the transition toward digitalisation and automation will gather momentum, placing a renewed emphasis on the need for new skills, and providing new opportunities for energy firms to develop their workforce.”
We expect to see new technologies and operations to continue creating new opportunities at entry and experienced levels. Decarbonization is driving an industry-wide operational evolution and many firms are reassessing their approach to succession by identifying future leaders in new ways. The path to leadership is becoming less linear, and firms are finding new ways to support future leaders with the skills and values needed to guide the firm through a period of rapid change.
“In the immediate future, energy firms will need to focus on addressing the immediate skills shortage and experience gap by attracting new joiners and retaining the existing workforce. ESG reporting requirements will have an impact on how energy firms select and develop talent, with a spotlight on diversity, equity and inclusion.”
We are seeing energy firms actively responding to ESG pressures by increasingly engaging with new initiatives to broaden their typical talent search parameters and identify candidates from more diverse professional backgrounds to boost innovation and drive change.
Talk With Us
If you would like to discuss any aspects of these insights, or to better understand our capabilities in this area, please do not hesitate to get in contact with our team.
Emma Whitworth
Senior Risk Engineer
emma.whitworth@aon.co.uk
Geri McMahon
Co-Head of Responsible Investment
geri.mcmahon@aon.com
Suzanne Courtney
Chief Commercial Officer, EMEA
suzanne.courtney@aon.com
https://www.bloomberg.com/energy
https://www.bbc.co.uk/news/business-56559073
https://www.shipmap.org/
https://www.ogci.com/about-us/who-we-are/
https://www.bbc.co.uk/news/uk-scotland-scotland-business-46947628
https://www.brunel.net/en/blog/business-growth/energy-skills-shortage
https://www.brunel.net/en/blog/business-growth/energy-skills-shortage
4
5
6
“Within 20 years, the development of technology is likely to accelerate the transition to automation. As business models change and roles become increasingly automated, different skills will be needed… digital readiness will be the difference between success and failure.”
Already, innovative technologies are helping firms evolve their operating models.We expect new technologies to become integral to business models, and firms will seek to fill new roles to support this transition. The pace of technological development will continue to grow exponentially, demanding new skills from the workforce, which will continue to evolve over time.
5 Years
10 Years
20+ Years
1
2
3
7
Talk with
us
Mark Jeavons
Associate Partner - Head of Climate Change Insights
mark.jeavons@aon.com
Daniel Ocampo
LATAM Natural Resources Industry Leader
daniel.ocampo@aon.com
Divestment
Supply Chain
Talent
supply chain management
supply chain management
Our Predictions
At the beginning of 2021 we made several predictions on how progress would evolve over the next 20 years, many of which have only become more pertinent as events have unfolded.
5 Years
“Current circumstances could lead to the increased digitalisation of workstreams.”
As discussed above, the last year has highlighted how integral data-driven technology is to the future of supply chain management.
“Greater diversification into green energy by integrated oil companies, with a corresponding need to develop new supply chains.”
The pledges made at COP26 have accelerated this prediction and the impact on supply chains will be significant. Chief executives from a dozen integrated oil giants, including BP, Exxon Mobil, Shell and Chevron are members of the Oil and Gas Climate Initiative (OGCI)[4], a voluntary, industry-led initiative driving tangible, transparent and integrated contributions to climate change solutions.
Leaders now appreciate that they need a deeper understanding of their supply chains, and the demand for flexible, accurate supply chain logistics is increasing. This has prompted a realization that supply chain due diligence cannot exist without data-driven technology – tracking goods in transit and potential downstream impacts of delay.
Back at the start of 2021, we launched the Future of Risk: Energy, exploring the major challenges - and opportunities - facing the energy sector in the coming years.
We addressed the industry landscape from multiple angles, and reading it back confirms that most of what we wrote remains highly relevant today. Nevertheless, several areas warranted an update following the events of 2021 - and COP26 in particular.
AN INTRODUCTION
As such, we have revisited three themes of particular interest to oil and gas companies, namely: divestment pressure, supply chain resilience and the war for talent - with insights drawn from right across Aon.
The energy sector is undergoing a fundamental change, and the more we can understand and identify the challenges it faces, the easier it will be to navigate as an industry.
Henric Gard
EMEA Energy Industry Leader
Natural Resources
Henric Gard
EMEA Energy Industry Leader
henric.gard@aon.com
Europe- in general and in line with all other regions - appears unprepared to shift away from oil and gas and transition fully into renewables and other sustainable energy sources. There remains scope for the development of field opportunities in the region, even as clients embrace the energy transition. They are however keen to understand how they can build ESG, low carbon emission technologies, carbon emissions and carbon footprint improvements into their storytelling and corporate strategies.
In Europe , ESG progress is likely to be driven by a combination of reputational risk and access to capital. Brand and reputation are driving forces in the region – and when significant losses occur, oil and gas firms are starting to be questioned about due diligence, ESG and the energy transition more forcibly. European investment is underpinned by both international and local banks and funds, and access to capital remains critical for the sector. Lender requirements with an increasing emphasis on ESG will be a key driver of firms’ willingness and efforts to embrace the energy transition.
In Europe, the energy industry still relies heavily on international re/insurance markets as local insurers generally don't have the appetite or the substantial capacity needed to write oil and gas, with a couple of exceptions. Much of this capacity is found in Continental Europe as well as in London, and as such the industry will be compelled to follow international carriers and the international market’s lead on the energy transition.
Divestment/Investment Headwinds
Firms are starting to feel the pressure to divest assets or expand their operations utilizing more sustainable feedstock, or otherwise increasing the blend-in of non-fossil components into their produced transportation fuels. Clients are focusing on carbon emissions, low carbon emission technologies, alternative refinery feedstock, investing in renewable energy, and looking to diversifying their portfolios.
Regional players in Europe are also looking to the global giants to understand the blueprint to reduce their carbon footprint. In the Nordics, which at this juncture might be seen as leading the energy transition, major oil and gas companies are already in an advanced stage when it comes to e.g. hydrogen and CCS technologies. The Nordic major refining company, Preem in Sweden, have advanced credible plans backed-up with investment strategies to reach carbon neutrality in scope 1, 2 and 3 already by 2035 which, if successful, would be well ahead of many, if not most, of their European and international peers.
Regional spotlight: Divestment and Investment
Pressure in Europe
Divestment after cop26
The race to replace humans with robotics influences every part of the supply chain: autonomous vessels, driverless trucks, temperature controls and blockchain all provide greater transparency over exactly what happens to the product. It also reduces human error and risk, redeploying the workforce to more high-value activities.
The energy transition is not just dependent upon investing in renewable energy sources, it also relies upon investment in developing electricity networks and broader infrastructure.
Contacts
Back at the start of 2021, we launched the Future of Risk: Energy, exploring the major challenges - and opportunities - facing the energy sector in the coming years. We addressed the industry landscape from multiple angles, and reading it back confirms that most of what we wrote remains highly relevant today. Nevertheless, several areas warranted an update following the events of 2021 - and COP26 in particular. As such, we have revisited three themes of particular interest to oil and gas companies, namely: divestment pressure, supply chain resilience and the war for talent - with insights drawn from right across Aon.
The energy sector is undergoing a fundamental change, and the more we can understand and identify the challenges it faces, the easier it will be to navigate as an industry.
Henric Gard
EMEA Energy Industry Leader
Current Top 10 Risks
Predicted Future Risks By 2024
Business Interruption
Regional spotlight: Divestment Pressure in Latin America
Regional spotlight: Divestment and Investment Pressure in Europe
The Suez Canal Blockage
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