Expectations for businesses have changed; the world now expects them not just to be profitable, but also responsible. The recent actions of many major extractives firms – those in the oil, gas and mineral resources industries – demonstrate this evolution, with BP, Shell, Rio Tinto, BHP and others commiting to net zero carbon emissions by 2050.
These companies’ fundamental redefinition of their future reflects the material change in stakeholders’ and society’s expectations of them. Being a responsible business is no longer a nice-to-have; it’s critical to survival.
Now, extractives businesses must also reflect on how being responsible impacts their corporate portfolios.
The advantaged portfolio
In 2015, Monitor Deloitte introduced the ‘advantaged portfolio’ concept – finding that the most successful portfolios exhibit three broad characteristics:
In recent years, however, the voice and influence of stakeholders – such as investors, governments, media, employees and consumers have grown louder. They want businesses to be more responsible. The sentiment has risen up the board agenda too and is now considered a strategic priority by many companies – helping create and protect organisational value. This focus will be even more prevalent as the world recovers from COVID-19.
In this environment, a successful portfolio is also one that reflects companies’ aspirations. Acting responsibly will also bolster all three advantaged portfolio characteristics.
Additionally, an advantaged portfolio is considered as a system, rather than through its individual components. In the case of a diversified extractives company, look at how the combination and relative proportion of commodities work to the business’ advantage. As the world continues to decarbonise, there will be a move away from commodities that don’t support a sustainable future, which will drive portfolio changes.
Commodities of the future
The concept of an advantaged portfolio is particularly complex for the extractives industry. Commodities are at the heart of industrialisation and building a modern world. For example:
Looking ahead, the low-carbon transition will bring a new future of energy. Fluctuations in the energy sector over the last decade are set to continue, with increasing global energy demand and climate change accelerating the need to decarbonise. New challenges and opportunities will arise as the global energy mix continues to change – forming new ecosystems and requiring growth in technology and infrastructure.
To support the transition, there will be increased demand for minerals used in areas such as renewable energy generation, electrification and hydrogen fuel cell technologies.
These markets create advantageous opportunities for extractives firms, which can restructure their portfolios to align with the expected growth in demand for commodities and supply products needed to meet global sustainable development goals. Conversely, extractives companies can apply a critical eye to some of their legacy businesses, such as fossil fuel and metals products, which won’t fare as well in a low-carbon economy. In fact, recent commitments to bold climate ambitions, such as net zero by 2050, have already impaired fossil fuel assets and balance sheets – underscoring the need for diversification.
A recent campaign by Climate Action 100+ – a group of institutional investors collectively managing $52 trillion in assets – will accelerate this trend in the decades to come. The group called on 161 companies, accounting for 80 per cent of global greenhouse gas emissions, to set strategies for decarbonisation across their whole value chain. The Climate Action 100+ has developed a framework to benchmark these companies’ progress and performance, which will publicly hold them accountable.
This all means that extractives will have to build portfolios for future commodities that are strategically sound and resilient.
Examining the trade-offs
But it’s not a simple task. Beyond climate risk, there is a complex web of societal and environmental trade-offs associated with extracting and processing products to support a low-carbon future. And even though companies may commit to sustainability, that doesn’t absolve them of the need to consider other responsible business issues inherent in their choices and across their supply chain.
For example, there are significant ethical and human rights concerns associated with the extraction of cobalt, a key metal used in producing lithium-ion batteries. At present, more than half the global cobalt production comes from the Democratic Republic of Congo, where illegal and artisanal mining practices are endemic. This means there is substantial risk that responsibly mined products are mixed with metals that were mined illegally – resulting in human rights or child labour abuses.
Even products central to the low-carbon transition, such as wind turbines, bring challenges. These include quality-of-life risks for nearby communities, as well as environmental issues related to construction and biodiversity loss.
Given this web of trade-offs, extractives bear significant responsibility in how they manage their own operations, as well as their downstream supply chain.
Building an advantaged portfolio, responsibly, for positive externalities
There are many examples of initiatives that deliver on both a responsible agenda and operational efficiencies, such as the use of onsite renewable energy and digitised extractive technologies. In addition, a restructuring of assets in line with a strategy that supports both operational decarbonisation, as well as the broader societal agenda to transition to a low-carbon economy, offers the potential for a more financially, operationally and reputationally resilient organisation. A restructured portfolio, competitively positioned for responsible business, will reduce the exposure of balance sheets to oil price fluctuations and the risk of impairment to fossil fuel assets, while also delivering on global sustainability objectives.
Moving toward a truly responsible portfolio will also bring new strategic challenges. The advantaged portfolio concept highlights the need to ensure portfolios are ready to survive various scenarios. For example, today resilience under different climate scenarios is a core challenge for the extractives sector. Some of the more ambitious climate scenario pathways represent upending key commodity markets and drastic price shifts over the coming decade and beyond.
Making responsibility pervasive
With greater societal and environmental responsibility, and the increased focus on the future of the industry, organisations can expect more scrutiny on how they choose to sell their products. It is not enough to make decisions through only an economic lens; a truly responsible business should challenge itself to ensure that its products are sold to those who share a commitment to responsible usage.
Extractives have a unique capacity to generate wealth and support development if well managed. For example, consider the metals required to make a smartphone or tablet. A responsible miner may opt to sell to those with recycling commitments, or commitments to ensuring the technology is enabling improved communication or education.
Similarly, efficient vehicles will allow for greater utility to be obtained from petroleum products, presenting oil companies with a challenge to act responsibly and seek out markets that promote and reward efficient fuel usage, even where the net result may be a lower demand for petroleum products.
The road ahead
Designing advantaged portfolios requires hard work to analyse data, compare trade-offs and make tough choices. Incorporating a responsible lens presents an even greater challenge – to understand the product lifecycle in sufficient detail to ensure optimal societal value is derived from it and to have the confidence and conviction to empower decisions on that basis. Making these responsible decisions will deliver a reputationally resilient organisation and facilitate a “societal license” to operate.
As the world transitions to an economy that promotes long-term planetary sustainability and survival, companies have to realise when the value of their businesses could be at risk – and evolve accordingly. Parts of the extractives industry have started to progress toward a more responsible business model. However, there remain tough choices for the industry ahead and the most resilient organisations that build the greatest competitive advantage will be leading, rather than lagging, in ensuring responsibility.