rethink sustainability
Ørsted’s metamorphosis from a carbon polluter to a renewable champion
As we move to a Circular, Lean, Inclusive and Clean (CLIC™) economy, there will be winners and there will be losers. We want to find companies that both understand the urgency of the change and are transforming to be at the forefront of the new economy.
A model turnaround
Some 12 years ago, the energy company Ørsted made 92% of its revenues from fossil fuels and was responsible for one third of Denmark's CO2 emissions. However, far-sighted management saw the need to shift from a Wasteful, Idle, Lopsided and Dirty (WILD) business model and Ørsted is now one of the world's leading offshore wind-power manufacturers. The transformation of the Danish company has focused on one of the core elements of the CLIC™ economy - renewable energy, which enables the decoupling of economic growth from carbon emissions, in turn supporting resource efficiency and zero-waste.
Ørsted- then called the Danish Oil and Natural Gas Company (DONG) Energy - set out its '85/15' vision1 before the 2009 United Nations’ COP15 climate summit in Copenhagen. It made the commitment to shift from a company which was focused on fossil fuels to one focused on renewables within 30 years. The firm aimed to move from 85% coal-based revenues to the same amount from renewables by 2040. It hit the target last year, 21 years early.
The rebirth came about, in part, after local opposition stopped the development of a 1,600-megawatt coal-fired power plant in Germany. The company was also encouraged by the regulatory backdrop. In 2007, the IPCC said it would be cheaper for society to tackle climate change than to bear the economic and social consequences of not solving the problem.
Ørsted is now on track to phase out coal by 2023 and reduce CO2 emissions by 98% by 2025. Last January, Ørsted was named the most sustainable company in the world by the Canadian think tank Corporate Knights.
Driving the transition
While regulation spurred the transition, falling technology costs are also accelerating the change as less CO2 intensive solutions are becoming cheaper. This comes as investors and consumers are demanding that companies focus on sustainability and the three “P’s” – planet, people and profit.
When Ørsted started on its new journey, offshore and onshore wind prices were 60% higher than they are today. Since then, economies of scale and government support have significantly reduced renewable costs. Today, it is cheaper to produce renewable energy than fossil fuels in two-thirds of the world.2
Now the rest of the oil and gas industry are starting to follow suit. In 2019 Repsol said it, too, will become a “net-zero emissions company” by 2050 and BP, Royal Dutch Shell and Total all have similar commitments. However, few of these commitments fit within the 'carbon budget', i.e. an upper limit on emissions. Few of the ambitions cover full scope three lifecycle emissions – those produced when customers use the fuel – nor do they give interim targets, or target absolute emission reductions. This makes it likely that these companies will fall short of being aligned with the goals of the Paris Agreement to limit global warming to less than 2°C.
However, the industry is clearly being forced to undergo a reset. BP announced in August 2020 further details on its net-zero plan, including its aim to transition into an “integrated energy company”. It committed to cutting oil and gas production by 40%, halting oil and gas exploration in new countries and increasing its investment in low carbon technologies, 10-fold, by the end of the decade. It plans to boost its annual expenditure on "low carbon investments" such as clean electricity, bioenergy, hydrogen, carbon capture and storage and mobility to $5 billion by 2030, up from around $500 million today.
Cleaner and also cheaper
The cost of green solutions is being driven down in other areas - notably in electric vehicle batteries and industries exposed to sustainability challenges such as building, agriculture and heavy industry.
In the future, new fuels and technologies, that are more costly today than their more carbon-intensive alternatives, may become the next investable opportunities. Regulatory support and economies of scale could see many alternative technologies replacing demand for existing ones. This will likely drive an increase in demand for electric vehicles, a move towards living and working in net-zero buildings (constructed using circular materials) and growing demand for more sustainable food products.
At Lombard Odier, we believe the transition to a CLIC™ economy will provide significant investment opportunities across all industries. We want to find the transitioning companies that are leading their pack.
The best companies are not just those that offer sustainable solutions today but also those in more carbon-intensive industries, which understand the urgency and scale of the transition required, and act earliest to reset their strategies and business models.
1 https://www.mckinsey.com/business-functions/sustainability/our-insights/orsteds-renewable-energy-transformation
2 https://www.bloomberg.com/news/articles/2020-04-28/solar-and-wind-cheapest-sources-of-power-in-most-of-the-world#:~:text=Solar%20and%20onshore%20wind%20power,%2D%2D%20coal%20and%20natural%20gas.
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Important information
This document is issued by Bank Lombard Odier & Co Ltd or an entity of the Group (hereinafter “Lombard Odier”). It is not intended for distribution, publication, or use in any jurisdiction where such distribution, publication, or use would be unlawful, nor is it aimed at any person or entity to whom it would be unlawful to address such a document. This document was not prepared by the Financial Research Department of Lombard Odier.
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