Overseeing companies’ energy decisions is a core fiduciary duty for NEDs

This fiduciary duty to act as responsible stewards in the context of climate change has been viewed through several lenses in recent years.

“In the first wave, there was a deeply held view that there was a moral responsibility for companies to be good corporate actors; but over the course of the last few years, we have seen two new angles that are equally, or maybe more important when thinking about climate,” says Kortenhorst.

“The first is the recognition that tackling climate change also addresses the risks boards must manage. The most immediate of these is physical asset risk: if the world is not safe for people, it is not safe for businesses either.”

He continues: “The second dimension is the growing recognition that the shift from fossil fuels to clean electricity and broader electrification is happening far more quickly, and scaling much faster globally, than many expected. This creates risks for investors, who are now confronting the possibility that the world may look very different from what they anticipated just five years ago.”

For boards, this conversation is about opportunity as much as risk. “If the transition is accelerating, boards need to consider what that means for their business. This is not only about managing the risk of being left behind, but also about identifying new opportunities,” he says.

How to think about liability for actions and omissions

“Liability for actions and omissions remains in flux,” Kortenhorst says, “depending on a company’s location and sector.” The challenge for a European fossil fuel company board cannot be compared with that of a low-carbon media business, for example. Board directors of the former will be thinking both about their liability as a non-executive director as well as their personal reputation in the light of the climate crisis.

“But if you think about liability from another perspective, from the point of view of a director approving significant investments in, say, additional LNG export capacity right now, and it turns out that because of the crisis in the Middle East, demand for LNG does not materialise as previously predicted, there may be liability for not having fully considered the downside risks to those investments,” he says.

Liability for board directors around keeping up with the pace of change is real; what has gone before is no longer an indication of where things are headed.

What’s showing up on the board agenda?

In the tussle for board attention, AI is clearly winning. “Understandably, every Chair and board is considering the implications of the AI revolution on their business,” says Kortenhorst. “In every setting I am involved in – an early-stage company, a mature business, a carbon related business, and so on – AI is an issue and is on the agenda. And to the extent that AI has maybe risen on the list of priorities, and global political uncertainty and instability has also risen on the agenda, it is maybe understandable that climate change and the energy transition has dropped a bit.”

Having said that, the energy demands of AI and global political instability are two major influences on the global energy agenda. “There is a much broader trend in relation to the rapid growth in electricity demand, the need to maintain electricity affordability, and the need to scale electricity supply, including through renewables globally,” he says.

“On top of that, the war in the Middle East has underscored the inherent unreliability and insecurity of transporting commodities around the world. If a board had not thought about security of supply when it comes to energy, then that now appears to have been a failure as well.”

He points out that the answer to addressing climate change is precisely the same answer as the one that addresses the energy affordability and the energy security questions in the long term. “Renewables are hands down the lowest cost for power generation,” says Kortenhorst. “The efficiency of an electrified energy system is many times higher than the efficiency of a fossil fuel-based system, just by virtue of the thermodynamics of producing power through combustion. And so, if you want to address affordability, if you want to address security, you are, by definition, starting to look at clean electrification. And if you are addressing those two things, you are automatically addressing climate change.”

While climate may not be explicitly on the board agenda, he stresses that energy transition, for other reasons, will likely be high on that agenda.

How to imagine a clean future and how to pay for it

The Energy Transitions Commission has set out a vision for the energy transition which, for a very significant part of our energy economy, is now crystal clear: clean electrification is going to be the dominant trend of our energy transition for the foreseeable future, addressing up to 75% of energy systems around the world, and therefore posing a very significant threat to the future of fossil fuels.

Less clear is a vision for the hard to abate, or hard to electrify, parts of the energy system: heavy industry, shipping, aviation and chemicals. And how things will play out for the heavy road transport and built environment sectors remains somewhat opaque. “It will certainly take more policy interventions to address the transition in those harder to electrify sectors,” says Kortenhorst.

“But the total cost of ownership of the low carbon solutions is also the lowest total cost of ownership. So, the switch to electric vehicles, the switch to rooftop solar, the switch to heat pumps, the switch to renewable electricity in general, is the right one in the long run. And the challenge is therefore to mobilise capital, particularly in developing countries and in emerging markets.”

The right decisions for climate generally also make economic sense, albeit that in the harder to abate sectors, the sectors that you cannot automatically electrify, there is still an incremental cost. “The incremental cost of producing green steel over traditional steel is not insignificant, but how that translates into the cost of a car produced with green steel is actually a very modest additional cost,” says Kortenhorst.

“New analysis from the Energy Transitions Commission shows that the incremental cost to the world of higher prices for oil and natural gas because of the war in the Middle East is about equal to the incremental capital expenditure necessary to decarbonise the energy economy in any one given year. So, if the war stretches to the rest of this year, we will pay about the same amount of extra money for oil and gas as we could invest to decarbonise our energy system.”

Kortenhorst stresses that investing in a sustainable energy future is cost effective in comparison to the actual and potential future cost of oil and gas because that investment in the future also buys you energy security.