Net zero: 2050 no, 2060 maybe, probably never

Legend has it that Icarus, son of Daedalus and Naucrates, locked up by the king of Crete in the labyrinth built by his father, escaped there with wings made of feathers modeled with wax on his body by his father himself. The father, aware of the risks of the solution used, recommends his son not to go near the sun. We all know how it ended: Icarus approached the sun and his wings melted and made him fall into the sea.

Similarly, those who today get too close to the reality of the energy transition find themselves grappling with a solution that melts in their hands. Skepticism pervades company executives grappling with the challenges linked to the implementation of decarbonization plans. In addition to becoming aware of the complexity of what they are called to do, they realize that the idea of ​​changing the energy foundations of a $90 trillion global economy in a quarter of a century is probably just as much nonsense.

A survey by Bain & Co certifies that approximately two-thirds of executives in the hydrocarbon, public services, chemical, extractive and agri-food sectors who operate in the climate business believe it is appropriate to move Net zero after 2060. The reality seems to be more effective than the sun at melt the wax.. Translated: customers' willingness to pay for these investments is a growing problem that is causing their profitability to collapse.

And while there are trillions of dollars of capital investment around the world seeking opportunities in low-carbon energy systems, the logic that capital seeks returns clashes with the reality that customers are not available. to pay higher prices. What blocks the expansion of low carbon systems is not access to capital but the guarantee of sufficient returns to remunerate the capital, i.e. the unavailability of consumers to pay higher prices to reduce greenhouse gas emissions.

Meanwhile, international oil companies are facing criticism for scaling back their climate commitments to increase dividends to shareholders. Shell has announced a slowdown of its emissions reduction targets for 2030 similar to Britain's BP. It is worth noting that the new rules introduced in Brussels with the CBAM have found an immediate response: some companies have recently withdrawn their listing from the stock exchanges of the EU bloc countries to avoid the strict requirements that will come into force.

Over 1,000 companies, including Microsoft and Unilever, representing $23 trillion in market capitalization have responded to a call ahead of COP26 in 2021 in Glasgow to commit to net zero emissions targets. Hundreds of them did not achieve their objectives or presented unambitious ones.

Despite the pandemic and war in Europe, investors in commodity-related stocks have enjoyed record returns in recent years. Collectively, company balance sheets have never been stronger. This reflects rigorous financial discipline, record industry margins and strong market fundamentals. This has made it possible to absorb, without financial repercussions, the downward turn in raw materials markets in the wake of faltering demand and a weak global economy while supply continues to rise and surpluses increase.

To understand the inadequacy of the climate objectives it is enough to observe that the capital investments of those companies that should “build” the transition have essentially remained unchanged compared to the lows of 2015. And if the Chinese economic model allows state mining companies to Living in a parallel universe of subsidies, private companies must act according to the dictates of their shareholders that do not allow them to increase the capital expenditures necessary to achieve faster decarbonization.

From the analysis of the financial statements of the last 20 years of the top 40 global mining companies, it clearly emerges that capital expenditure, which generally exceeded 20% of EBITDA, as is to be expected in a sector where the quality of the deposits existing is progressively declining, in recent years it has collapsed by 50%, bringing the level of investments to 10% of EBITDA. Furthermore, the trajectory for the next few years indicates a decline in capital expenditures of more than 70% through 2026. Excluding investments in the lithium sector, capital expenditures in 2026 would be just 6% of the 2012 total.

Returns to shareholders are rewarded and the financial resources of the companies are used for merger and acquisition operations but this does not open new mines, does not increase production and the inelasticity of the mineral supply guarantees long times to develop it: let alone in a world which is fracturing along ever deeper geopolitical fault lines.

It's easy to blame mining companies for parking the transition train on a siding. But first it is worth asking who are the shareholders who continue to ask for dividends and share buybacks that offer the returns they desire in the short term? It is us, the public, the investors in the funds. The transition is only important as long as someone else pays for it.