In the second of our conversations about the post-pandemic landscape, we spoke with a power utility and an industrial gases company about climate-related risks and opportunities.

The COVID-19 pandemic has provided a unique opportunity to reset and rethink our approach for a better future. We invited thought leaders and experienced professionals to share their views on various transformative trends that could shape our lives and our investment landscape in the post-pandemic world.

In our second conversation, Neuberger Berman’s Senior Research Analysts Jared Mann and Ronald Silvestri discussed climate-related risks and opportunities with Jessica Aldridge, Head of Investor Relations at the power utility NextEra Energy, and Simon Moore, Head of Investor Relations, Corporate Relations and Sustainability at industrial gases company Air Products.

"I think there is now a global movement for carbon neutrality, which is a paradigm shift.”

Climate risk has been climbing the business agenda rapidly over the past few years, and since the start of 2020 there has been an explosion of “net-zero” commitments from countries, companies and institutional investors. Are we seeing genuine progress, at last?

Ronald Silvestri: I think there is now a global movement for carbon neutrality, which is a paradigm shift. Despite the pandemic, companies continue to make net-zero commitments, often enabled by revolutionary technology and governments setting ambitious decarbonization goals. U.S. President Biden’s original infrastructure proposal allocated some $600 billion to climate initiatives. About one-third of the €750 billion Next Generation European Union stimulus is climate related. There has also been tangible action. Since 2005, CO₂ emissions from the U.S. power sector are down more than 30%, due to the retirement of coal generation and its replacement by renewables, where costs are declining by 15% every year and where tax credits are likely to be extended. The clean energy transition is the most powerful mega trend I personally have ever invested in. And finally, carbon neutrality is very important to our clients. Multi-billion dollar new mandates are being issued with explicit net zero objectives and heightened emphasis on environmental, social and governance (ESG) analysis and engagement. The bottom line is that the world is aligning when it comes to acting on climate change.

How important is the green infrastructure tilt in current fiscal stimulus packages?

Jared Mann: The proposed fiscal spending, though substantial, is nowhere near enough to meet decarbonization goals—but if it accelerates the move of green technologies down the cost curve, that should spur opportunities for private capital. The battery industry is a model, here, where government money has a kick-starter effect to drive down costs. There is a lot of political negotiation to come in the U.S., but we do expect some level of stimulus tailwind.

NextEra, a leader in renewable energy generation and the largest producer of wind and solar energy in the world, is taking a different approach to emissions reduction than the standard “net-zero-by-2050.” Jessica, can you tell us about your stance on this?

Jessica Aldridge: Our current goal is to reduce our CO₂ emissions by 67% from 2005 levels by 2025. We set goals that are actionable and achievable—not just ambitious. So that target is based on our realistic renewables deployment expectations and the competitiveness of our wholesale electricity business, Energy Resources. At our Florida business, FPL, we publish a 10-year site plan with the Florida Public Service Commission every year.
The results speak for themselves: we have already reduced our emissions by 57% from the 2005 baseline and we just eliminated all the coal in our system in Florida. We committed to participating in the Carbon Disclosure Project (CDP) survey this year, and we also published our 2050 electric sector decarbonization analysis in our ESG report, and it blew our minds compared to where we were even just a few years ago. In the electric sector, there is a realistic prospect of getting, not just to net zero but to “zero-zero” by 2050, or even net-negative—with no premium paid by customers.

Air Products has made a “Third by 2030” commitment. Simon, can you tell us where your carbon emissions come from, and what that pledge implies?

Simon Moore: As an industrial gas company, the vast majority of our Scope 1 direct CO₂ emissions come from hydrogen production, because CO₂ is a by-product of the steam-methane reforming process. But most of that hydrogen goes to the refining industry to allow them to clean-up transportation fuels—overall, for every ton of carbon we emit, we enable our customers to avoid three tons of CO₂-equivalent emissions.
Like NextEra, our goal of cutting our carbon intensity by a third by 2030 is based on actions we are taking today and a realistic timeframe. Most of our projects are major capital commitments. We have recently announced two multi-billion dollar carbon-free hydrogen projects, in Canada and Saudi Arabia, which will be hugely additive for sustainability and growth, but will take three or four years to come onstream.

Do investors welcome that thoughtfulness and nuance around emissions reductions, as opposed to going for the standard net-zero pledge?

Jared Mann: In isolation, a “net zero by 2050” target is of very little value. To be useful, companies need to be thoughtful about setting interim targets that can be used to mark progress toward that long-term goal; make clear disclosures as to how they intend to achieve them, through investments, new technologies, and so on; and detail costs, payback periods, and the operational efficiency gains they expect from these innovations. Ideally, key performance indicators should link to compensation.

What are your key business risks and opportunities associated with climate change?

Jessica Aldridge: We view climate change as a potential multiplier to existing risks and opportunities in our business, rather than as a discrete risk. A good example of that is system disruption from extreme weather events. That has long been integrated into our risk management processes, but it is now multiplied by the threat of stronger and more frequent storms. Since 2006, we've invested more than $5 billion into building a smarter and more resilient energy grid. A lot perceived business risks for utilities around energy transition are actually huge opportunities. We’ve shown that moving away from inefficient fossil fuels toward much more efficient solar and batteries can save customers hundreds of millions of dollars. At our Florida-based FPL subsidiary, in particular, we benefit from a regulatory environment that supports our solar build-out and sees the benefits of storm hardening in terms of savings for customers—we don’t take that for granted.
Simon Moore: The biggest risk for Air Products is not moving fast enough to seize the opportunities. And whenever things change so fundamentally, it creates opportunity. Improving sustainability is our number one growth driver, and we’re focused on gasification, carbon capture, and carbon-free hydrogen for the transportation sector. But it’s also about attracting the best talent. I recently interviewed a candidate from the materials sector who told me, “I'm sick of playing defense on sustainability— I want to come and play offense.”
Ronald Silvestri: There will be winners and losers. Some energy companies may be unable to conceive of a world where their products are used less. But there are clear upsides for the utilities sector in pivoting from coal to renewables, which are still only 12% of the U.S. power-generation mix. That opportunity is not just in the leading or best-in-class companies. We think value-priced unregulated power companies such as Vistra Energy can be attractive, for example. Vistra has above average coal exposure today, but very strong free cash flow and a management team that is focused on rapidly greening its facilities and investing in battery storage, and we think that’s a good recipe for valuation to re-rate higher.

How are climate-change considerations integrated into day-to-day business decisions?

Jessica Aldridge: For our firm, emissions reduction has been part of day-to-day decision making and strategy at the highest level for many years. That’s important because the energy-transition opportunity constantly evolves. We recently took out some gas fired plants that we expected to build in Florida in the middle of the decade. We’re currently replacing an existing gas-fired plant with a 409-megawatt solar powered battery system. That’s a decision that changed as both the cost-effectiveness of solar and the reliability of battery storage has improved so much over recent years. That project is expected to cut 100% of the site’s carbon emissions with no adverse cost or reliability impact to customers.
Simon Moore: It’s been 25 years since we recognized the opportunity for the refining industry to outsource their hydrogen business, so like Jessica I would say this has been at the heart of what we do for a long time. I mentioned our Scope 1 emissions from hydrogen production, but we are also tackling our Scope 2 emissions by taking local decisions about the best way to purchase renewable energy for our plants around the world. Renewables are increasingly the cheaper option, but not always—and we empower our local teams to decide the premiums their customers can absorb. We have committed $3.7 billion to produce carbon-free hydrogen in Neom, Saudi Arabia, which we will then transport around the world as ammonia before “cracking” it back to hydrogen at point of use. It’s innovative to do this on such a scale, and the reason we are doing it in Saudi is because the sun shines and the wind blows—making the power we will produce renewable and low-cost. To make these large-scale capital projects work, we constantly have to ensure that our corporate structure, our balance sheet, our internal technology portfolio and our technology partners, and the size and skillset of our teams, are fit for purpose.

Are these innovations customer-led, or do you have to show customers what is possible?

Jessica Aldridge: It's definitely both. We are leaders in this sector, but we also have commercial and industrial customers who are pressing us to develop solutions to meet their own ESG goals.
Simon Moore: I would agree. Our refining customers are part of decisions we make to, for example, retrofit a hydrogen plant with a carbon capture system, because that’s a commercial and sustainability opportunity for them as much as it is for us. At the same time, something like our recently announced carbon-free hydrogen project in Alberta is a bold step: it shows that carbon-free hydrogen made from natural gas can be available within a few years in Western Canada, which we hope will help tip the balance for municipal bus managers to switch to hydrogen vehicles.

What is the role of an investor like Neuberger Berman, beyond simply providing capital?

Jared Mann: We certainly view engagement as a key source of value creation for our clients and other shareholders, and we believe our input continues to be useful and appreciated even with companies like Air Products and NextEra where we've built trusted relationships over time. One area where our perspective helps is ESG financial communications—getting the true message across to investors. As we’ve heard, Air Products is a relatively high CO₂ emitter itself, but its products help customers cut their emissions, for a net reduction overall. Communicating the complexities of direct and indirect emissions to investors is something we can collaborate on productively.
Simon Moore: When there is so much inconsistency and incompleteness in ESG data, reporting and rankings, we particularly appreciate investors who take time to engage and understand our business, rather than assuming everything can be boiled down to a single metric.
Jessica Aldridge: I agree 100%, open dialogue is so important. We are not a box-checking company, so we look for partners who are not box-checking investors, who understand the full story of where we've been and where we're going. There are a lot of unknowns associated with the energy transition, so we value long-term partners like Neuberger Berman and our other great shareholders who are ready to work with us on it.

This article is based on a webinar hosted by Neuberger Berman on June 15, 2021. A recording is available. Should you wish to see it, please contact your NB representative for details.