A pumpjack oil well in a baron landscape scarred by fossil fuel production.

Counting the cost: Firms and individuals remain reluctant to accept the price of a greener approach.

A staggering 80 per cent of the world’s greenhouse gas emissions are linked to just 57 companies.

Among those, ExxonMobil is the world’s biggest investor-owned contributor. Shell is the second, according to Carbon Majors Database.

Both have attracted vocal criticism from activists. Their environmental record and historical stance on climate change have also been the subject of several court cases.

Despite this, both companies are solid financially. Exxon reported net profits of $36 billion in 2023 and Shell posted profits of $19.63 billion.

There is another, even more alarming statistic, for campaigners. Exxon enjoyed greater success than Shell, despite the latter setting more ambitious climate change targets.

Shell’s more proactive stance on climate change saw its share price increase by less than eight per cent. During the same period, Exxon’s has climbed by almost 250 per cent.

The reason is for this disparity is hard-nosed economics. Oil and natural gas are more profitable than renewables.

In the long-run energy transition seems inevitable, but right now, nobody wants to pay for it.

Why ‘doing good’ does not pay in oil and gas

David Elmes, a Professor of Practice at Warwick Business School who specialises in the energy sector, explains: “Margins in renewable energy projects such as offshore wind farms are around five per cent while oil and gas projects usually deliver returns above 10 per cent.”

The only way energy companies like Shell or BP could excite investors is by arguing that they can deliver higher margins than renewable specialists. This could be achieved in three different ways.

First, oil companies could argue that they are much better in delivering large complex projects. After all, this is their bread-and-butter. But this is problematic.

“The track record of oil majors is actually not that convincing.” says Professor Elmes. “Often it was the rising oil price that made projects look good.”

The second argument is that oil companies are particularly good in negotiating with governments. There is some truth to that, but power generating companies have experience in this too.

Finally, energy companies could rely on their ability to handle large amounts of data more efficiently, helping them to optimise operations.

Again, this argument has some merit, but obviously not enough to convince investors.

Why did Shell water down its emission targets?

Any business case for oil and gas companies to aggressively move into renewables died with Russia’s invasion of Ukraine.

Oil prices are soaring and energy security is high up the corporate and political agenda.

When consulting firm PwC asked 4,702 CEOs which threats their company will be exposed to in the next 12 months, only 12 per cent named climate change.

By comparison, 24 per cent listed inflation or macroeconomic volatility – both issues that are being driven in part by rising gas and oil prices.

It is little surprise that Shell recently watered down its emission target. Without a clear business case for renewables, the Exxon model is winning.

Oil companies will continue to invest in carbon capture and energy transition. Like any smart business, they prepare for the future while exploiting their current model. A full switch is unlikely in the near future.

What next for the green transition?

It’s easy to blame Exxon and Shell for their inactivity. However, the dirty little secret is that most of us are not prepared to pay for social goods like combating climate change.

Timo van Balen, of Utrecht University, and Murat Tarakci, of Rotterdam School of Management, recently studied whether start-ups communicating a social vision receive more job applicants.

They coded the vacancies posted by 1,200 start-ups on AngelList Talent platform. To their surprise, they found that companies which included the good they did in their adverts received 46.3 per cent less applications.

A subsequent field experiment found job seekers were worried that the sense of purpose would come at the expense of opportunities to advance their careers.

There was only one way to compensate for this: offer higher remuneration.

If we want energy companies to transition away from gas and oil production more quickly, we have to remove the incentives for using fossil fuels.

This comes at a higher price that few are ready to pay.

This article was originally published by Forbes.

Further reading:

How can the world reach net zero?

Cutting demand for gas: The key to preventing UK energy crisis

A new strategy for UK Government to meet heat pump targets

Shell buying BG Group paves way for more M&As in sector


Christian Stadler is Professor of Strategic Management and teaches Strategic Advantage and Strategy and Practice for the Executive MBA and Global Online MBA.

Learn more about strategy on the four-day Executive Education course Leading People through Change and Disruption at WBS London at The Shard.

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