Tuesday, 28 March 2017

A true commitment to green energy crucial for success



LBS expert comments on what Aramco can do to make its solar panels investment credible


Dubai, UAE, 28 March 2017 – A number of oil and gas majors are going through an existential crisis in recent years given that the world is decisively and rapidly moving away from fossil fuels. Therefore, the future of the industry in its current form seems rather uncertain, says an LBS expert.

According to Ioannis Ioannou, Associate Professor of Strategy and Entrepreneurship, London Business School, it is no surprise that a number of oil companies across the Middle East are already beginning to invest in renewable forms of energy, hoping that such investments will act as a stepping-stone for the next phase of the energy landscape.

Dr Ioannou said: “For the oil and gas industry, perception and timing are critical – the recently announced $5bn investment in solar panels by Aramco, ahead of what could become the biggest IPO ever, warrants closer attention. A true commitment to renewables, and a credible pitch towards investors, should be embedded throughout the organisational structures and processes – financial commitments alone may not be enough, especially given the increasing sophistication of the investment community in evaluating companies’ commitment to a more sustainable future.

“Research shows that companies perform better in the long run, and thus produce superior shareholder returns, only when environmental and social issues become part of a corporation’s DNA. For Aramco, this means a credible commitment to renewables will have to include appropriate ways to incentivise top executives, formal responsibility for the renewables division at the highest levels of the company’s hierarchy. It also requires transparency with regards to the company’s overall impact on climate change and reporting transparency around both renewables as well as the fossil fuels division of the company.”

According to Dr Ioannou, the adoption of these elements would signal deep engagement with stakeholders in the renewables industry in the long term and it will also signal a longer-term time horizon for decision-making at Aramco more broadly. This would result in financial investments carrying a greater weight with investors when they are backed up by credible organisational commitments.

He continued: “Importantly, one should also not underestimate the challenge of competing in the same industry – in this case, the energy industry – with two very distinct business models: fossil fuels and solar. Aramco’s long-term success – and hence, its ability to generate investment returns – will hinge upon its ability to evaluate whether the synergies generated by competing with two positions in the same industry outweigh the costs, and whether the resulting conflicts can be managed effectively. It is very likely that at Aramco, attempts to run these two businesses side by side will generate various forms of conflict, ranging from challenges in terms of corporate culture and incentives to cannibalisation concerns if the fossil fuels division perceives the renewables division as a threat to its own survival.”

“If conflicts become too difficult to manage – and given how different the two models are, this is very likely – then putting fossil fuels and renewables under the same roof may not only fail to generate incremental value but it may even destroy value for shareholders. The investment community will undoubtedly be watching closely to see how Aramco manages these challenges, and how the company’s commitment to a sustainable future manifests through its organisational processes and structures, over and above its recent financial commitments,” he concluded.

London Business School has been has been developing the region’s business leaders for the last 10 years from its Dubai Centre, which offers the Executive MBA programme, based at the Dubai International Financial Centre. Ioannis Ioannou (@iioannoulbs) teaches on the programme. For more information, please click here.

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