Fossil Fuel CEOs Face A Key Decison: To Invest Or Divest?

Investors have soured on fossil fuel companies in recent years as climate change has become an increasingly clear problem. However, more recently, fossil fuel companies’ prospects are a bit brighter as commodity prices surge, the pandemic wanes and the world economy opens up. Now, fossil fuel executives face a simple but critical decision: Do you invest and stay the course or divest and pivot the business? It may be the most important decision that many of these executives ever make.

The bear case for fossil fuel companies is simple: Climate change is real and carbon emissions coming from their core products are a huge part of the problem. In other words, their business has an existential long-term problem which will only get worse as emissions increase. Investors would appear to see the risk, with relative valuations declining for companies that are viewed as contributing to the climate problem versus those deemed to be part of the solution.

Near-term, however, the fundamental outlook for fossil fuel companies is quite good. As the pandemic wanes and economies reopen, demand is surging. At the same time, supply is constrained due to a lack of recent investment in fossil fuels. The result is a predictable one: rising prices for oil and gas.

Therein lies the critical choice facing all executives and boards of fossil fuel companies. Long-term your product has an existential problem but short-term you are likely to make a lot of money. So, what do you do from here?

There are two possible paths.

1. Invest & Stay the Course: Many executives and boards will see the surge in prices as an opportunity to invest in their core business. After all, prices are surging because there is not enough supply. They will restart dormant projects around the world to bring more oil and gas to market, commenting on the need to power the world and provide low-cost energy. There will, of course, be showy talk about investments in clean energy and glossy brochures touting various sustainability initiatives. But the core business will remain substantially as it is today: a business tied to fossil fuels.

2. Divest & Pivot the Business: Some may see the surge in prices as a great opportunity – perhaps their last one – to divest core assets at a good price and reinvest proceeds in solutions to the climate problem. This will be seen as a bolder path by many. But for those that can manage it well, they may be able to dramatically pivot their business towards a future where their products are consistently more in demand, not less.

No doubt, many managment teams will struggle and over-analyze the situation. Option #2 will seem incredibly dramatic and risky to incumbents. They will worry about messaging to employees, customers and Wall Street. Many executives will be paralyzed by fear and indecision, driving their companies to option #1, simply staying the course and making no real strategic change.

To be clear, aggresively divesting and pivoting is dramatic. Even the most experienced corporate leaders will struggle to adeptly answer hard questions about the path forward. However, those choosing to stay the course with option 1 should ask themselves hard questions as well. Mainly, what happens to their business if carbon emissions keep trending up? Put another way: sure, divesting and pivoting is risky but isn’t investing and staying the course even more risky?

However, a select few fossil fuel executives may look past the noise towards an increasingly clear future for the industry – one that is more clean and sustainable than today. Executives that choose this path recognize that while they face a critical risk to their core business today, they have a unique opportunity to pivot over the next 12 to 24 months given surging prices. For the select few that move decisively, they just may figure out the key to winning in an energy market in transition: You do not beat your clean energy competitors, you join them.

https://www.forbes.com/sites/michaelmolnar/2021/11/22/fossil-fuel-ceos-face-a-key-decison-to-invest-or-divest/