The tension at the heart of sustainable business and finance was laid bare at Enel’s capital markets day in Milan on Tuesday.
It is a creative tension — at least, we must hope so.
Enel, the world’s largest private sector electricity producer, with 73m customers, switched in 2015 to a business model in which it embraced sustainability.
In 2016 it reabsorbed its subsidiary Enel Green Power, spun off in 2010, and over the past three years it has accelerated the greening of its generation fleet. In 2015 Enel’s power came 36% from renewable sources and it was adding 1GW of capacity a year. This year, renewables are set to hit 50% of capacity, through 1,200 plants in 31 countries, and it is bringing on stream 3GW annually.
In September, Enel, an established green bond issuer, became the first company to issue a bond in which it offered investors a step-up coupon if it failed to hit a sustainability target. It will issue all its bonds in this form in future.
On Tuesday, Francesco Starace, Enel’s CEO, presented a new business plan for 2020-22. The company plans to invest €14.4bn in generation to develop 14.1GW of new capacity, or 4.7GW a year. Its renewables share will rise to 60% — well beyond the target in its $1.5bn bond — while coal generation falls by 74% from its 2018 level.
This dynamic transformation, coupled with the company’s forthright messaging about its commitment to decarbonisation, have put Enel on many lists of leading sustainable companies.
Straight talking
Starace is one of 30 CEOs convened in October by António Guterres, the UN secretary-general, to form a new Global Investors in Sustainable Development Alliance, to accelerate solutions to raise the $2.6tr of annual investment estimated to be necessary to meet the Sustainable Development Goals.
Launching the group, Guterres said: “These leaders have seized our sense of urgency, recognising that our pace must be at a run, not a crawl. They are committing to cooperate across borders, across financial sectors and even with their competitors, because it is both ethical and good business sense to invest in sustainable development for all people on a healthy planet.”
Enel’s capital markets day struck a different tone. There was little or no touchy-feely waffle.
“The decarbonisation process is not something we do because there is a mandate,” Starace said. “We do it because economically, it makes sense. And if it doesn’t, we don’t do it.”
Every year Enel reviews all its assets to decide if they are likely to be profitable over a 10 year timeframe. If they are not, it moves to close or sell them. If they do look profitable, it keeps investing in them. If Enel is not sure, it stops investing and reconsiders the next year.
Thus it has decided to close two coal plants in Chile, but has not so far slated any thermal plants in Peru for closure.
“Overall, in the next 10 to 20 years it will happen slowly or fast” in different countries, Starace said.
That may grate on the ears of environmentalists, who rightly realise that the imperative to cut emissions is global, urgent, and based on humanitarian needs.
As Sean Kidney, CEO of the Climate Bonds Initiative, recently pointed out, the energy transition needs to be “an inverse J-curve — we’ve got to do the biggest reductions in the next 10 years”.
How does that sit with Enel’s willingness to let decarbonisation be dictated by profitability — and that it is building six new gas turbines to replace moribund coal stations to keep the lights on in parts of Italy?
Kidney is adamant that the European Union’s Taxonomy of Sustainable Economic Activities, for which he is on the drafting committee, will allow no room for gas as a transition fuel.
How much of Enel's motivation for greening itself is pure profit-seeking, and how much is an enlightened recognition of society's needs, is impossible to say. But the two motives are clearly separate. Sometimes they pull against each other, sometimes in the same direction. The resultant vector will dictate the company's direction.
Cooling story, bro
Yet Enel is no foot-dragger among companies. It has signed up to a Science-Based Target — the gold standard among responsible business and investing initiatives. This means it has committed to reducing its emissions, not just according to an arbitrary target, but in line with what scientists say the economy must do to reduce the risk of catastrophic climate change. The SBT Initiative has certified that Enel is on a path consistent with well below 2C of global warming.
Most of the world’s great and good are now singing from the same hymn sheet: business and government must cooperate to save the world from climate change and bring about sustainable development.
Few could disagree with that. But when the rosy haze clears, the cold reality is that business and government have different roles.
Government’s job is to set the direction, pace and agenda.
Enel is now cycling downhill towards a future of clean energy because the costs of solar and onshore wind power keep falling, while coal plants become marginalised and hence unprofitable — though it still requires considerable effort to add renewable capacity at the record rate it is achieving.
But that would not be happening without the push uphill government has given renewables, through a variety of policies, including subsidies, since the 1980s.
More importantly, it is clear from Enel’s policy of decarbonising at different paces in different countries that government must continue to set the pace, and to accelerate it.
Industrial companies — Enel is just one example — cope with different, and sometimes fast-changing, regulatory regimes in every country they operate in. The power sector — so vital to the environment — is particularly influenced by regulation.
Businesses can cope with most things governments throw at them. Starace was singularly relaxed about a recent U-turn in Romania, where electricity was re-regulated and deregulated in a single year.
But public authorities should not kid themselves that businesses will save the world for them, out of the goodness of their hearts — however honey-tongued their CEOs can sometimes sound. Government has to take the responsibility to lead.
At the same time, governments should stay out of the sphere of business, which is execution. The main opposition party in the UK, Labour, wants to nationalise “rail, mail, energy and water” to put people before profit. It sounds great but that is the problem; it is idealistic.
History shows that in practice the state can rarely muster the resources — financial, intellectual, managerial — to fulfil all the needs of the people as efficiently and quickly as possible.
Decentralising decision making and empowering a wider set of people to take initiative, in response to market incentives, has proved far more effective.
Government would struggle to replicate the impressive achievements, flexibility and speed of an Enel — let alone also replacing the myriad other private firms, each with its own culture, that will have to deliver the clean economy.
But the conditions in which the private sector operates, and which determine whether a given investment or technology can be profitable or not, are set by government. The traditional business environment allows companies to escape the costs of their pollution. Only state action can correct that and make Enel and its peers bring about the transition quickly enough.
Government folly and private greed are equally to blame for the climate emergency. Government wisdom and private creativity will have to get us out of it.