The Road to Net Zero in Latin America
How investors, energy companies and suppliers can maximize opportunities while avoiding pitfalls in the region's top 6 markets
Compared to payments, logistics or tourism, the pandemic’s long-term impact on the Latin American energy sector is not as clear. Inadvertently, however, the pandemic showed the dire consequences that an unaddressed global phenom can have on both the world economy and the livelihood of people.
Beyond the loss of life, the most devasting effect of the pandemic were the strict lockdowns imposed across the globe. As people stayed at home, daily global CO₂ emissions decreased by 17% in early April 2020, year-over-year. For the first time in many people’s lives, the lockdowns allowed densely populated urban cities, such as São Paulo or Mexico City, to be free of smog and air pollution. More importantly, it forced major governments and energy companies to rethink the way in which they want to position themselves within the green energy transition.
This latter effect has been felt much more strongly in developed markets than in Latin America, but this clean-energy momentum has allowed investors to pressure companies into rethinking their long-term sustainability plans—and this could have a waterfall effect on Latin America. What is clear, is that there has been a fundamental change in consumer habits and climate awareness that will lead to long-lasting changes in the industry. Let’s start with the factors driving these momentum shifts, and then we’ll explore the direct implications within Latin America.
A Week Marked in History: How Big Oil’s Trajectory Changed for Good
Within just one week in May 2021, there were three major decisions involving the largest oil companies in the world: Shell, Chevron, and Exxon. For Shell, it was a landmark legal decision. For the first time, a private fossil fuel company will have to address the scope of its emissions in a legally binding way. A Dutch court ruled that the company must reduce its 2019 carbon emissions by 45% by 2030, likely forcing them to cut oil product sales by 30%. If this new legal precedent survives Shell’s appeal, which will happen in 2021, it will likely lead to an increase in climate lawsuits, an acceleration in carbon-reduction strategies among oil and gas companies, and additional clean energy mandates imposed by governments.
The silver lining for oil majors based in the Americas, is that several legal systems in the region fail to utilize legal statutes. Thus, if governments want to change the laws governing the liability of those companies, they will need do it through each country’s individual legislature.
In the case of the U.S. oil giant ExxonMobil, three of its 12 newly elected board members came from a climate-friendly shortlist recommended by activist hedge fund Engine Number One. The hedge fund, which owns 0.02% of Exxon’s shares, wants to limit Exxon’s carbon footprint while increasing shareholder value. Their strategy worked: they were able to win the support of the world’s largest institutional investors, including BlackRock, Vanguard, and State Street. In 2018, those three investors casted roughly 25% of all director votes for S&P 500 companies. As long as the markets continue to reward sustainable initiatives, investors will continue to elect climate-friendly board members who can substantially impact companies’ trajectories.
Finally, at Chevron, 61% of its shareholders approved a resolution to cut the company’s scope three emissions, which includes the indirect emissions generated from the use of its products. Although shareholder votes are sometimes forgotten or watered down in subsequent meetings, the implications of this decision will depend on large Chevron shareholders intensifying the pressure to implement this vote. If these shareholders believe that Chevron’s stock will be punished without a significant change of direction, it is likely that the resolution will be enacted in some shape or form.
What Are the Implications for Latin America?
Here are the key three takeaways from these developments:
- As investors veer towards low-carbon initiatives, capital costs will rise for oil and gas projects. These higher credit risks will force investors to favor low carbon initiatives, while prioritizing fossil fuel assets that consist of high-quality crude, low operating costs and fast drilling times, especially in countries with investor-friendly regulatory frameworks.
- Many of the world’s leading institutional investors who forced changes within those three Big Oil companies, are also shareholders of major energy players in Latin America—potentially pressuring them to cut emissions at a more rapid pace. Voters in the region may also be more inclined to elect climate-friendly politicans, who can enact legislation that accelerates the green transition. Among large companies, this could lead to a reshuffling of board members and greater scrutiny over actionable climate-policies. To address emissions throughout their entire supply chain, companies should use blockchain to transparently monitor the raw materials sourced from suppliers. Adopting a “circular” economy, that uses recycled material to build new products, is also a potential solution.
A) BIGGEST WINNERS: Renewable energy companies, such as Iberdrola and Enel Green Power, are already spearheading carbon-free technologies and will continue to see an uptick in demand for their services. Less obvious cases include consumer-facing multinationals, such as Uniqlo, Coca-Cola Femsa and Grupo Bimbo, who have successfully “greened” most of their supply chain and are in the good-graces of both investors and the public.
B) BIGGEST LOSERS: Slow-to-adapt public companies, such as Pemex, who is responsible for nearly 2% of total global greenhouse emissions, will continue to lose shareholder value and will face higher costs of capital. Reigniting its petrochemical production, while implementing CCUS technology or green hydrogen in its refineries, is a solution. It should also invest heavily in exploring and producing cleaner, lighter fuels, subsequently lowering its overall carbon footprint.
- Heavy industries such as steelmaking, mining and cement will also have to accelerate their transition into renewable energy within their manufacturing process. To reduce emissions, investment in new technologies, such as green hydrogen and Carbon Capture Utilization and Storage (CCUS), needs to grow exponentially to improve the cost-effectiveness of going green among these industries.
A) BIGGEST WINNERS: From Chile’s mining to Brazil’s steelmaking, both countries have energy-demanding industries that will be looking to reduce their carbon print. The country’s cheap renewable energy generation and large investment in these “next-generation” technologies, will also put them ahead of their regional peers.
B) BIGGEST LOSERS: With AMLO in power, Mexico’s large auto and industrial sectors will struggle to attract the necessary foreign investment and regulatory support needed to develop these carbon-cutting technologies.
Despite the increased investor, regulatory and public pressure, climate friendly investments must make long-term economic sense for large companies. This may require a global, uniform carbon-tax that will fiscally incentivize Big Oil and heavy industries to invest in carbon cutting projects. It may also require policy intervention to create market demand for energy sources that are not yet economically feasible, such as green hydrogen.
This transition will also not happen overnight. Beyond announcing net-zero targets, companies must revolutionize the way in which they do business, starting now. Failure to act can jeopardize their shareholder value, their reputation, and their surrounding environment.
5 Megatrends in Latin America’s Energy Sector for 2022 and Beyond
What you can expect in the near term and how you can leverage these shifts
AMI can help large companies understand how global decisions are impacting the day-to-day operations of Latin American companies, and craft the necessary strategies needed to mitigate these risks. Whether is through local community stakeholder engagement, or ESG due diligence prior to an acquisition, AMI will ensure that you have a sustainable and successful venture into a promising region. To sign up for our next piece, click here, where we will look at the specific opportunities in the region that have sprouted from this change in scenery.
You can also contact us to help you via customized research to help you make strategic decisions as green energy takes hold in Latin America.
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 Hypes, L. (2021). Could Your Company Get Sued Over Climate Change? BRINK
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 Millan Lombrana, L. (2021). Shell’s Court Rebuke Marks the Start of a New War Against Big Oil. Bloomberg.
 Phillips, M. (2021). Exxon’s Board Defeat Signals the Rise of Social-Good Activists. The New York Times.
 Griffin, P. (2021). A court ruling on Shell’s climate impact and votes against Exxon and Chevron add pressure, but it’s the market that will drive oil giants to change. The Conversation.
 Reuters (2021). Moody’s flags Big Oil’s rising risk from climate battle.
 Business & Human Rights Resource Centre (2019). Mexico: Pemex highlighted as the most polluting company in Latin America, raising concerns about the country´s commitments under the Paris Agreement.