Interview with the Founding Chairman of the CGI: Fossil projects with more expensive loans and insurance

The full interview was prepared by Borut Tavčar and published in the newspaper Delo and at delo.si on 26 April 2023. The following text was translated by Chapter Zero Slovenia.

Back in 1992, there was the climate summit in Rio de Janeiro and we all thought that climate change would be a big story and that action would follow. But nothing happened.

Indeed, nothing happened. As an investor, I have found that when I start talking about climate change, board members immediately turn the conversation to health and safety or to oil spills or other pollutants. That is, of course, good and important, but it is not the foundation of the business. We are in the wrong business, producing fossil fuels that are incompatible with climate security. It is excellent that you do not want oil spills, in fact it is a necessity, but that is not enough, we need to talk about whether we are in the right business. When I was sitting on the board for three weeks, I wrote to the chairman asking if I could see the company's climate strategy, because I couldn't find it. A lot has been written about oil spills and about reducing gas flaring. Fortunately, he was a big supporter of corporate governance and told me that I was right, that we were probably in the wrong business. So that's how Chapter Zero started.

And then it evolved into an international organisation?

If each does his own thing and on his own account, it is pointless. If we want to do something and no one else wants to do it, all that will happen is that we would suffocate in our own sweat. That is why it was necessary to mobilise directors from everywhere to look in the same direction, so that we are not alone.

They also talked about competitive advantage. A change can also lead to more competitiveness.

If you look at it from the point of view of the boardroom discussions, you have to ask where is the competitive advantage for us if we change. In our business, oil and gas, there has to be a great deal of investment now in order for production to continue for another 10, 20, maybe even 40 years. When you invest that much, you run the risk of having to write off a lot of assets. It may be worthless sooner than you foresee now. If your revenues dry up in 15 years on a 30-year project, you are in big trouble.

We therefore need to think about how to invest wisely so that we are not left with a lot of written-off assets and the obligation to rehabilitate production areas, which means millions and millions of negative value. We need to think about what the alternative is - similar, but different. We would simply go from refineries to biorefineries. Instead of crude oil, we refine vegetable oil or biological waste, which is even better, because we do not want to compete for food. As much as 70 % of our research and development budget is devoted to sustainability and climate change, and that is because the transition of a very large society is also very expensive, and the solutions have to be very feasible.

Also decision-making process in Europe is slow, perhaps it would be a good idea to speed things up in this context?

Bureaucracy is very slow indeed. We have heard of the case of a cement factory that has been waiting for 20 years for the possibility of registering new cement. The construction industry is very conservative. I was on the supervisory board of Lafarge, and they had exactly the same problem. They had a new cement formula with a significantly lower carbon footprint, but they could not get approval anywhere for it to be used. There are regulatory barriers, but I hope that once we get a sufficient number of companies together under the Climate Governance Initiative, things can change. We already have initiatives, we have 100,000 members. Together, we will demand regulatory change that penalises companies that break their climate commitments, while rewarding companies that work to reduce emissions and make sustainability a priority. It really is vital that governments and companies work together.

But we also need stable politics so that in situations like the war in Ukraine, we do not completely change course. In an oil company, new oil wells would no longer be seen as a misguided investment.

It is indeed true, but it is the case that, on average, it takes seven years for a new well to start producing. When we have all this pressure from investors and governments to increase production, we cannot guarantee that with new wells. So we have increased production with the wells we already have, and prices have gone up, so there is a lot more money flowing in. If it had not been for the war, this money would have been used to accelerate green investments and to pay additional taxes.

How do you see Slovenia in this context?

Slovenia is a small fish, as your President Nataša Pirc Musar put it, and can move quickly. Of course, you also have larger companies that find it difficult to change their course. But small countries can do big things. The Paris climate summit that everyone is talking about was led in 2015 by Christiana Figueres, who was a minister, not even Prime Minister, of the Costa Rica Government. That, too, is a small country. If you have good ideas and the will, you can do a lot, whether you are from a big country or a small country. Being small does not have to be a disadvantage, you can turn it into an advantage.

Europe is heavily dependent on raw materials and fossil fuels from other parts of the world. Is it moving in the right direction?

The EU is moving in the right direction, and faster than any part of the world, except the USA, which has recently embarked on this path. The USA did nothing for a long time, but last year it passed the Inflation Reduction Act and invested a huge amount of money to subsidise green investments. This has caused investors to move from Europe to the USA. European governments are not happy about this, but they note that, now that the USA is finally taking action, we do not want to stop it completely. That is why Europe is experimenting with incentives similar to those in the USA.

Our company has announced an investment in a refinery in Louisiana, worth USD 500 or 600 million, which we will convert into a biorefinery. Without the Inflation Reduction Act, we would certainly not have done this. This act, of course, has an impact on the relocation of capital, because otherwise we would be investing in Europe or looking for favourable investment opportunities in Asia. Investments go to countries where the regulatory and budgetary situation is favourable. The USA has introduced a series of budgetary incentives for green and climate-friendly investments.

It's not just the USA, there is also China, India and Japan.

China is the biggest investor in solar power plants, in fact, China is the biggest investor in everything, including coal consumption. So it is doing good things and also bad things in a very big way.

Europe is different, it has a very clear direction, we are going to shift our industry from brown to green. We have some setbacks, one of which is the growth in coal consumption due to the war in Ukraine and the closure of nuclear power plants in Germany. Most people in the business community are nodding their heads at this decision by Germany. Nuclear accidents are unacceptable, but the accidents at Chernobyl and Fukushima do not mean that all nuclear power plants are about to crash. We have no choice but to invest in nuclear energy.

Is the EU Emissions Trading System still the right solution?

This system has finally started to work. It did not work in the first few years because too many emission allowances were given away for free and there were too many allowances. Therefore, the allowances were too cheap to stimulate any change.

The whole point of charging for carbon is that it hurts. A little at first, then predictably more and more. Today you have to know that in five years' time, the credits will be 10 % more expensive, and in 10 years' time, 20 % more expensive. We cannot say that prices will be three times higher tomorrow. People need to be warned much earlier, so that they start to convert their large factories. But now that the ETS is working, the price of carbon has risen dramatically. This is a consequence of the war. Gas was scarce, companies turned to coal, so they had to buy more emission allowances, and that raised their price to more than a hundred euros per tonne of carbon dioxide.

They have already become a huge burden for our company, so we have announced that we will convert our refineries into biorefineries.

Many companies have relocated their production to Asia. They will now have to report on the footprint of their entire supply chain. Perhaps some of these companies will come back?

Maybe, although it should be considered that if someone closes a large factory and lays off workers, it will be very difficult for them to come back. We will keep the employees, as the work will be similar to what it was before.

If we do not bring industry back, we cannot count on being able to provide all the means for the green transition, for example steel for nuclear power plants.

That is what is happening with the Inflation Reduction Act in the USA, so it is possible.

Customer expectations are changing. What impact does this have on manufacturers?

Customers can be a bit schizophrenic. They say they want clothes that are not made by children who are forced to do it, and then they buy the cheapest cardigan they can find. But we certainly know that young people are paying more attention to this subject matter, and that corporations and industrial buyers are increasingly interested in it. If you and I buy a very carbon-intensive product, nothing will happen to us. If a company declares itself carbon neutral and it turns out to be buying coal, it is in trouble.

I have shareholders who control me. So we are trying to create a need for this kind of content among our customers and persuade them to choose us, because all the appliances, from heating, cooling, machinery to cars, will be zero-emission. So their emissions will be zero too. On the other hand, we are influencing our suppliers. If we buy products that have been made in a very carbon-intensive way, that is part of our footprint. That is why we also need to replace some of our suppliers. We have made a big platform for suppliers and invited other companies to join us. There are 10,000 companies on the platform, 6,000 of them are our suppliers. The data includes emissions and human rights data, which we also verify. We also benchmark companies against their peers and advise them on how they can reduce their carbon footprint.

Slovenia has many companies that supply large companies abroad.

If you have a large number of export companies here, and if buyers in Germany or elsewhere expect a low carbon footprint, companies need to modernise.

What is the best strategy to get climate strategies into the boardrooms?

I have really thought about this a lot. Companies are now too preoccupied with the consequences of war, but 20 years have shown that investors are becoming more interested every year.

Three years ago, Black Rock, the world's largest investor, said that climate change was a business risk. If you don't adapt, you will lose money. In dirty industries, we are thinking what to do with the dirtiest facilities. What is the simplest solution? Sell them. None of the big ones will buy it from me because they have the same problems. I sell it to a smaller company or to a Chinese company - and the problem is solved. In fact, the problem is not solved. And that is what the investors are interested in. Sometimes it takes half a year, sometimes longer, but how you solve your carbon footprint problem is important. Investors think about fair transition, responsible divestment, net neutrality targets, they want to see very precise targets, if it doesn't fit, they vote against strategies, against the board, against remunerations.

There are no more investors in dirty technologies. Everyone, including pension funds, banks and others, is talking green.

At Eni, we have found that access to capital is much more difficult. Many investors do not even want to invest in fossil fuel companies. Others say they will invest when we really shift. It takes a lot of work to convince people that these are really green projects, because there has been a lot of greenwashing. Now even the insurance companies are saying that they will not support any new fossil projects. Companies that want to go down this route will have to go to Chinese or other markets for more expensive money, and insurance will also be more expensive. Eni has had to issue bills of exchange and, if it fails to meet its climate targets, it will pay EUR 5 million more in interest.