Time to pivot: The role of the energy transition and investors in forging resilient resource-rich country outcomes

At a time when the world is confronting a global pandemic and unprecedented challenges related to climate change and inequality, the natural resource governance field must undertake concrete, urgent, and drastic changes in strategies and tactics to achieve much-needed progress. Here, we outline two core areas that demand focused attention and new ways of thinking: the energy transition and the role of investors.

The critical role of resource governance in the energy transition

Against the backdrop of the urgent realities of climate change, the pandemic, and the decline in oil prices, the necessity for oil- and gas-producing countries to immediately engage in the transition toward sustainable energy sources has come to the fore. This pivot must be central to a revamped natural resource governance field now and in the years to come. However, as needed as the transition is, it raises its own set of socio-economic challenges. It is imperative that the natural resource governance field addresses the issues which will result from reduced extractive revenue, stranded assets, and related risks.  Moreover, the economic consequences of the transition will fall asymmetrically—with dramatic negative impacts on countries and communities dependent on oil, gas and coal revenues, and a rise in opportunities for those rich in transition minerals like copper, cobalt, and lithium.

Because many resource-rich countries struggle with effective governance, the natural resource governance field should support them with initiatives that build on past efforts and pivot to respond to current challenges. These include:

• Building an evidence base around how governance challenges will affect the energy transition and how the lessons learned in the natural resource governance field can be applied in this new reality
• Tapping into the overlapping expertise of currently siloed movements working toward a common goal by building coalitions among them
• Fostering informed public debate about the effects that the global energy transition is having, and will likely continue to have, on geopolitics, national development, and the country’s economic health (including a focus on realistic fiscal revenues)
• Supporting efforts by resource-rich countries to use increasingly available and affordable clean energy technologies to safeguard peoples’ health, environment, and energy needs
• Improving sector governance of the extractive and renewable energy sectors, both nationally and sub-nationally
• Supporting major efforts toward economic diversification
• Mitigating wind-down costs for vulnerable populations reliant on commodities that will decline in the energy transition
• Ensuring that citizens and communities in producing regions and those living far from capital cities have a substantive role in policy discussions and decisionmaking

The central role of those working to improve governance in resource-rich countries will continue as those nations transition into a new energy reality—one where there is a decarbonization imperative.

Just as misgovernance has impeded efforts in the past to translate extraction into development, it now threatens to stymie countries’ efforts to grapple with the decline of fossil fuels, take advantage of technological progress, and build economic resiliency in a low-carbon future. Unless critical issues of corruption, state capture, and mismanagement are addressed, a just energy transition will be impossible.

Consequently, activists, decisionmakers, funders, institutions, and researchers must work to realize a transition to a green economy in a way that does not widen inequality gaps either between resource-rich countries and others or between individuals in resource-rich countries.

As part of the energy transition, some levels of fossil fuel production will continue in the short term, while the demand for critical minerals for renewable energy generation will only increase moving forward. The natural resource governance field must therefore not abandon oversight and accountability efforts regarding mineral, oil, and gas extraction, which will continue to have a massive impact on the billions of people living in resource-rich countries.

At the same time, an accelerated rate of energy transition provides a moment for those working in the natural resource governance space to pivot as well. Activists, donors, and researchers should examine and probe how the expertise, lessons, and tools from extractives governance efforts might be applied to wind and solar energy and other sustainable resources.

The new challenges of the energy transition require a new perspective, including a revamped vocabulary and a new role for resource governance. This role must fully integrate economic and climate realities, address long-standing inequities and injustices, be mindful of politics, and (crucially) build resilience.

The natural resource governance field has a well of expertise that should not be left untapped. However, the levers that the field has historically relied on (technical advice, transparency, capacity building, and the like) have not always been enough to motivate changemakers around the world. Connecting the dots between current resource extraction, the energy transition, the extraction that will continue even in an energy system based on renewables, and the weak governance that can undermine each of those systems, will require new evidence for what works and new forms of coalition- and community-building.

Underpinning it all should be an awareness of the lessons the field has learned to date, how they can be applied in new contexts and with renewable energy sources to improve governance outcomes, and which revamped strategies are needed and new methods are most effective in promoting resilience and a sustainable energy future. Further, we need to be mindful that major geopolitical shifts will continue, with major implications for the energy field. In this context, the role of corporations and investors will also be key. We turn to the latter next.

The role of investors and international financial institutions

Investors and international financial institutions (IFIs) are a priority audience for lessons learned and anticipated transitions ahead. Governance dimensions need to be an important consideration in their influential decisionmaking.

Investors and IFIs are central players in the energy transition. Today, private capital is migrating from fossil fuel companies to those positioned as more sustainable. This past summer, for example, the market valuation of the electric vehicle and clean energy company Tesla exceeded that of the oil and gas giant ExxonMobil.

Investors and IFIs, however, can do more than make market-moving investments. They can promote environmental, social, and governance (ESG) factors; sustainable financing models; and the implementation of transparency and other good governance conditions when making loans or investments to mitigate structural factors that can undermine returns. Investors need to be attracted to the table for discussion and mutual learning, while IFIs need to further their work on governance throughout their funding.

This has never been more necessary given a recent explosion of interest from investors in ESG, especially decarbonization, not only in the United States and the European Union but also in emerging markets. Last year alone, the investment management giant BlackRock announced that it would put climate considerations at the heart of all investment strategies; more than two dozen institutional investors joined the UN-convened Net-Zero Asset Owner Alliance to align with the Paris Agreement; and shareholders pushed for climate action even at ExxonMobil.

The natural resource governance community can further this movement by allying with investors. The push for effective ESG should focus not just on country- or macro-level factors but also on specific companies and deals. The natural resource governance community should apply pressure on investors to take a sophisticated approach to impact—that is, demonstrating ESG outcomes, not just inputs.

Although investors have the potential to influence positive change, public interests and the interests of investors are not always aligned. As such, ensuring effective oversight over investors and the transactions that they broker can be just as important to improving governance as leveraging their influence to shape commercial or government practices in the first place. Investors, if they are seeking to act responsibly and sustainably, have a responsibility to improve their own policies and practices. Notably, they must ensure adequate transparency and due diligence for corruption and governance risks—both in their own operations and in the deals they finance.

Investors also have a pivotal role to play in sustainable financing to create a more resilient and sustainable future. In addition, conditionality in IFI lending may have a role to play. The natural resource governance field is rife with standards and measurements for good governance, from the EITI Standard to the Resource Governance Index to the Open Contracting Data Standard, that could be considered as requirements for lending.

Some participants in the October 2020 dialogue argued that IFIs need to impose stronger governance conditions during sovereign debt restructuring. IFI governance pre-conditions could also include transparency in climate risk assessments, requirements for governments to stop investing in oil and gas companies, and other sustainability initiatives.

Conditions imposed by outside actors obviously cannot deliver lasting change. While IFIs need to step up regarding governance in the support and funds they provide, meaningful change in countries requires capacity-building, fostering political will, and addressing political economy constraints.

Looking ahead

In the coming years, the energy transition and investor focus on ESG, particularly regarding decarbonization, will only strengthen and accelerate. Today, major oil and gas company Total announced that it will not be renewing its membership in the American Petroleum Institute, a powerful oil and gas lobbying group, as a result of the latter’s stance on climate, including its support for American political candidates who oppose the Paris Agreement.

The next decade will usher in staggering shifts in the political economy of energy as these trends continue. The natural resource governance field needs to transform itself as well: It must not miss the opportunity to proactively and positively shape these shifts by leveraging the lessons learned and expertise developed over the past three decades in new contexts. For this, we must also seize the opportunity to engage new actors and work in these new arenas—as we will discuss further in our third installment of this series

Read the first entry of this series here, and the third entry here.