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ESG and the energy sector

This article first appeared in the Future of Emerging Europe: Sustainability Report 2022.  A copy of the full report is also available to access here.

Developments in ESG issues in emerging Europe’s energy sector continue apace. Energy generation companies, governments, local authorities and consumers are all affected by the drive towards a future that is less reliant on fossil fuels.

Of all the sectors impacted by ESG it is the energy sector which has arguably had seen the greatest upheaval. Broadly, it has carried out the transition well.

Kostadin Sirleshtov, CMS partner and Head of Energy and Climate Change for the CEE region, certainly believes the industry is making good progress in adopting ESG measures. 

“Ten years ago, the most expensive solutions were investments in renewables. Now, they’re the cheapest form of energy. Much of this is due to the twin support pillars of financial stimulus packages combined with regulatory breaks. In this, governments and regulatory authorities are playing an important role. And as prices come down, so renewables continue to become more attractive,” he says.

Varinia Radu, CMS’s head of oil and gas in CEE, concurs. 

“Pro-ESG designs that have been years in the planning are finally coming to fruition, such as ‘smart grid’ solutions developed for larger towns and cities.” 

Nevertheless, practical limitations still need to be overcome, she suggests. 

“For example, most of the electricity infrastructure in Poland is in the south of the country. There is a great deal of suitable land on which to site wind farms in the north, but investors face the challenge of connecting those to the country’s grid. Similar challenges related to grid availability and balancing costs exist in Romania and elsewhere in the region. However, ESG is as much about improving efficiency as promoting new methods of generation.”

Just a decade ago, photovoltaics were prohibitively expensive and required support schemes to lure investors, whereas now many more people of modest means can invest in generating their own green energy. 

“This demonstrates the full impact of ESG on the energy sector: at all levels from large corporations through to individual citizens, progress is being made,” says Radu.

Sileshtov meanwhile stresses the piont that it is important that ESG is seen to be a positive thing. 

“There needs to be a proper balance of energy supply from renewable, hydrogen and carbon capture sources. It’s also worth noting that the big oil and gas majors are investing in renewables. No one expects the huge oil and gas producers to abandon fossil fuels in the near future, but the fact that they are also taking a keen interest in alternative sources of energy generation must be considered a step in the right direction.”

 “It’s interesting to see how the major oil and gas companies are addressing the objective of transitioning to a net‑zero business,” adds Radu. 

“For example, some aim to become world leaders in renewables via a total shift, while others are playing their cards closer to the chests, merely indicating a mixed strategy with adding investments in solar, onshore and offshore wind projects. Beyond simple ESG compliance, the ability to maintain investors’ interest and source financing, as well as keep a good reputation, will largely depend on the efforts to meet sustainability criteria.”

But what of accusations of “greenwashing” by energy companies and the funds that invest in them?

Sirleshtov says: “This issue continues to plague the industry. While investment funds might make a public commitment not to invest in new fossil projects, they seldom mention the dirty energy in which they do invest. In our recent experience, a deliberately narrow interpretation has created a grey area. A leading global fund recently acquired a controlling stake in a lignite power plant in CEE. Its small‑print justification for this was that the power plant constituted ‘old’, or existing, dirty energy, and the fund’s commitment extended only to not investing in ‘new’ fossil fuel plants.”

However, despite this Radu says that the financial sector has changed, and there can be no going back. 

“Reporting and disclosure obligations mean that everyone must consider ESG in future transactions and investments, as well as in their operational processes and the supply chain. Indeed, in CEE, companies need to commit without necessarily drawing attention to themselves. We can see today the new phenomenon of ‘greenblushing’, where companies and investment funds prefer not to sing their own ESG praises for fear of being unreasonably accused of greenwashing.”

As for where ESG in the energy sector in CEE goes from here, Sirleshtov says, “I believe the cost of electricity will fall significantly over the next three to five years. We will see prices drop to as little as one-tenth of what they are today, and there is a good chance that power may very well almost be free in the years after that. This will need strong investment in, for example, battery technology, so that solar power generated during the day can be stored for use at night. Remarkably, the latest scientific developments suggest that solar power can even be stored for years before being released as heat when needed. Such new technology offers the potential for an exciting future.”

Regarding ESG issues, Radu points out: “The effects of these measures need to be measurable and quantifiable, and that will also take a few years. Energy companies need to invest in automation and energy efficient technology so that in a few years, they can link ESG performance to financial results and will be able to monitor and calculate the impact the sustainability measures have on their bottom line. IT companies need time to develop, test and roll out the software necessary to be able to quantify the impact ESG initiatives have on the broader energy sector in CEE.”

It’s important to note, she points out, that bigger companies tend to move faster and hence incentivise the development of bespoke services that are needed to roll out a full ESG management programme. 

“For example, and coming back to the IT sector, we already have firms like Google and Microsoft using renewables and reporting on ESG-led savings. Nevertheless, one key issue is that what is voluntary today needs to become obligatory tomorrow, and I am convinced we will see this happen.”

Sirleshtov concludes: “Ultimately, climate change and sustainability are going to be the defining issues of this decade. On the one hand, the energy sector in CEE is moving in a sustainable direction, despite still having a long way to go. On the other, the importance of businesses meeting ESG metrics will only increase, as everyone from investors to shareholders to consumers puts sustainability at the top of their criteria for doing business.

Key contacts

Kostadin Sirleshtov
Managing Partner
CEE Head of Energy & Climate Change
Sofia
T +359 2 921 9942
Varinia Radu
Partner
Deputy Head of EPC, CEE | Head of Energy and Projects, Romania | Head of Oil & Gas, CEE
Bucharest
T +40 21 407 3870

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