Ørsted’s transformation has been heralded by climate change activists, governments, and investors across the globe as an example of how we can all participate in – and benefit from – the economic transition to a fossil-free world. However, there are some important points in this story that are often overlooked. First, DONG recognized the need for transformation very early. In fact, in the same year it embarked on its journey, oil prices reached more than $110 per barrel. Second, it acted quickly and decisively. Third, it was among the first companies in the sector to do so.
Why are these points so important? Just ask previous employees of the Eastman Kodak Company (or Kodak for short). One of its engineers developed the first prototype of a digital camera in 1975, but fear of cannibalizing its leading business in analog cameras and photographic film delayed the company bringing the technology to market. As a result, companies like Nikon, Sony, and Fuji leapfrogged Kodak, developing and releasing digital cameras in the late 1980s. Kodak finally released its first digital camera in 1991 amid a backdrop of declining sales for both analog cameras and film. After struggling to gain market share against the competitors in a tough market, Kodak ultimately filed for bankruptcy in 2012.
Whether it’s fossil fuel or photographic film, the first mover advantage is key. Not only do you want to sell your existing incompatible assets at a good price, you also want to enter your new market when competition is low. If you’re a laggard, you run the risk of finding no buyers for your assets and then subsequently entering a market that is already saturated.
Today’s Changing World
The long-term transitions that are changing the world today – demographic, technological, environmental and related to corporate governance – will create many casualties. The concept of stranded assets, often associated with fossil fuels, may soon be a much more pervasive term. For example, as urbanization continues in countries such as the US, what might become of the deserted and unprofitable warehouse retail stores? And who will be the last buyer of these assets?
As sustainable investors, we spend much of our time thinking about the transformations occurring across the world in a range of countries, industries, and markets. Mirova has built a team of analysts specializing in various market segments, including energy, mobility, resources, and health. We work with universities and academies and we talk to companies – a lot of companies. We do all this with one objective: to identify the businesses that we believe will win out in a world of transition, companies that are seeking both superior financial performance and maximum environmental and social impact.
The Schumpeterian concept of Creative Destruction1 is alive and well. The waves of innovation are becoming both faster and more violent, especially those backed by large-scale social movements. There are few companies out there with the foresight that Danish Oil and Natural Gas had back in 2007. But those companies prepared to look beyond next quarter’s earnings and think meaningfully about the future will ultimately be rewarded by the market and valued by society. And those that don’t? Well, we have an idea about how they may end.
1 The term creative destruction, developed by economist Joseph Schumpeter, refers to the dismantling of long-standing practices in order to make way for innovation.
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This material is provided for informational purposes only and should not be construed as investment advice. The views and opinions expressed are as of November 2019 and may change based on market and other conditions. There can be no assurance that developments will transpire as forecasted, and actual results may vary.