Finance Lecturer, Bard College MBA in Sustainability, and Founding Partner, Noosphere
Professor, Sustainable Management Bard MBA, President, Natural Capitalism Solutions
Bard MBA in Sustainability, Class of 2015
The Bard’s MBA in Sustainability Finance course asked students to work in groups to tackle some of the complex questions facing Chevron. Their journey mirrored the one most of us in sustainability undertake-from naïveté to maturity in our thought processes as we strive to solve the direst problems facing us today. Students rightly assumed that an energy transition is both inevitable and well underway. Their initial impulse, however, was to call for an immediate and nearly wholesale shift from fossil fuel assets to renewable energy, ignoring the impact on revenues, employees, and global energy needs. Then, they were armed with probing questions to help them and were given three weeks to refine their thinking. Their initial advice to pivot wholly toward renewables evolved into a nuanced exploration of how an entrenched super-major oil and gas company could either be opportunistic or remain an obstructionist powerhouse. The students’ thinking matured. They became strategists.
Their earlier radicalism to divest from fossil fuels became tempered. Their recommendations to Chevron, and the shareholder resolutions they crafted as part of their assignment, became realistic. The possibility that Chevron would totally divest itself from fossil fuels did not make the final cut. Perhaps it was edited out. Perhaps it appeared to them-after careful consideration-too radical a possibility. This, too, seemed an important teaching lesson, one that mirrors the real world. Managers at most legacy companies do not seriously entertain the idea of divesting from a profitable business-often until it’s too late.
Really? Teaching Chevron at Bard’s MBA in Sustainability
Our ability to solve problems in the future will derive from the depth and quality of discussions in our classrooms today. The debates in MBA classrooms presage the debates in the boardrooms of the future. BARD MBA in Sustainability encourages such debates in the classroom with an integrated, bottom line focus. Those who are trying to get enrolled at a business school on such a course may want to consider going through Fortuna Admissions, who know what it takes to get accepted, for help, consultation, and first-hand insider knowledge. As a BARD MBA in Sustainability finance professor, my goals are to teach core finance and inspire a new way of thinking-to challenge and solve the problems of our future by reshaping our thinking today. To that end, along with the problem sets that focus on traditional finance concepts-time value of money (TVM), capital-asset pricing model (CAPM), weighted average cost of capital (WACC), and the like-I wanted a finance course assignment to include a case study that illustrated complex, real-life challenges requiring the most demanding financial calculations and one based on a company that sustainability students would find generally difficult to embrace. We all love Patagonia and Unilever. But how do we reform a super-major oil and gas producer, especially one that, for many, embodies the most intransigent of the major oil companies?
The Case Study
Searching for a meaty, yet thorny subject, we homed in on Chevron. Unfortunately, the Harvard Business School (HBS) case study, “What Should Chevron Do?” was not yet available for non-HBS students, and was still undergoing revisions, according to co-author George Serafeim. Cary Krosinsky, sustainability author and editor (including of the JEI), suggested we put together our own case study based on a variety of publicly available sources, including the Carbon Tracker, Bill McKibben’s article in Rolling Stone, the BP Energy Outlook, and Chevron’s own financial statements. This case study would allow students to wrestle with the same issues.
The class of 13 was divided into three randomly selected groups that would consider Chevron’s situation separately.* What should Chevron’s fundamental business strategy do so that the company could adapt to the changing realities of our times while continuing to provide value to its shareholders? Can Chevron shift a business model that is currently based on an assumption about the sustained market demand for their products to one that addresses the reality of a carbon-constrained world? What does an alternate reality look like for Chevron with billions of dollars already invested in oil explorations that, in the future, may not provide the expected ROI because the company may not be allowed to extract and sell oil? Should Chevron take a proactive stance acknowledging trends in the energy markets or continue to hedge its bets on growth driven by fossil fuels?
Such questions and analyses are routine for traditional business schools but are rarely asked from a perspective that encourages system thinking, holistic transformative business-model innovation, or shareholder activism. At Bard MBA in Sustainability, the faculty and administration strive to impart in-depth knowledge of core business skills through the lens of sustainability. The curriculum provides all the management essentials, but with a continual focus on the Integrated Bottom Line: economic success, based on environmental integrity, and social equity.
Students met in groups for 30 minutes to prepare a 10-minute address, answering three questions, which my colleague Robert Schwarz, manager, Investor Initiative for Sustainable Exchanges, at Ceres, helped me craft.
The questions were:
- How can Chevron be most opportunistic during a rapid transition to renewable energy?
- How would Chevron adapt to a sudden, globally implemented $100/ton price on CO2 emissions (assuming that a carbon tax is applied at the point where carbon enters the economy)?
- How should Chevron respond to activist investors who claim that the company has not adequately disclosed risks in its financial statements, including whether the assets on its books are at risk for becoming stranded if oil prices remain at $50 to $75/barrel or if carbon regulation is imposed?
Initial Recommendations to Chevron’s Board: Idealistic or Simplistic?
The three groups made their presentations to an imaginary Chevron board. Their recommendations, crafted hastily by necessity, suggested that Chevron pivot almost entirely toward renewables, disclose potentially stranded assets, and lead the energy transition to renewables as a global energy company. Their responses, not unexpectedly, were idealistic and overly simplistic. The rapid-fire-response style of classroom presentations did not afford students sufficient time to consider the difficulties a legacy company might have in radically transforming its business model. The subsequent part of the case study-written answers to the same questions, and preparation of three related shareholder resolutions-would illustrate their maturing thought process as they considered Chevron’s dilemma more deeply.
Thinking Evolves Rapidly
The students’ written responses, submitted two weeks later, were well thought out and far more nuanced than their initial presentations. The prevalent thought was that an energy transition is not only inevitable but well underway. This transition, according to one group, offers Chevron a chance to rebrand itself.
Shifting from oil to renewable energy empowers Chevron to enrich the company vision with a new brand. Chevron can rebrand itself as ‘green’ and own its position as the market and industry leader in green energy-challenging the notion that the world is run on oil . . . . Green is the new black. (Columbare et al.)
All three groups recommended that the company move rapidly to engage with renewables but recognized the complexity of any such corporate action, given Chevron’s core competency in the oil and gas business-acknowledging a complexity that had not been expressed in their initial presentations. “Positioning Chevron to capitalize on a rapid transition to renewable energy would be virtually impossible without some foresight and longer-term planning from its management.” (Kalafa et al.) However, Chevron’s “attendant expertise in exploration, infrastructure development, supply chains logistics can be positioned as a service to the renewable energy sector.”
Beyond suggesting the rapid expansion into the renewables sector, all groups observed that Chevron could be most opportunistic by acquiring renewables companies, given its strong financial position and rich human resources.
Chevron can utilize its strong financial positions to hedge against the risks of this global shift by investing in cleaner, more sustainable sources of energy. . . . Chevron can leverage its financial position to bring in top-tier engineers and scientists, as well as strategists and consultants, to formulate an overall plan that enables Chevron to maintain market share and define the emerging market for replacements to fossil, liquid hydrocarbon fuels. (Souza et al.)
No Calls for Divestment
Divestment was not mentioned-even once-in any of the students’ written work. It had been raised during group discussions but had not made it into the final drafts. In sharp contrast to their initial classroom presentations, divestment-in the form of a spinoff or by separating into two companies-was not offered as a potential solution for Chevron.
This was especially striking given the students’ awareness of both E.ON and RWE, Europe’s two biggest utility companies, both of which are now undergoing profound business transformations. E.ON had agreed to spin off its fossil fuels, nuclear, and hydropower assets; RWE, after its profit dropped $5.8 billion in a year, opted to transform its business model to become a distributed utility, also shedding its fossil and nuclear holdings. Students calculated, however-or learned from others’ calculations-what might happen if Chevron’s high-cost fossil fuel assets became stranded. However, divestment didn’t present itself as the optimal choice for these students. Why not? Did they see a spinoff as effectively shifting the problem rather than solving it?
To Move Quickly or Use Time as an Asset?
It is indeed a conundrum for an entrenched company to focus on emerging technologies when abundant cash flows from its core business continue to dwarf those produced by smaller, newer products and services. Throughout history, it seems more likely that an upstart company will disrupt an industry than a legacy company will pivot in time. One student group assumed Chevron would have time to pivot its business.
Renewable energy is not a threat to Chevron’s market share in the near future. Time is a valuable asset not often quantified, but Chevron should leverage time to assess options that increase their already large competitive advantage.” (Souza et al.)
An opposing view of time was expressed by another group. These students urged Chevron to move quickly, since renewable energy companies would be less eager to sell or collaborate with Chevron as they become more successful and “Chevron’s financial clout will have less power within renewables.” (Kalafa et al.) They described how Chevron could use its ample cash flow and assets to absorb competitive renewable energy companies quickly and compete in the new sector.
A spree of acquisitions in the energy sector would most likely emerge from the previous oil and gas giants, so beginning that process sooner would be most cost-effective and allow Chevron an advantage over its larger competitors. (Kalafa et al.)
No Longer Naïve, Still Optimistic
Throughout their writing, the students remained optimistic about Chevron’s potential to use its financial leverage for what we, in the sustainability space, perceive to be the greater good. Only one group raised the possibility that Chevron may choose “myopic tactics”: being obstructionist or opting to leverage its financial clout to buy and kill emerging leaders in the renewable energy sector, “impeding the transition to a less fossil-fuel-intensive global economy.” (Kalafa et al.) However, they ultimately believed these tactics, if undertaken by Chevron, would only “delay rather than prevent a transition from fossil fuels.”
This was not a group to bash companies, even those whose past corporate actions may give us pause.
Chevron has tremendous financial and human capital. Strategic planning will allow the company to continue accessing the full extent of those capitals should protection of natural capital be required. (Souza et al.)
Dissenting Views on Adequate Disclosure of Risk
Had Chevron, in its financial statements, adequately disclosed the risks of potentially stranded assets should oil remain at $50 to $75/barrel or if climate protection makes extraction non-viable? The groups’ responses varied considerably. “Chevron has adequately disclosed risk in financial statements because the risk of assets being stranded has been assessed and determined to be low.” (Kalafa et al.) Another group disagreed.
Chevron must differentiate itself from its competitors by publicly recognizing certain aspects of fossil fuel risk rather than completely denying these risks. Strategically embracing the dynamics of this shift in mentality at both the regulatory and business level enables Chevron to turn a potential impediment to continued success into an opportunity to gain an advantage in the energy industry. (Souza et al.)
Shareholder Resolutions Call for Investments in Renewables; Concern About Stranded Assets
As part of the assignment, students were asked to craft shareholder resolutions. In their resolutions, all three groups focused on increasing transparency about levels of investments in renewables or called for increasing investments in renewable energy.
One group (Souza et al.) suggested that executive compensation be tied to environmental spending and risk, and recommended setting up a fund to withhold compensation for five years with a claw-back mechanism should excessive risk lead to potentially ill-gotten compensation. Another group recommended investing in carbon offsets. (Marino et al.)
One group (Kalafa et al.), sounding much like activist investors not typically associated with sustainable investors, asked Chevron to increase its dividend until a long-term
strategy for renewables is adopted, fearing that excess cash might encourage investing in “high-cost, high-risk projects that yield decreasing profits,” due to the “rising possibility of stranded assets and Chevron’s ‘capex crisis.’ “(Figure 1)
Figure 1: Costly Quest-Change in Production and Capital Expenditures
Source: “Big Oil Companies Struggle to Justify Soaring Project Costs,” by Daniel Gilbert and Justin Scheck. The Wall Street Journal, Jan. 28, 2014.
If the only sin is despair, the students demonstrated they were far from that risk. But although their optimism radiated throughout the assignment, it was not the blind optimism of the uninformed. Theirs was tempered by their realistic sense that Chevron may remain an obstructionist player in the energy space. Steeped in their sustainability studies, they understand the importance of addressing carbon emissions, and identified Chevron’s role in geothermal as a potential opening. Similarly, they mentioned its large position in natural gas as an opening for the company to lead the effort to reduce carbon emissions, if fracking concerns are addressed.
During the three weeks the Bard MBA in Sustainability students explored Chevron’s predicament, their thinking evolved from a simplistic “switch to renewables” stance to a refined exploration of how a super-major oil and gas company could pivot responsibly to renewables, potentially rebrand itself, and leverage its position as a global energy supplier to lead an energy transition. While the process of refining their thinking made them more “reasonable,” it trapped them into the belief that the company had the luxury of time. By backing away from their earlier calls for Chevron to divest, they mirrored the behavior of our entire society that believes we can solve the climate crisis incrementally. Had a reasonable dollop of realism replaced a radical solution? Or had they assumed that Chevron could find ample time to transition when-we believe inevitably-they will have to exit their fossil fuel business.
Class discussion brought home to us all that this remains the critical issue of our times, and that none of us yet has an easy answer.
Kathy Hipple, a graduate of Marlboro’s Sustainability MBA, is a founding partner of Noosphere Marketing, and an adjunct professor at Bard’s MBA for Sustainability, where she teaches Finance through a sustainability lens. At Noosphere, she works with mission-driven organizations, financial services, and tech firms to advance-and communicate-their ESG initiatives. While teaching Finance, Kathy infuses sustainability and regenerative capitalism into a traditional finance curriculum.
Prior to launching her firm, Kathy had an extensive background on Wall Street, working with international institutional clients at Merrill Lynch, and in local search, where she ran a NYC-based media company with nearly 200 employees and $35 million in revenues and served on the national board of the Local Search Association.
She is a founding member of the Generative Council, a group of women leaders in the for-profit and not-for-profit sector. She serves on the boards of Meals on Wheels in Bennington, Vermont; Sawah Bali, in Bali, Indonesia; and The Center for Nature and Leadership, in Washington, DC. She is working to launch a Sustainable Women’s Investment fund, which will select investments through a gender and sustainability lens. The mother of three, she is a passionate outdoorswoman, a competitive cyclist, and classical pianist.
She is keenly interested in:
- How financial capital can be leveraged to create a flourishing future
- Paradigm shifts
- The outdoors and how it deeply connects us to nature.
L. Hunter Lovins is President of Natural Capitalism Solutions. NCS, helps companies, communities, and countries implement additional regenerative practices profitably.
A professor of sustainable business management at Bard College, Hunter was named a Master at the De Tao Academy in Shanghai. She sits on the steering committee of the Club of Rome, Alliance for Sustainability And Prosperity, and Capital Institute Advisory Board. A founding mentor of the Unreasonable Institute, she teaches entrepreneuring and coaches social enterprises around the world. She is a founding partner in Principium, an impact-investing firm.
A consultant to scores of industries and governments worldwide, including International Finance Corporation, Unilever, Walmart, the United Nations, and Royal Dutch Shell, as well as sustainability champions Interface, Patagonia, and Clif Bar, she has briefed heads of state, leaders of the numerous local governments, the Pentagon, and about 30 other countries, as well as the UN, and the U.S. Congress.
Hunter has written 15 books and hundreds of articles. She has won dozens of awards, including the European Sustainability Pioneer award, and the Right Livelihood Award. Time Magazine recognized her as a Millennium Hero for the Planet, and Newsweek called her the Green Business Icon.
Juzer Rangoonwala, Bard MBA in Sustainability, Class of 2015, is a proven leader in IT management, and an aspiring sustainability professional, with an affinity for numbers and a keen interest in sustainable finance. www.linkedin.com/in/juzerzr
The Bard College MBA in Sustainability students who worked in three groups on the Chevron case study:
Group 1 (Kalafa et al.): Amy Kalafa, Martin Lemos, David Rozins, Mario Q. Russo, Alex Santiago
Group 2 (Souza et al.): Mariana Souza, Nicholas Hvozda, Nour Shaikh, Simon Fischweicher
Group 3 (Columbare et al.): Brooke Forde, Reuben Jaffe Goldstein, Curtis Columbare, Victoria Marino