A Net-Zero Value Chain Is the Next Frontier in Ørsted’s ESG Journey

Originally published on TriplePundit

While many companies today seek to align their operations with the imperatives of strong environmental, social and governance (ESG) performance, some firms put the ESG stake in the ground long ago. One of these is renewable energy giant Ørsted.

It was a surprising turn of events back in 2009 when Ørsted, formerly Dong Energy, was a thriving business almost entirely dependent on oil, gas and coal. The company began transitioning to renewable energy in 2010 and has since gone from being one of the most coal-dependent companies in Europe to transitioning its portfolio almost entirely to renewables.

Multiple pressures converge to change the trajectory of a company

The story of how that happened is one of multiple pressures, Ida Krabek, senior director and head of sustainability at Ørsted, told TriplePundit. “We could see the whole momentum around the climate building up and that our legacy business was under pressure. Our top management recognized that the future of energy was renewable energy and that to maintain a profitable business, we had to reconsider how we made our money,” Krabek said.

“There was also civil society pressure, including environmental protests against a new coal-fired power plant we were planning in Germany. And there was regulatory pressure, as the European Union began to launch regulation to tackle climate change,” she continued. “All of this was a very clear sign that the context we were operating under was changing.”

Toward a new kind of energy system

Today, Ørsted’s vision is a world that runs entirely on green energy. The company develops, constructs, and operates offshore and onshore wind farms, solar farms, energy storage facilities, renewable hydrogen and green fuels facilities, and bioenergy plants. Ørsted is recognized on the CDP Climate A List as a global leader in climate action and was the first energy company in the world to have its net-zero emissions target validated by the Science Based Targets initiative (SBTi).

The company has set ambitious targets, including reaching net-zero across the value chain (Scopes 1, 2 and 3) and a 90 percent reduction in absolute emissions (Scope 3, from gas sales) by 2040. In the shorter term, the company is looking to cut Scope 1 and 2 emissions intensity by 98 percent by 2025, using a 2006 baseline.

Though net-zero by 2040 may seem a tall order for an energy company, Krabek said the company is on track to meet the target. This is even in light of the Danish government ordering the company to postpone the shutdown of three coal units last year to help guarantee the country’s energy security.

“This has not been an easy journey,” Krabek told us. “It has required that we set a long-term vision for the company and stick to it to build the internal momentum and to have a suite of actions year on year that bring us in the right direction.”

Buy-in from C-level has been a consistent factor. “Our CEO and top management have stayed firm in the belief that this was the right direction for the company, and that has helped to build organizational focus and support over the years,” she added.

Embedding sustainability into governance structures

Another integral part of the company’s journey was ensuring that ESG objectives were integrated into corporate governance. Ørsted is working to ensure sustainability is embedded across all relevant parts of its operating model so that, as the company describes it in its 2022 Sustainability Report, “every colleague, every decision and every business development pull toward the same ambition.”

The company has three interrelated strategic pillars to ensure sustainability is integrated: decision-making and accountability; competencies and governance; and culture and leadership.

“Concern for the climate and the build of renewable energy has been core to our business strategy for more than a decade, so it has naturally been built into our governance structure,” Krabek said. “Our board has oversight, and we have top management who are familiar with taking decisions linked to ESG where the business case is often a bit different and more long-term than the traditional business case.”

ESG is now part of short-term incentive remuneration

In 2022, Ørsted strengthened ESG criteria in its executive team’s short-term incentive remuneration scheme, giving them the same weight as financial KPIs. “It’s not salary alone that incentivizes an organization,” Krabek said, “but it is a very important tool in showing what we value as an organization.”

This level of accountability is one very effective aspect of the company’s approach to governance for sustainability. Another is transparency. In addition to its annual Sustainability Report, Ørsted publishes an ESG Performance Report and each year includes more sustainability information in its Annual Report to investors. Additionally, the company published a Green Bond Impact Report in 2022.

On the data side, the company’s chief financial officer heads its Sustainability Committee and not only has strategic responsibility for sustainability, but is also responsible for ensuring the quality of the company’s ESG data, Krabek explained. 
“I think it's extremely important that your organization and your top management trust the data that you have available in this space because then you understand the problem better, and it's also easier to make decisions on what to do next,” she said.

The next frontier: Decarbonizing the value chain

To positively impact the global challenge of climate change, Ørsted leaders recognize the company must look further than its own business. “For us, the next frontier is about making sure that our entire value chain footprint is net zero,” Krabek said. “As a growth business, that means decoupling growth from supply chain emissions. That is the next big challenge.”

Ørsted’s broader vision is to help the world’s energy systems move toward decarbonization — including more challenging sectors such as steel, concrete and shipping — while contributing to biodiversity rather than adding to massive biodiversity loss. The company has committed to net-positive biodiversity impact from all new renewable energy projects commissioned from 2030 at the latest.

The company also embraces the “S” or social impact in ESG in that it has a responsibility to contribute to a just transition to sustainable energy systems while protecting human rights.

“We want to be part of managing the impacts of the green transition in a way that makes it a force for positive change, because it is really a large-scale societal transformation that we will have to go through over the next decade,” Krabek said.

Because sustainability challenges are a moving target, every year Ørsted conducts a sustainability themes analysis to identify, assess, and prioritize the themes that matter to its stakeholders and business. The five issues that emerged in last’s assessment were carbon emissions from renewable energy supply chains, biodiversity and local ecosystems, reusing, recycling and avoiding waste,, communities, and human and labor rights.

“While we want to play a leading role, it’s really an industry ambition that we cannot solve on our own. It requires dialogue with our suppliers and other stakeholders,” Krabek concluded. “Active collaboration is key.”

This article series is sponsored by Workiva and produced by the TriplePundit editorial team.