Last week, I set out a framework for classifying Big Oil firms according to their transition strategy, based on my conversation with industry insider Julio Dal Poz. If you haven’t already read that piece, you can find it here:

This week, I want to conclude this analysis by going a layer deeper. What are the underlying conditions that give rise to each strategy – and what can we do about it?

Peeling back the layers

If you hadn’t guessed by now, there is a relationship between our geographical framework (Europe/America/ME&China) and our strategy framework (investor-generators, expert-adaptors, political-integrators, and double-downers). Investor-Generator firms are much more likely to be European; Expert-Adaptors describe the majority of American majors; whilst the unique conditions that make a Political-Integrator firm work are found in Asia and the Middle East (though potentially elsewhere in the developing world too – and let’s not forget that many forward-looking European companies began as state-owned enterprises). This is hardly a surprise,` because strategy is never created in a vacuum – if you learn nothing else at business school, it should be that! So to fully understand the problem of these legacy firms – and what we can do about it – we need to go a layer deeper again.

The two key drivers of overarching strategy that I can see here are government regulation and business culture. Let’s take the role of the state first. As I discussed in my conversation with Paul Beijer, there is perhaps no sector more exposed to changing government whims today that energy. The differences in government attitudes to energy and renewables, between Europe, the US, and autocratic states, should be clear. As Dal Poz put it, ‘European ones are obviously the ones that are under the most pressure,’ on decarbonisation; whereas ‘the American system, which has [moved] back and forth in terms of its desire to actually address the challenges of climate change.’ Meanwhile, the integrator model is only possible in places like China, because it allows executives to ignore shareholder pressures and market forces in favour of top-down political decisions.

For Dal Poz, the different fates of offshore wind illustrate the differences:

‘Here in northern Europe, you have the government setting the pace with very strong ambitions to achieve net zero by a certain date – opening up leases and acreage and providing support schemes for the offshore wind industry to develop at a faster pace than in other countries. And in the US, you saw how long it took until the country actually adopted offshore wind as a strong way to address climate change. Now they’re trying to catch up, but given that the industry is already investing billions of dollars a year enough in Europe, even the catching-up process will take a while. And US regulation also needs to catch up with what the industry needs, to move faster.’

The other critical driver is business culture. American firms are much more driven by a narrow vision of shareholder value, and have public markets with shorter attention spans. They are less tolerant of social or political intervention in markets. They also spend much more in lobbying dollars to maintain that culture. By contrast, European business culture is more consensual and recognises a wider range of stakeholders; is more expectant of government intervention (both as regulation and support), and places more value on reputational concerns. In Asia, by contrast, there is a long history of conglomerates as a business model; state capture of the economy is much stronger; and private property rights have much weaker cultural primacy.

It was us all along

And now to the final layer, which is both forward-looking and hopeful. What lies behind both politics and culture is us. As troubled as our democracies are, they still respond to what people say they want. As Dal Poz put it: ‘regulation originates from public opinion, and then the public pressure for governments to do something and to move in the right direction – to put pressure on private owned companies to actually do the right thing.’ In Europe, for example, public pressure has had a clear impact on pushing policy forward – but the lack of urgency we see in existing net-zero plans does reflect the ‘do it tomorrow’ attitude that infuses majority opinion on climate change.

Business culture, too, is an emergent property of wider social norms. Why do we place such primacy on financial return? Who get’s to define what is valuable, and why? What are the boundaries of public and private property – and how far should those rights extend? No matter what an economist might try to tell you, these are not scientific concerns, variables that have been solved and optimised on an efficiency curve. They are philosophical questions, which vary across space and time. And we have the power to change our minds. There is no point throwing up our hands and blaming blind executives or selfish shareholders, because they exist in the business culture which we ourselves ratify.

So, if we want the oil majors to go faster in their transition – if we want them to sunset their legacy assets without destroying the world in the process – then we need to understand how to shift our own norms. Perhaps this will be voluntary, although I’m not holding my breath on some of these deep-seated ideas. Instead, we may find that our impending collision with reality changes our minds for us.

For example, take the following things that we all ‘know’ as cultural facts:

• We ‘know’ that land belongs to someone
• We ‘know’ that we cannot just take what belongs to someone else
• We ‘know’ that firms have a duty to make as much money for their shareholders as they can
• We ‘know’ that we have to leave over 80% of existing, proven fossil fuel reserves in the ground, if we are to (probably, hopefully) make it into a two-degree world

Look at these four social facts long enough, and you realise we are in something of a paradox. One of these four has to break, and when it does, the shift in social expectations will remake regulations and business culture, which in turn will define strategy. As Dal Poz’s frameworks above suggest, there is more than one way to get there. What matters is that we do get there; but also, I hope, that we can preserve, and enrich, our other values along the way.

Perhaps that will be the greatest legacy of the ultimate ‘legacy’ industry; by forcing us to reckon with social values that no longer serve us, it might allow us more than simply an energy transition. Fingers crossed.