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Russia’s war on Ukraine and the folly of misalignment

Europe’s dependency on Russian natural gas shows that energy security, foreign investment and ESG are inextricable.

Even though the drumbeat of war had been growing louder for the past few weeks, it has been a shock to wake up to the horror of armed conflict.

It’s not for this publication to dissect the chain of events that led us to where we are now, except to deplore the loss of life resulting from Russia’s invasion of Ukraine. But we would be remiss to ignore the impacts of a war that is so inextricably tied to the energy infrastructure market.

What’s more, the war is likely to accelerate ongoing discussions around energy security, foreign investment and ESG, demonstrating how deeply intertwined they are.

Let’s start with energy security. With about 40 percent of the natural gas it consumes coming from Russia, it’s no secret how dependent the EU, which counts on gas for more than 20 percent of its energy mix, is on Russian energy.

There are solutions to the EU’s predicament, of course, but none are available overnight. The most powerful fix, as EU climate chief Frans Timmermans said in January, is to boost renewables and energy transition investments. “If we really want to stop long-term making Putin very rich, we have to invest in renewables and we need to do it quickly,” he argued.

Another idea is to satisfy Europe’s needs via liquefied natural gas. But as you can hear in our recent podcast on how the Russia-Ukraine conflict is impacting the sector, there are constraints that stop LNG from being a panacea.

Even if the EU decided to prioritise many of the investments needed to immediately assert its independence from Russian gas, the costs would be steep, or even prohibitive, Columbia Business School lecturer Gernot Wagner writes in Bloomberg Green. Abruptly cutting off the flow of Russian gas, which Wagner supports, would almost certainly push the EU to up its usage of nuclear and, inevitably, coal. Of course, Russia might end up making that decision for the EU, in retaliation for its support of Ukraine.

At this juncture, the obvious needs pointing out: if you are highly dependent for your energy on an actor whose values you are not aligned with, that is a recipe for disaster.

As the world watches how Europe handles its predicament, questions of alignment with foreign actors are likely to boost detractors of foreign ownership of critical infrastructure. While some sources of capital (think sovereign wealth funds from certain geographies) are already in the firing line, it is not beyond the pale to suggest governments might become increasingly skittish about most kinds of foreign ownership. Investors might also start asking tougher questions about where and alongside whom their money is being deployed.

There is more to be learned on the ESG front. Leaving aside the glaring moral quandary Timmermans alludes to above, the EU’s bind highlights how important it is to ensure alignment across the supply chain. As we wrote recently, natural gas can be a cleaner alternative to coal, but it needs to be done responsibly, with methane leaks a problem. According to a recent report by the International Energy Agency, methane emissions are about 70 percent higher than governments have reported, with Russia the world’s second-largest emitter.

“Putin has deliberately hidden Gazprom’s massive methane leaks for decades, fooling a complacent Europe. In fact, Russia’s huge fugitive emissions of methane make its natural gas worse from a climate perspective than the coal it’s meant to replace,” Paul Bledsoe, a strategic adviser at the Progressive Policy Institute, told the Guardian following the report’s publication.

“People talk about ESG yet it seldom gets tested,” Quinbrook Infrastructure Partners co-founder David Scaysbrook said, after the manager terminated its contracts with Gazprom in the wake of Russia’s attack on Ukraine. “Let’s all be judged by our actions and do what we can that’s right.”

If there’s a lesson, then, as Europe gets sorely tested, it’s this: while doing the right thing may be costly, not doing it is costlier still.