THE NEW ESG – For Energy, ESG Now Means Economics, Security and Geopolitics

With “energy dominance” comes great turbulence. President Donald Trump’s open-ended war against Iran reflects a US seemingly unconstrained by energy needs and ready to wield its own fossil fuels as instruments of power. In doing so, the US has switched from being an effective underwriter of global energy security to disrupter. The war also cements another shift, from the old ESG of environmental, social and governance factors shaping energy decisions, to new ones: economics, security and geopolitics.

l oil and gas. Flashing headlines mentioning just four places around the Persian Gulf — Hormuz, Kharg Island, Abqaiq and Ras Laffan — would herald a true global energy crisis. For much of the post-World War II era, the US mitigated such risks with a broad commitment to police shipping lanes and also deter trouble in the region.

Today, the US is a disruptive force on multiple fronts. Energy is a foundational element of this, with the country’s flip from net import dependence to net exports — a two-decade swing equivalent to the current annual energy demand of India — stoking Washington’s sense of autonomy. It is doubtful Trump would have risked a blockade of the Strait of Hormuz without it.

Jeff Currie, Carlyle Group Inc.’s chief energy strategist, wrote last year that a peak in “traded energy” was upon us as globalization went into reverse. It is perhaps a coincidence that fossil fuel trade as a share of supply peaked the same year Trump won his first election, but it’s a useful one regardless.

A more fragmented world means higher costs, and potentially existential disruptions, for the majority of countries which rely on imported fuels. Domestically produced energy, chiefly in the form of electricity, becomes more attractive. This offers a new source of value for zero-carbon energy such as renewables and nuclear power, whose green attributes have been devalued of late, particularly in the US. They can now tout the new ESG pitch.

Remaking energy systems built for a world of US-backed free trade is expensive and time-consuming. It is becoming unavoidable anyway.

Consider Europe, which finally wrestled with its dependence on Russian energy after missiles started hitting Kyiv. US exports of LNG provided crucial, if expensive, help back then. But can Europe really stake its long-term energy security on a mercurial ally that has cooled on supporting Ukraine, threatened to invade Greenland and started a war with Iran all in the space of a year or so?

Over the longer term, Europe must accelerate efforts on renewables and energy efficiency as part of a broader repositioning away from US dependence that encompasses trade, military readiness and even nuclear deterrence. Nuclear power, its huge expense perhaps justified as a form of defense spending, will also likely make a comeback. Germany is the nation to watch on that front.

China’s methodical development of a world-leading cleantech industry was predicated in part on limiting its reliance on oil and gas imported along sea lanes patrolled by the US Navy. Beijing has already blocked exports of diesel and gasoline in the wake of the Iran war, demonstrating the imperative of energy security. Domestic coal is also a pillar of that, China will likely keep twin-tracking mining with its leadership in renewables, electric vehicles and nuclear power.

Coal’s wider dispersion relative to oil and gas means it will also benefit from the disruption trade elsewhere. In green-minded Europe, for example, higher LNG prices arising from the war could encourage 22 gigawatts of coal-fired generating capacity back into the market, according to Bloomberg NEF, even if only temporarily.

In the “energy dominant” US, too, security of supply is a concern.

A sign of this came with Trump’s offer of US Navy escorts and insurance for ships transiting the Strait of Hormuz, echoing the so-called “Tanker War” in the 1980s, when the US was decidedly dependent on oil imports. With the US still part of global energy markets, “dominance” is not the same as “invulnerability.” Average US pump prices jumped this week back above where they were at Trump’s second inauguration. Shale may have blunted OPEC’s energy weapon, but the White House still fears irate SUV drivers. Similarly, Trump hosted several Big Tech executives on Wednesday, securing voluntary pledges to shield households from the electricity costs of datacenters powering artificial intelligence.

The AI boom is also emblematic of the new ESG, as Silicon Valley’s other voluntary pledge, to be net zero, gets demoted in favor of speed-to-market and reliability. This has enhanced the value of gas-fired power to Big Tech. But the AI boom has revealed that the biggest challenge in shale-rich America isn’t getting the molecules but instead securing the turbines and grid connections to use them. Hence, even as renewables lose federal support, their other, non-green attributes of underlying deflation and scalability mean they continue to dominate new generation projects.

This underscores the problems of Trump’s narrow focus on maximizing fossil fuel production and undermining alternatives. It makes little sense, for example, to shut down half-built wind farms in the midst of rising electricity demand and prices, except as a salvo in the culture wars. Nor does it make sense to roll back efficiency standards. The latter is especially pertinent when you consider that the biggest drop in US energy intensity, which is consumption per real dollar of gross domestic product, occurred in the decade after the 1970s oil shocks.

What was once called the rules-based order is now giving way to something more Hobbesian. Efficiency, security and reliability will take precedence in energy markets. Unlike the 1970s, coal and fission are not the only options available to importing countries that are trying to protect their grids, preserve their hard currency and mitigate the power of foreign petrostates. This is energy in an age of power.