Energy investors pile on the pressure

Energy investors pile on the pressure

FOR IMMEDIATE RELEASE
Fossil fuel companies are feeling the heat from investors concerned that moves towards a global low-carbon economy could leave many of their assets worthless.

LONDON, 25 October – In recent days a group of 70 investment managers from around the world – controlling funds worth a total of more than US$3 trillion – have launched the first ever coordinated campaign aimed at making the large energy and power companies disclose how they assess the risks of climate change.

Under what is called the Carbon Asset Risk (CAR) initiative, the investors have sent letters to 40 of the world’s major oil and gas, coal and electric power companies requesting detailed responses to questions about the financial risks posed to corporate accounts by climate change. The companies have been asked to provide answers before the next annual round of shareholder meetings begins early next year.

The CAR campaign follows on from a number of other initiatives, with increasing numbers of shareholders around the world demanding more corporate disclosure on the impact on company revenues posed by climate change.

The CAR investors, mainly based in the US and Europe, include California’s two largest public pension funds and the UK-based Scottish Widows Investment Partnership, one of Europe’s largest asset management companies.

“We would like to understand (the company’s) reserve exposure to the risks associated with current and probably future policies for reducing greenhouse gas emissions by 80% by 2050”, says the investors’ letter.

“We would also like to understand what options there are for (the company) to manage these risks by, for example, reducing carbon intensity of its assets, divesting its more carbon-intensive assets, diversifying its business by investing in lower carbon energy sources or returning capital to shareholders.”

Radical cutbacks required

The UN’s Intergovernmental Panel on Climate Change (IPCC) and other international bodies say that in order to limit the rise in global average temperatures to 2C above pre-industrial levels by 2050 there must be a radical cut-back in the use of fossil fuels. This means that a large portion of fossil fuels already discovered – and which are listed as assets on the books of the corporate energy giants – must stay in the ground.

“As long-term investors, we see the world moving toward a low-carbon future in which fossil fuel reserves that companies continue to develop may actually become a liability, which could take a toll on shareholder value”, says Jack Ehnes, the head of the California State Teachers’ Retirement System, the second largest public pension fund in the US, managing assets of $172 bn.

According to a recent report produced by the Carbon Tracker group and the Grantham Research Institute on Climate Change and the Environment the world’s 200 largest publicly quoted fossil fuel companies spent an estimated total of $674 bn in 2012 on finding and developing new reserves of fossil fuels – some of which may never be used, becoming what are termed “stranded assets”.

“Companies must plan properly for the risk of falling demand by stress-testing new investments to minimize the risk our clients’ capital is wasted on non-performing projects”, says Craig Mackenzie, head of sustainability at Scottish Widows Investment Partnership.

The CAR campaign is being coordinated by the Carbon Tracker group and Ceres, a US-based organisation which lobbies for more sustainable business practices.

“Fossil fuel companies are the biggest sources of carbon pollution by far, which means they are also uniquely positioned to lead the world in responding to global climate risks”, says Mindy Lubber, the Ceres president. – Climate News Network

Climate action ‘could halve energy firms’ worth’

Climate action 'could halve energy firms' worth'

If the world succeeds in reaching its targets for curbing greenhouse gases, a leading bank says, this will mean huge quantities of oil and gas reserves must be left unused.

LONDON, 2 February – Oil and gas multinationals could lose up to 60% of their market value if the world cuts its carbon emissions to limit climate change, according to the world’s second-largest bank.

This is the first time the financial sector has been warned by one of its own that shares could plummet if the necessary action is taken to prevent disaster.

The study, Oil and Carbon revisited: Value at risk from ‘unburnable’ reserves, is published by HSBC Global Research.

The International Energy Agency (IEA) said in its 2012  World Energy Outlook that in order to have a 50% chance of limiting the rise in global temperatures to 2°C, only a third of current fossil fuel reserves can be burned before 2050.

Staying within the 2°C limit would mean keeping carbon dioxide concentrations in the atmosphere to 450 parts per million (ppm). They are already at 390 ppm, and are increasing by about 2 ppm a year.

To stop them crossing the 450 ppm boundary, scientists say the world can emit only around 1,440 gigatonnes (Gt) of carbon between now and mid-century. It has already emitted 400 Gt, leaving only around 1,000 Gt in the budget – one-third of current proven oil and gas  reserves.

The 2°C target has been the goal of many policymakers for years, although there is a growing scientific consensus that it is already out of reach.

The World Bank has said that the Earth may warm by as much as 4°C, and some predictions suggest that even a 6°C rise is possible – a prospect whose impacts would be devastating.

“We haven’t forgotten climate change, but we have forgotten that we have to do something about it”

The HSBC study says the economic impact on parts of the hydrocarbon industry of exploiting only a third of fossil fuel reserves would also be devastating.

The Norwegian company Statoil would be hardest hit, with 17% of its reserves unburnable.  The study says about 6% of BP’s reserves are at risk, 5% of Total’s and 2% of Shell’s.

But it says a bigger risk is that reduced demand for fossil fuels could force down oil and gas prices, meaning that between 40 and 60% of leading fossil fuel firms’ current market capitalisation – essentially their net worth – could be at risk.

The study’s authors say: “We believe that investors have yet to price in such a risk, perhaps because it seems so long-term.

“And we accept that our scenario probably exaggerates the risk as we assume a low-carbon world today rather than beyond 2020.”

They advise investors to focus on companies with low-cost projects, and say they think capital intensive, high-cost projects like heavy oil and oil sands will be the riskiest.

The HSBC authors’ argument that much of the world’s fossil fuel reserves cannot be used if climate change is to be tackled seriously is not new: it has been advanced  by scientists and conservationists for years.

What is striking is that this appears to be the first time the argument has been made by the financial sector itself. James Leaton of  the NGO Carbon Tracker told the Climate News Network: “The question this raises for investors is this: is this investment compatible with a 2°C world?”

Andrew Simms, a fellow of the new economics foundation, said: “I wonder whether this will wake us up from the strange spellbound state that has persisted since the Copenhagen climate summit in 2009?

“We haven’t forgotten climate change, but we have forgotten that we have to do something about it.” – Climate News Network