Carbon Asset Risk: A Review of Progress and Opportunities

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Courtesy of Ceres

The concept of carbon asset risk – that the world’s fossil fuel companies hold at least three times more oil, gas and coal reserves than can realistically be burned in order to avoid potentially catastrophic climate warming – has risen to the forefront as Wall Street analysts, investors, regulators and governments increasingly recognize carbon asset risk as an actionable, systemic financial risk that must be brought under control. Fossil fuel majors are largely ignoring global trends that are fundamentally changing demand for their products—rising costs of producing unconventional fossil fuel reserves, falling costs for renewable energy and efficiency advances that are cutting into coal and oil demand growth.

In September 2013, Ceres and the Carbon Tracker Initiative launched the Carbon Asset Risk (“CAR”) Initiative with support from the Global Investor Coalition. The CAR Initiative was launched as 75 investors representing $3.5 trillion in assets called on 45 of the world’s largest fossil fuel companies to come clean on the risks of stranded assets.

This report chronicles major shifts in the financial landscape since the CAR effort began. Some of these changes can be linked directly to actions or progress achieved through the CAR Initiative or its many collaborative partners, while others are more indicative of the increased relevance of the carbon asset risk framing around wasted capital, stranded assets and unburnable carbon.

Five key changes highlight the momentum the Carbon Asset Risk Initiative has directly spurred or helped accelerate:

1. Oil, gas, coal and electric utility companies have disclosed new, actionable information.

In response to investor requests, more than 20 companies have provided detailed information about how they view their exposure to carbon asset risks, including: whether they put an internal price on carbon emissions; what screening prices they use for sanctioning new extraction projects; whether they assess impacts from a low-carbon global scenario where global temperature increases are limited to 2 degrees; and how they plan for climate-related physical impacts.

The quality of these first-ever disclosures varies, but overall they have changed the conversation and are beginning to generate important changes in the business models for major fossil fuel firms. These disclosures have provided valuable information for investors and advocates – information that has been used to challenge faulty demand assumptions and create new awareness about the risks and uncertainty of investing in fossil fuels. The increased disclosures have also spurred internal changes at companies. For example, former coal giants like BHP Billiton and Exxaro have affirmed the consensus on climate science and the need to reduce greenhouse gas emissions, while Total has made major investments in solar and Statoil has created a new renewable energy division focused on offshore wind.

2. The fossil fuel monolith is fracturing.

Growing “unburnable carbon” concerns in the investor community have forced fissures in the fossil fuel industry. The big six European oil companies are breaking with U.S. oil and coal companies. While Shell, Statoil and BP supported shareholder resolutions on climate change, each of which passed with 98.9%, 99.95% and 98.3% support, respectively, Chevron and Exxon continued to fight tooth and nail against shareholder resolutions that raised climate concerns. Shell, BP, Total, Eni, Statoil and BG Group have all abandoned any semblance of an alliance with coal by writing an open letter to the United Nations extolling the climate benefits of natural gas over coal and calling for a global price on carbon pollution.

3. Mainstream acceptance of carbon asset risk continues to grow.

From an analysis being commissioned by the Bank of England on the risks of stranded carbon assets to the G-20’s request for a rigorous review by the international Financial Stability Board (FSB) of the global economic risks posed by the threat of stranded assets, it’s clear that regulators and analysts are more aware of these risks than ever before and are beginning to act accordingly. Meanwhile, dozens of the world’s largest investors are pushing the world’s finance ministers to take action.

In what was perhaps the biggest indication of the tables turning on fossil fuels, the world’s largest importer and largest exporter of oil have both gone on record in ways that completely undercut the bullish energy scenarios the oil industry uses to justify its business decisions. First, the head of Sinopec said that China’s demand for diesel fuel could peak as early as 2017, and demand for gasoline could peak by 2025. Second, Saudi Arabia’s oil minister predicted that Saudi Arabia itself would wean itself off of oil by 2040 or 2050, replacing it largely with renewable energy.

4. Clean energy breakthroughs have severed the link between carbon intensity and economic growth.

Advances in renewable energy and technologies that integrate them into the electric grid are moving faster than anyone expected. In fact, solar power is now cheaper in parts of the world than fossil fuel power and UBS just predicted that solar will replace nuclear and coal and become the “default technology of the future to generate and supply electricity.” Furthermore, extreme weather events from droughts to flooding to heat waves and wildfires weigh in favor of more distributed energy systems built around renewables and energy storage, to promote resilience. Tesla’s new battery, for example, beat the sales record of Apple’s iPhone in its first week, and big data and efficiency along with major technology advances for electric vehicles and driverless cars are completely at odds with demand forecasts that underlie the investment decisions of fossil fuel companies. Companies like Exxon and Chevron are betting that the next 100 years will look a lot like the last 100 years even though the facts stack up against that.

5. Investors are turning up the pressure on boards to be accountable on carbon asset risk.

Ceres is working with INCR members to ramp up the pressure on boards members at fossil fuel firms. Nearly three-dozen fossil fuel companies faced resolutions this year focused on “proxy access,” or the right of major investors to independently nominate directors to the boards. Despite management opposition, resolutions received majority voting support at numerous companies, including oil companies Chevron, Anadarko, Apache, Cimarex, ConocoPhillips, EQT, Hess, Marathon, Murphy Oil and Range Resources; coal company Alpha Resources; and utilities AES, American Electric Power, DTE, Duke, First Energy and PPL. Shareholders also forced boards and CEOs to address their failure to adequately manage carbon asset risks by pushing resolutions aimed at adding board members with expertise on climate issues and directly challenging continued capital expenditures on high-risk fossil fuel extraction projects.

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