The world’s top 200 fossil fuel companies spent $674 billion dollars on exploring for new resources and reserves last year alone. Now major investors are worried these firms—which include the most profitable companies on the planet today—are literally sinking their money into the ground.
At issue is the emerging idea of "unburnable carbon," and a group of long-term-minded investors together representing $3 trillion in assets has recently written letters to the world’s major fossil fuel company's asking them to address it.
As climate change become more urgent, the coalition of 70 investors has become convinced that fossil fuel companies might not even get to burn the reserves they already hold. Maybe not in five or 10 years, but perhaps in 20 or 30, the pure mathematics of the situation could eventually cause the sectors’ market value to plummet—-at least if companies stay on the path that many are on today.
"Companies like ExxonMobil and Peabody Energy are spending billions of dollars of our shareholder capital on a future that looks a lot like the present, in terms of fossil fuel use," says Jack Ehnes, CEO of the California State Teachers’ Retirement System, a fund that manages $175 billion in assets. "The fact that these reserves might be left in the ground could result in liabilities that would take a major toll on shareholder value," he says.
The mathematics go something like this. To avoid planetary chaos, international governments have agreed that it’s crucial to limit the world to 2 degrees of warming, which would require stabilizing the atmosphere at concentrations of 450 parts per million of CO2. From there, it’s relatively easy to calculate how much carbon it is possible to burn before reaching that threshold (absent major capture and storage efforts). The International Energy Agency concluded last year that no more than one-third of the proven fossil fuel reserves around the world can be consumed before 2050 to achieve that goal.
The rest? For companies like Exxon and BP, reserves of untapped fossil fuel assets could be left "stranded" in the ground. Investment bank HSBC believes that some companies could lose 40% to 60% of their market value in this kind of situation, the investors’ letter notes.
Of course, the reality today is that most national governments are far from passing any kind of strict carbon regulations—a fact that stopped Craig Mackenzie, head of sustainability at one of Europe’s largest asset management companies, from putting the issue at the top of his "to-do" list a few years ago.
But more recently, he was convinced that "stranded asset" concerns were more urgent than he realized because of the coal industry's recent experience.
"We kind of put it on the back burner," says Mackenzie. "But in the U.S., coal demand has fallen 20% in the last five years," he says, citing the fact that cheap gas and new regulations on coal-fired power plants is causing some firms to lose up to two-thirds of their market value.
"All of this makes the risks of unburnable carbon and stranded assets seem to be here already. It’s not something that has to wait for a global climate deal to come," he says. "It seems, at least for coal, the door might be closing already." His firm, Scottish Widows Investment Partnership, has reduced its holdings in "pure play" coal companies to nearly zero.
The letters were already sent, and Ceres, the sustainable investing group coordinating the coalition along with the Carbon Tracker initiative, says that many of the 45 firms have responded already, though it wasn’t willing to share the specific response of different firms at this early stage. Many are taking the concerns seriously and say they already are conducting or are starting to conduct risk and strategic assessments that deal with this issue. Others were dismissive or did not respond.
Fossil-fuel companies won’t necessarily be doomed by climate change, however, the investors' letter notes. The ones that plan their strategies well and make investments in emerging alternative energy sources, as some already have been, could be well positioned to emerge in an energy economy dominated by what are considered "alternative" sources of energy today.
"The valuations that we’re seeing now, these are based heavily on exploration and future reserves," says Julie Fox Gorte, senior vice president for sustainable investing at Pax World Management. "That’s going to change."
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