Carbon Bubble anyone? “The Scientific Trajectory is Clearly in Conflict”
October 25, 2013
Bit of the Carbon bubbly anyone?
PITTSBURGH — Some of the largest pension funds in the U.S. and the world are worried that major fossil fuel companies may not be as profitable in the future because of efforts to limit climate change, and they want details on how the firms will manage a long-term shift to cleaner energy sources.
In a statement released Thursday, leaders of 70 funds said they’re asking 45 of the world’s top oil, gas, coal and electric power companies to do detailed assessments of how efforts to control climate change could impact their businesses.
“Institutional investors must think over the long term, which means that we must take environmental risks into consideration when we make investments,” New York State Comptroller Thomas DiNapoli told The Associated Press in a statement. The state’s Common Retirement Fund manages almost $161 billion of investments.
Fossil fuels currently provide about 80 percent of all the energy used in the world. The pension funds say that because it takes decades to recoup the huge investments required for fossil fuel exploration, there’s a significant chance that future regulations will limit production or impose expensive pollution-control requirements that would reduce the fuels’ profitability.
Others signers of the letter include the comptrollers or treasurers of California, New York City, Maryland, Oregon, Vermont and Connecticut, as well as The Church of England Pensions Board, the Scottish Widows Investment Partnership, the investment firm Rockefeller & Co. and dozens of other funds that control a total of about $3 trillion. Only a fraction of that is with fossil fuel companies, however.
The American Petroleum Institute, which represents the industry, was examining the statement and did not immediately comment.
Big money quote:
“The scientific trajectory that we’re on is clearly in conflict” with the business strategy of the companies, Ehnes added, referring to the overwhelming consensus among top scientists from around the world that global warming is a man-made threat, that pollution from fossil fuels is the biggest problem and that many of the already-discovered fossil fuel reserves will need to stay in the ground to avoid extreme climate change.”
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The investors asked the companies to carry out the risk assessment in time for their 2014 annual meetings, generally in the first half of next year, and to publish details about their conclusions, subject to the constraints of commercial confidentiality.
About 30 companies have now replied to the letter, Ceres said, some rejecting the idea outright, some saying they planned to comply with the request and most saying they would consider the proposal.
Andrew Logan of Ceres, the investor network that works on environmental and social issues, which co-ordinated the letter, said: “Investors have already been burned by coal, because of the sudden drop in demand in the US, and there’s a concern that oil is going to go the same way.”
Mainstream forecasts of energy demand put out by government agencies, oil companies and consultancies still point to sustained growth in global demand for fossil fuels, including coal and oil, driven by emerging economies.
Mr Logan said: “We’re not necessarily predicting the future. But there are credible scenarios people have put forward that raise questions about the energy industry’s business model, and whether the pace of its capital spending makes sense, given those future prospects.”
HSBC has estimated that in a world where carbon emissions were constrained, oil and gas companies could lose 40-60 per cent of their market capitalisation.
The International Energy Agency, the rich countries’ think-tank, has said only one-third of the world’s proved reserves of fossil fuels can be used by 2050 if the world is to stay within the 2-degree limit, unless there is widespread use of carbon capture technology.
Anne Stausboll, chief executive of Calpers, the California state employees’ pension fund, said: “We cannot invest in a climate catastrophe.”
“Long-dated bonds of fossil fuel companies, some with maturities extending decades into the future, could readily become toxic financial assets as the credit quality of their issuers deteriorate in reaction to belated market responses to the harsh reality of stranded asset risk and systemic climate risk,” warns Joshua Humphreys of the Tellus Institute.
Market responses could include a carbon tax that will increase the price of fossil fuels and concurrently incentivize renewable energy investments. According to some estimates, average carbon prices could be more than $100 per metric ton if the full lifecycle costs of carbon were assessed properly.
This isn’t just a viewpoint that small institutional investors are espousing. Groups as diverse as Shell, Mercer, HSBC, prominent insurance companies and re-issuers, Standard & Poor’s and the International EnergyAgency have been giving clear warning signs about continuing to invest in fossil fuels. Experts leading the divestment conversation have different suggestions for pathways to fossil fuel divestment
For investors concerned about risk: Aperio Group’s report, “Building A Carbon Free Portfolio” has calculated that eliminating fossil fuel energy firms (as few as the top 15 to as much as the entire fossil fuel production industry) does not create a significant potential penalty of theoretical return.
This report demonstrates the low risk of removing fossil fuels from portfolios, which combined with the high (and increasing) risks of holding onto fossil fuel investments makes a very compelling case that fossil fuel divestment can be a safe and effective action.
For investors who aren’t sure where to begin: Joshua Humphrey’s article, “Institutional Pathways to Fossil-Free Investing: Endowment Management in a Warming World,” creates a framework to rebuild portfolios on fossil-free investments (and includes a number of institutional case studies), using three steps:
The first involves freezing fossil fuel investments in the 200 largest fossil fuel companies (measured by proven carbon reserves in oil, gas or coal). The second step builds on the first and reinvesting a minimum of 5% of the portfolio in fossil-free investments. The third and final pathway involves divestment and then strategic reallocation across all asset classes to manage climate risk and embrace sustainable investment opportunities.
In an interview about the economic impact of climate change, Al Gore has warned that individuals, investment funds, and institutions should divest from fossil fuel companies before the great “carbon bubble” bursts in world financial markets. Gore maintains that the largest risk ever to the financial markets is now global climate change.
Gore explains that, “There are $7 trillion worth carbon assets on the books of multinational energy companies today. There are another $14 trillion owned by sovereigns like governments in the Persian Gulf region. But just to take the public companies; the valuation of those companies and their assets is now based on the assumption that all of those carbon assets are going to be sold and burned. And they are not. The global scientific community has just reaffirmed that no more than one-third can ever possibly be burned without destroying the future.”
Gore likens these fossil fuel assets to sub-prime mortgages, saying “these are sub-prime carbon assets”. He explains that sub-prime mortgages had an artificial value based on the assumption that people who couldn’t make a downpayment on a mortgage would never default on their loans. The institutions selling them operated on the assumption that selling them on would magically eliminate the risk involved, at least for them. It was a self-serving illusion. Eventually, when the assets were examined more closely, it resulted in them being “suddenly and massively repriced, and that’s what triggered the global credit crisis, and detonated the Great Recession”.
For more discussion, see Al Gore’s interview at the link above or here. Yahoo wouldn’t let me upload or embed.
Then catch a counter argument from the very smart, not-a-denialist Dan Dicker, who is more pessimistic. I’m going to say I’m not sure Dan is as clued in to the magnitude of the changes we are seeing in the renewable sector as Gore is.