The Risky Business of Fossil Fuels

Above, more from Jim Byrne’s interview with Lord Nicholas Stern, on the risks inherent in fossil fuel investments.

A number of studies in recent years have warned that stock markets around the world have overvalued companies with large holdings of coal, oil and gas.

The problem stems from the fact that countries including the UK agreed at a UN meeting in Mexico in 2010 to limit global temperature rises to 2C.

To achieve this, economists including Sir Nicholas Stern have calculated that between 60 and 80% of existing reserves of fossil fuels will need to remain in the ground, unburned.

Today’s report from the House of Commons Environmental Audit Committee (EAC) reiterates these warnings.

“The UK Government and Bank of England must not be complacent about the risks of carbon exposure in the world economy,” said Committee chair Joan Walley MP.

“Financial stability could be threatened if shares in fossil fuel companies turn out to be overvalued because the bulk of their oil, coal and gas reserves cannot be burnt without further destabilising the climate,” she said.

Kerry Dolan in Forbes:

Former New York City Mayor Mike Bloomberg, former U.S. Treasury Secretary Hank Paulson and hedge-fund-billionaire-turned-environmental-advocate Tom Steyer don’t typically agree on political issues. Bloomberg is an independent, Paulson a Republican and Steyer a die-hard Democrat. But all three men share a concern for the economic impact of climate change on U.S. business. Last fall, they decided to do something about it, and embarked on what they’re calling the Risky Business initiative, a project that will culminate in a report that will spell out the likely economic impact of climate change on U.S. business.

“I see this as a way to really impact the debate [on climate change],” said Hank Paulson, speaking from his office in Illinois. “It’s not just an environmental issue, it’s an economic issue. I thought investors were ignoring real risks of climate change.”

Paulson said the Risky Business report, to be released in June this year, is targeted at people who lead businesses of all sizes. It will look at the economic impact on various industries and different regions. “It goes into great detail, right down to the county level,” Paulson explained, cautioning that, “none of this is certain in terms of timing or extent of impact. No doubt, there will be a very real impact.”

The report will not suggest solutions, leaving that for businesses to decide.

Does it matter that Paulson, Steyer and Bloomberg have different politics? “We like the fact that we came from different political backgrounds. The whole idea was: Let’s stay out of politics,” said Paulson. “People turn off on this issue for various reasons, and often they turn off over politics.”

Despite their differences, Paulson, Steyer and Bloomberg do have a background in finance as a commonality. Paulson spent 32 years at Goldman Sachs, culminating in an 8-year stint as the investment bank’s chief executive officer and chairman. Steyer worked at Goldman Sachs before founding San Francisco-based hedge fund Farallon Capital Management in 1986; he retired from Farallon in late 2012. Bloomberg worked at Salomon Brothers before founding financial media firm Bloomberg LP in 1981. Paulson said he knows Steyer from his days at Goldman Sachs; he has known Mike Bloomberg for many years and sits on the board of Bloomberg’s foundation.