The shareholder activist group As You Sow has scored a landmark, first-of-its kind carbon risk disclosure agreement from none other than Exxon Mobil, which under its previous incarnation as Exxon was notorious for directly funding the climate change denial lobby.
The agreement was announced yesterday by As You Sow and its partner in the effort, Arjuna Capital (video available at the link). It addresses the emerging issue of “stranded” carbon assets, as energy companies keep plowing more dollars into fossil fuel investments that a growing number of analysts see as high risk, given the likelihood of global carbon regulation in the near future.
The Power Of Carbon-Aware Shareholders
The tool used as leverage by As You Sow and Arjuna was a shareholder resolution citing a recent International Energy Agency (IEA) statement that “No more than one-third of proven reserves of fossil fuels can be consumed prior to 2050 if the world is to achieve the 2° C [two degrees Celsius] goal, unless carbon capture and storage technology is widely deployed.”
In terms of stranded assets, the math is simple. Again citing IEA, the shareholder resolution states that proven fossil fuel reserves (coal, oil, and natural gas) total about 2,860 gigatons of potential carbon dioxide emissions, while the International Panel on Climate Change estimates that the limit on emissions is only 987 gigatons through 2100, if global warming is to be capped at an increase of two degrees Celsius.
This gap represents an enormous risk for investors, as competition ramps up with new alternative fuels creating downward pressure on fossil fuel prices. New energy efficiency technology is also adding to the pressure.
Concurrent with market forces, public pressure is mounting on governments to encourage, and to take advantage of, new energy technology. In the US, one notorious example is the phase-in of new efficiency standards for light bulbs, which started off as red meat for conservative politicians just two years ago and now raises barely an eyebrow.
Here’s the money quote from the shareholder resolution (bolded for emphasis):
Investors require additional information on how Exxon Mobil is preparing for potential scenarios in which demand for oil and gas is greatly reduced due to regulation or other climate-associated drivers. Without additional disclosure, shareholders are unable to determine whether Exxon Mobil is adequately managing these risks or seizing related opportunities.
We noted that thing about failure to seize opportunities on two accounts. Last year, we reported that Exxon Mobil had apparently ramped down an important investment in the promising algae biofuel field, moving away from a commercial-track position to focus on foundational research only.
The second item crossed our radar just last week, when Exxon also announced plans for a major expansion of its Baytown facility in Texas to convert natural gas to plastic, following on major investments in shale gas and oil fields. This is at a time when other companies, notably Shell, are beginning to shed their shale assets due to continued sluggish profits (and, quite likely, growing evidence of environmental and public health risks beyond carbon pollution).
The Exxon Mobil Carbon Risk Disclosure
The bottom line of the shareholder resolution was to request a report by Exxon with a deadline of September 2014, specifically addressing “the risk of stranded assets presented by global climate change, including analysis of long and short term financial and operational risks to the company.”
As of this writing Exxon has not formally announced its agreement. Our friends over at Fuel Fix cite email confirmation only so far from the company, but As You Sow and Arjuna certainly wasted no time in making it official. Yesterday, the two partners blasted a press release on PR Newswire asserting that they will withdraw the resolution in exchange for Exxon Mobil’s agreement to provide the requested information, particularly as it relates to the company’s business model, its plans for a “carbon-constrained” world, and the effect of climate risks on its capital expenditure planning.
Natasha Lamb, director of equity research and shareholder engagement at Arjuna Capital, lays out the risk of reserve devaluation in a carbon-constrained world:
More and more unconventional ‘frontier’ assets are being booked on the balance sheet, such as deep-water and tar sands. These reserves are not only the most carbon intensive, risky, and expensive to extract, but the most vulnerable to devaluation. As investors, we want to ensure our Companies’ capital will yield strong returns, and we are not throwing good money after bad.
We’re all for that, but let’s keep in mind the aforementioned vigorous pursuit of the shale market by Exxon Mobil. In addition to a major shale acquisition last year, rumors have been flying around this winter that the company is set to buy the beleaguered Chesapeake Energy, a major shale investor.
So, let’s see what happens to that disclosure agreement when September 2014 rolls around.
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