Investors Finally Focusing On Risk Of Stranded Assets, Says Ernst & Young
Originally published on RenewEconomy.
By Sophie Vorrath
Climate change and the risk of stranded assets have been named as two major areas of increasing investor focus and concern in the latest global survey of institutional investors by Ernst & Young.
Tomorrow’s Investment Rules 2.0, EY’s second annual survey of more than 200 global institutional investors, including in Australia, finds that nearly two-thirds (63.6%) of respondents believe companies do not adequately disclose the environmental, social and governance (ESG) risks that could affect their current business models.
Top among these risks, according to the survey, was that of stranded assets; a risk most recently associated with the energy and resources sectors – or more specifically, the fossil fuel sector – as renewables start to thrive and world leaders commit to an increasingly tight global carbon budget, in a bid to limit dangerous global warming.
And investors are right to be concerned. According to that carbon budget, around 80 per cent of the worlds untapped coal reserves need to stay in the ground. In dollar terms that’s a lot of money: a recent Citigroup analysis predicted this could result in $US100 trillion of potential stranded assets in the fossil fuel industry.
Of course, this huge risk has been one of the major reasons the Adani-owned Carmichael coal mine in Australia’s Galilee Basin – with its as-yet untapped supply of 60 million tonnes of coal a year – has struggled to get off the ground, with investors increasingly reluctant to stump up $16.5 billion in an increasingly compromised thermal coal market.
According to the EY survey results, nearly two-thirds of respondents (62.4%) expressed concern over stranded asset risk and more than a third (35.7%) said their funds had divested holdings of a company’s shares in the past year due to the risk of stranded assets, while another 26.7% expect to monitor it closely in the future.
The survey also revealed that the top areas causing investors to reconsider prospective investments were risk or history of poor environmental performance (75.6% would reconsider the investment) while the greatest increase in focus for investors was climate change, along with human rights.
The survey’s findings are interesting in light of the recent allegation that Australia’s $117 billion Future Fund – the country’s largest public pension fund – was still completely ignoring the mounting risks of climate change to its portfolio of investments.
As we reported here, a freedom of information request submitted by the Asset Owners Disclosure Project (AODP) revealed last week that, according to its records, the Future Fund’s board of guardians had not considered the issue – even once – despite being put under increasing pressure to factor it in.
This was the same finding revealed more than four years ago, after an FOI request from the Climate Institute for minutes of all Future Fund meetings where ”climate change” was mentioned turned up zero matching documents.
The latest AODP FOI request has also confirmed that the Fund has not once considered reporting its plans for climate risk protection to allow itself to be measured against other funds around the world.
This week, Greens Senator Larissa Waters followed up on the matter by asking Future Fund managing director, David Neal, if the fund looked at its exposure to the risk of enormous stranded assets?
According to a statement from the AODP on Wednesday, Neal replied thus: “I think the way that we look at it—the policy that the board applies—is that these kinds of risks are integrated into the investment decision-making.
“We expect our investment managers that we employ on our behalf, who choose the particular stocks to invest into, will have regard to all the risks impacting the sustainability of the business, the quality of the business and the flow of future earnings into that business.”
Asked by Senator Waters if he had rethought the decision for the Fund not to participate in the AODP global climate index, or any other disclosure mechanism, he replied: “No, because the way that we have regard to these risks, as I have said, is to integrate those risks into the prospects for each individual company.”
Similarly, in a response emailed to RenewEconomy, a Future Fund spokesperson said the AODP was “simply wrong” to claim the Board did not consider climate change.
“The Future Fund has an environmental, social and governance policy that applies to all environmental issues including climate change. The policy has been explained many times: in Senate Estimates hearings, in our annual reports, in papers on our website and in media briefings,” the statement said.
But John Hewson, AODP chair, has described Neal’s response in the Senate Estimate hearing as “staggering.”
“(Neal) is basically saying that the whole risk is the sum of the parts – it’s classic sub-prime mentality,” Dr Hewson said. “The Australian public deserve to know the odds their Future Fund is putting on their greatest ever gamble.”
Perhaps the fund should also observe what EY analysts have described as a “clear signal” that investors’ expectations and attitudes to non-financial reporting have shifted.
“There is an enormous opportunity for companies to capitalise on a growing thirst for integrated and value-driven reporting, that demonstrates just why their business will create value and provide returns for shareholders in the longer term,” said EY Oceania’s Climate Change and Sustainability Leader, Dr Matthew Bell.
“Companies that are able to provide the type of non-financial information that investors want may enjoy greater investor attention and, ultimately, be better positioned to attract and retain investors’ capital.”
Indeed, the EY survey found significant increases in the number of investors embedding non-financial disclosures into their investment decision making, with 79.1 per cent who undertake some form of assessment of companies’ environmental and social impact statements (up from 64.4% in 2014)
An increasing number of investors are conducting structured, methodical evaluations of this information – 37% in 2015, nearly double the 19.6% in the 2014 survey.
Reprinted with permission.
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This is great news. If we can take away FF development money they can’t move forward.
I know we all love the cool new tech, but this is probably even more important to increase the rate of renewable adoption.
Problem is, they’ll find a way to fleece us out to pay for the profits these stranded assets would have earned them. Take for example the electric utilities investments on coal and natural gas plants.
Well, they will certainly try, and it would be foolhardy to predict a zero success rate for their doubtless well-financed and well-connected efforts. But I don’t think we need to cede them success in advance.
And there are some hopeful precedents, such as the evaporation of value from many coal-producing major’s stocks. It’s been largely unlamented by any except coal stockholders and, AFAIK, there’s no sign so far of political traction to try to ‘remediate’ this.
The real challenge is making these attempts and successful extortion efforts visible to the public. Right now, the huge, interconnected subsidy schemes that nuclear plants get for construction, operation and decommissioning almost seem intentionally complicated in order to confuse / disinterest the average person. Convoluted rate structures, cost recovery, etc. for other plants are the same. What we need is simple line items on electricity bills like:
$X.XX per kWh charge for nuclear plant cost overrun
$X.XX per kWh charge for dirty coal plants that become uneconomic
And so on.
The problem is that each state will operate independently and many of them, plus most utility companies, have a vested interest in confusing people when it comes to what makes up the charges on somebody’s electricity bill.
Yes. They use divide and conquer pretty well don’t they.
Finally? The US coal industry has been crashing for a few years now.
The big question is when will it start happening for oil? If GM really gets batteries at $145/KWH and Tesla delivers a 200+ mile range EV for $35K, plug-in vehicles are going to start taking a real bite out of oil.
The coal stock crash is at least three years old but seems to have gone mostly un-noticed until recently. I expect realizations about oil to be no better
Well, coal was MUCH easier to kill off. It had to compete with nuclear, solar PV, natural gas, wind, hydropower, etc.
Oil doesn’t have much competition . . . until now. Vehicle electrification has only just started. It is tiny right now. But it looks like it is poised to grow with the battery prices starting to approach the $100/KWH goal.
And by what some oil analysts have said, even just a small but respectful single digit market share penetration could wreak havoc on the oil markets since they are so tight. But the sad thing is that dropping oil prices would cause some people to remain addicted to oil. I think we’ll have to start taxing it more.
Also even a small drop in oil sales could start closing gas stations too. They have very thin margins.
Several international oil companies already distribute more cash in the form of shareholder dividends than their current cashflow allows. They accomplish this by borrowing from banks (believe or not!) and reducing investments in exploration and development. These companies have already decided to liquidate their companies and will in the near future be forced to shut down or sell out if current low oil prices continue.
So far only private investors have been considered. You can bet the experts at the pension schemes won’t need any prompting on this issue, surely pivotal?
They are Very Serious People who would rather be wrong with their peer group than take a chance on some hippie theory. They are starting to divest from coal only now, after the share prices tanked. We can hope for more from cynical bears at hedge funds, always on the lookout for vulnerable companies with overpriced shares.
I think that the people at pension schemes are only interested in the dividends rather than the share price. Those dividends haven’t tanked – yet.
Any conglomerate with FF “assets” on the books needs to divest ASAP so that their shares/stocks are less toxic to investors.