Should We Carry On As Usual & Risk Stranded Assets With Fossil Fuel Investments?

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Those of us in sustainability advocacy know that, in order to achieve low-carbon growth and development, increasing our investments in energy efficiency, innovation, and broader clean energy technologies is essential. The UN says it. Forbes claims that clean energy investment isn’t really a cost at all, as some others argue. The National Resources Defense Council states that clean energy is so important that governments should lead the charge.

If clean energy is so transformative, then why are so many investors concerned about their portfolios filled with fossil fuel stocks that may become stranded assets?

Oil & Gas Projects in the Works

The top 10 energy companies are designing investments approaching $1 trillion by 2030, according to an expose by Bloomberg Businessweek. If projects continue along as planned, new oil fields will be located and tapped, drones and drilling rigs will be purchased, hard-to-reach deep-sea sites will be pursued, and crude oil refineries and trunk or transmission pipelines will be built. The bet is that the oil and gas industry will continue to reap extraordinary profits for shareholders in fossil fuel extraction as markets will grow in response to the relatively low commodity prices that are being fostered by new oil and gas supplies.

However, as governments commit to robust targets that limit greenhouse gas (GHG) emissions, broad consumption of carbon-based fuels will likely fall, and prices will tumble commensurately.

Should investors beware? You know who you are. Is your karma coming to haunt you? You recognize in your heart-of-hearts that your past profits have contributed significantly to climate change, and the fossil fuel investments you hold dear for a flush portfolio may be fleeting.

Stranded assets are becoming the talk of the investment industry.

How Tenuous is the Oil & Gas Infrastructure?

The October, 2018 Intergovernmental Panel on Climate Change (IPCC) report revealed how humanity has about 12 years to avoid the most dire consequences of climate change. This United Nations’ scientific panel outlined that, to avert catastrophic sea level rise, food shortages, and widespread drought and wildfire, emissions must be reduced by 45% from 2010 levels and by 100% by 2050.

What happens if the cost of extracting a barrel of oil is $40, and that barrel can only be sold for $35? The vast investments to produce that oil will have been wasted. The result is what is now commonly referred to as “stranded assets.” As consumers  — individual, municipal, and corporate — alter their coal, oil, and gas consumption habits, they are igniting consequences throughout the global economy. Boardrooms across the globe are filled with whispers about corporate climate dilemmas, which are now posing all-too-real likely future risk scenarios.

Will a declining company valuation become the norm as fossil fuel holdings reduce to little more than stranded assets?

For example, the US has officially entered the “coal cost crossover” – where existing coal is increasingly more expensive than cleaner alternatives. Today, local wind and solar is positioned to replace approximately 74% of the US coal fleet at an immediate savings to customers. By 2025, this number grows to 86%, according to a recent report by Energy Innovation.

In that scenario, with fast immediate action to address climate change, fewer companies would invest in fossil fuels, so that more portfolios would be rife with stranded assets. Add in incentives that invite more consumers to make the switch to electric cars and away from coal-fired power plants, and a familiar foundation of dependency on fossil fuel companies could crumble.

Momentum is building. At the end of 2018, over 1000 institutions with managed investments worth almost $8 trillion had committed to divest from fossil fuels. Fund managers and fiduciaries are increasingly aware of the risks of climate breakdown and deciding of their own accord to divest from morally unsound and financially risky industries.

The UN Environment Program Finance Initiative, a collaboration with institutional investors, argues that implementing the needed measures today would cost the globe’s 30,000 biggest companies $4.3 trillion over the next 15 years They add that waiting another decade to impose stricter limits on carbon output would boost that to $5.4 trillion.

The realization that investors may need to rethink fossil fuel holdings is causing angst among oil companies, automakers, and consumer-product manufacturers. Some say they’ll fund a campaign advocating a US tax on carbon dioxide emissions. Others are in even earlier stages of acknowledgment, with shareholders voting on measures to establish board committees to address climate change issues.

What are the Oil & Gas Companies Planning for Carbon Reduction? Much of Anything?

Meanwhile, legacy energy companies say they’re confident their investments make sense. Exxon sees “little risk” from declining oil and gas demand even in a scenario where policymakers limit global warming to 2C above historical norms, the company said in its 2019 Energy & Carbon Summary. Yet, being prudent, they do acknowledge that their company has been “responding to changes in society’s needs. With long-standing investments in technology, we are well-positioned to meet the demands of an evolving energy system.” Keywords there to note: “changes in society’s needs,” “investments in technology,” “evolving energy system.” This is careful doublespeak, eh?

All too often the oil and gas companies dissemble and place blame rather than take responsibility for their climate degradation and likely stranded assets.

BP and Royal Dutch Shell both pledged $1 million each to Americans for Carbon Dividends, the lobbying arm of the conservative right Climate Leadership Council, which is advocating for a tax-and-dividend plan that would give the taxes collected back to US households. They say that their plan is “based on the conservative principles of free markets and limited government, and offers the most popular, equitable and politically viable climate solution.” Always help capitalism thrive, right?

A Plan of Action to Move toward Sustainable Energy Investments

“A Call for Action: Climate Change as a Source of Financial Risk” is an April, 2019 report issued by the Network for Greening the Financial System. Describing climate change as having a foreseeable  and irreversible nature as well as far-reaching impacts in breadth and magnitude, the consortium provides 6 recommendations for central banks, supervisors, policymakers, and financial institutions to manage environment and climate-related risks.

1. Integrating climate-related risks into financial stability monitoring and
   micro-supervision.
2. Integrating sustainability factors into own-portfolio management.
3. Bridging the data gaps.
4. Building awareness and intellectual capacity and encouraging technical assistance and knowledge sharing.
5. Achieving robust and internationally consistent climate and environment-related disclosure.
6. Supporting the development of a taxonomy of economic activities.

Maybe now, with public opinion on global warming shifting from ignorance to alarm, oil companies will switch from funding campaigns of climate denial that block regulations to more productive market-based problem-solving.

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