Investors in Fossil Fuel Companies Boost Focus on Carbon Asset Risk in Warming World

October 16, 2015 /3BL Media/ - In the past year, carbon asset risks in the fossil fuel industry have escalated from a fringe topic to a front-and-center concern driving key decision-making across all global energy companies and investors owning them. So concludes a new report issued today which cites climate change pressures, regulatory trends and market forces that have triggered a heightened focus by investors on how energy companies are grappling with the rapid transition to a low-carbon global economy.

The report, Carbon Asset Risk: From Rhetoric to Action, was authored by Ceres, the Carbon Tracker Initiative, Energy Transition Advisors and the 2° Investing Initiative.

According to Shanna Cleveland, director of the Carbon Asset Risk Initiative at Ceres and a lead author of the report,

“We have seen a transformation in how fossil fuel companies think about climate change,” said Shanna Cleveland, a report lead author and director of the Carbon Asset Risk Initiative at Ceres, a nonprofit sustainability advocacy group. “While companies used to see climate change as a minor and strictly long-term regulatory concern, they are now beginning to see it as a more immediate risk to their business strategies. As a result, fossil fuel companies are taking a much harder look at what a low-carbon future will mean for their businesses.”

Key trends cited in the report include:

• After universally rejecting the idea of carbon asset risks two years ago, fossil fuel companies have cancelled more than $200 billion of projects, primarily oil & gas projects, due to price pressures and weakening fossil fuel demand.
• Regulatory and technology forces are causing profound shifts in global coal markets, especially the US where coal demand has plummeted in recent months and China where coal demand is close to peaking.
• Though markets have been the primary force behind cuts to capital expenditures, investor action has also been key to changing how companies think about the need to address Carbon Asset Risk.
  
  • CAR-related shareholder resolutions at BP, Shell and Statoil all received greater than 98 percent support from investors, which is particularly significant since these resolutions directly challenged the current business models of those companies.
  • Companies including BP, Statoil and BHP have begun to stress test their portfolios against a variety of low carbon/2 degree scenarios, a step which investors believe is critical to ensure that the industry is resilient in a low-carbon world.
  • Major Oil companies including BP, Shell, BG, Eni, Statoil, and Total have called for a global carbon price.
  • A majority of global investors this year supported proxy access resolutions – seeking more direct ability to nominate independent board members – at 23 of 33 leading oil companies despite company opposition. Nearly all of these resolutions were driven by investor concerns that company boards lack diverse perspectives in approaching low-carbon global trends and carbon asset risks.

"In many senses markets have recently imposed their own severe stress test on high carbon fuels, some of which we believe is structural—not just cyclical—reflecting long term risk factors including climate issues," according to Mark Fulton, report editor and founder of Energy Transition Advisors. The report provides an explanation of the forces that have led to these dramatic market shifts and provides evidence about the structural changes that are at work in the coal, oil and gas and electric sectors.

Still, too many companies are focusing on how they talk about climate rather than changing how they act. As Robert Schuwerk from Carbon Tracker Initiative explains, "Fossil fuel companies are beginning to recognize that they must heed shareholder concerns and consider how their business models can adjust to a low-carbon transition.  However, companies need to go beyond debating the likelihood of such a transition and provide decision-relevant information to investors on how such a transition would affect their business models."

Christopher Weber from 2° Investing Initiative agrees: “Only by understanding future-looking information about companies’ positioning, such as capex and R&D decisions, can investors truly assess the full risk to carbon-intensive companies’ business.”

The report confirms that momentum has been building, but as we move towards COP21 in Paris, it is critical that investors continue to build support and commitments from fossil fuel companies to play a constructive role in reaching a global agreement.

About Ceres
Ceres is a nonprofit organization mobilizing business leadership on climate change, water scarcity and other global sustainability challenges. Ceres directs the Investor Network on Climate Risk (INCR), a network of more than 110 institutional investors with collective assets totaling more than $13 trillion. Ceres also directs BICEP, an advocacy coalition of 36 businesses committed to working with policy makers to pass meaningful energy and climate legislation. For more information, visit www.ceres.org or follow on Twitter @CeresNews.