Investors Concerned Over Climate Change

Environmental activists and energy industry companies are usually not on the same page when it comes to climate change. Energy industry giants like Royal Dutch Shell or Exxon Mobil owe their allegiance to their shareholders, and that is who they must satisfy. When those shareholders question energy company planning with respect to climate change, there is likely to be a quick and thorough response. And that is what happened.

In April 2013 an organization called Carbon Tracker issued a report titled Unburnable Carbon. Carbon Tracker receives funding from an array of philanthropic funds concerned about sustainability, including such well-known names as the Rockefeller Brothers Fund. The report found that in 2012 alone, the 200 largest publicly traded fossil fuel companies collectively spent an estimated $674 billion on finding and developing new reserves, some of which may never be utilized. Some of the terms used in the report need to be defined. “Unburnable carbon” is fossil fuel energy sources which cannot be burnt if the world is to adhere to a carbon budget that seeks to keep global warming from exceeding a specific temperature increase, in this case called the “2 degree Celsius (2ºC) scenario.” These fossil fuels could be used for purposes that do not require burning such as in petrochemicals. Energy company assets that are devalued or become liabilities because they cannot be used are termed “stranded assets.”

In response to the report by Carbon Tracker, a group of 70 global investors managing more than $3 trillion in assets established a relationship with CERES, a nonprofit organization coordinating business and investor leadership on climate change and other environmental issues. With coordination by CERES, in September 2013 the investors sent letters to the world’s 45 largest oil, gas, coal, and electric power companies, asking them to assess their financial risks that might accrue should changes in demand or price occur. As the CEO of the California Public Employees Retirement System, Anne Stausboll, wrote: “We have a fiduciary duty to ensure that companies we invest in are fully addressing the risks that climate change poses.” Thomas P. DiNapoli, trustee of the $160.7 billion New York State Common Retirement Fund added: “Institutional investors must think over the long-term, which means that we must take environmental risks into account when we make investments.”

On May 16, 2014 Royal Dutch Shell responded to the inquiries from shareholders. Shell wrote, “We do not believe that any of our proven reserves will become ‘stranded’.” Exxon and Shell both projected that demand for fossil fuels will remain high, and they believe that governments will not “tackle and resolve” the climate issue before 2100. In other words, the energy companies are planning on business as usual. Carbon Tracker took issue with many of Shell’s conclusions. Carbon Tracker estimates that the minimum time from discovery of a new source to production of oil is 10 years and 15-20 years for complex projects such as deep water or oil sands, by which time the level of demand could be drastically reduced. Carbon Tracker reported that Shell’s strategy views gas as a long-term energy alternative, as Shell believes that any energy transition away from oil will take enough time that it should not impact investment decisions for the foreseeable future.

Admittedly many nations that have committed to the 2ºC target have yet to enact policies aimed at achieving that goal. Carbon Tracker concludes that, “Rather than simply note how the status quo on global climate policy falls short of ultimate goal, prudent companies will note these steps [taken by the U.S. and China] toward a low-carbon world and consider the consequences for their business models in a scenario where such steps accelerate in the future.”

Whether the Carbon Tracker report and its follow-up by institutional investors ultimately impacts investment decisions by these investors remains to be seen. As of this writing no response from investors was reported.

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