Stranded Carbon Assets: A Change Towards a Low Carbon Economy

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Sebastian Ljungwaldh
Sustainability Services EMEA

In late September 2013, the Intergovernmental Panel on Climate Change (IPCC) published its first report (of three) to assess the impacts of climate change and global warming. The IPCC concluded that fossil fuels are behind the majority of the increase in CO₂ concentrations since the industrial revolution and is due mostly to human activities.

To avoid going beyond a two degree Celsius increase relative to pre-Industrial levels the world cannot afford to release more than the touted amount of around 560Gt CO₂. If we are to prevent extreme weather events, rising oceans and changes in regional climates from happening, the global community has recognised that it will need to take drastic action on every level. However, some areas have shown to be of greater concern than others.

In light of this, the Carbon Tracker Initiative (CTI), a non-profit organisation, brought the concept of stranded carbon assets to the fore. The CTI scrutinises fossil fuel reserves held by publicly listed companies globally and challenges the communicated value associated with those hydrocarbon assets.

Interestingly, in one of their reports ‘Unburnable Carbon – Are the world’s financial markets carrying a carbon bubble?’ they estimate that if all proven oil, gas and coal reserves were exploited, five-times the carbon budget (an alarming 2,795Gt CO₂) would be released into the atmosphere – a future scenario that not even the climate scientists really understand the full scale of.

Nonetheless this leaves approximately 80% of these assets technically unburnable, and therefore will need to remain in the ground. These assets have become known as stranded carbon assets.

In the current situation, those oil, gas and coal companies who explore and exploit these reserves, are funded largely by institutional investors. This relationship has proven a loyal one over decades and rebalancing behaviours will be needed to drive change and incorporate a sustainable approach across investors’ portfolios. However, without clear regulatory pressures or economic opportunity, the majority of institutional funds are unlikely to divest in historically rewarding sectors such as coal or oil. And why would they? Since the economic downturn in 2008 oil and gas stocks globally have performed favourably as a sector, making them difficult to ignore.

Despite this, some awareness and action in addressing the risk that stranded carbon assets hold can already be seen. The idea of a carbon bubble has pricked up the ears of investors with evidence that this emerging concept has also stimulated a rise in demand of information from investors. A group of 70 global investors who manage more than $3 trillion wrote to 45 of some of the world’s largest oil and gas companies to demand and request what the financial impact this could have on their businesses.

Pension funds, which typically have long-term investment horizons, are seriously either weighing up their hydrocarbon investments or have already diversified their portfolio to reflect lower carbon risk exposure over the long term. Storebrand, a Norwegian pension fund, has already divested thirteen coal- and six oil companies from their portfolios. One of their key asset managers was quoted as saying “In my view, the largest gamble is to do nothing”.

Whether or not global leaders come to settle a binding agreement at the annual climate summit in Paris in late 2015, a shift to a low-carbon economy model will be needed to avoid dangerous climate change and to even give a fighting chance of staying within the carbon budget.

Oil, coal and gas stocks are currently a mainstay for most funds. Nevertheless, diversifying and divesting, in selecting strategies that align with the low-carbon economy model, or even starting to view the impacts of carbon risks across portfolios, provide a healthier long-term outlook. Not only are some of the emerging opportunities becoming more attractive by holding comparatively lower risk in the long term, but also becoming an equally viable alternative investment. The business case of investing into energy efficiency in buildings and renewable energy already exists.

More public disclosure will not, by itself, mitigate investment into stranded carbon assets, but by exposing systemic risks to investor scrutiny will help investors make better informed decisions in the long-term.

If we started to see institutional funds like Storebrand not only divest from stranded carbon assets, but reallocate large amounts of capital in low carbon investments, it could have a significant impact on the needed change towards a sustainable and low carbon economy.

One thought on “Stranded Carbon Assets: A Change Towards a Low Carbon Economy

  1. Jean-Luc Burlone

    Furthermore, on last January 15, institutional investors met at the UN (Investor Summit : Climate Risk) to be brief on that issue. A proposal to invest 1 trillion dollars on clean energy projects per year for the next 25 years was put on the table.

    In line with that objective, Goldman Sachs announce recently a 40 billion investment in clean energy project and not to save the planet but to make a killing!

    If financial institutions with deep pockets start to invest for a low carbon economy, the probability of success is improving substantially!


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