Will we be asked to pay the cost of stranded oil assets in the climate change process?

It has been an interesting six weeks on the issue of climate finance.

The most recent prophetic announcement was around the UN Secretary General’s Climate Summit. It is becoming clearer daily that climate change WILL pose a risk to the value of present investments. There were 350global institutional investors representing around $24 trillion in assets calling for government leaders across the globe to put a price on carbon, to help redirect investment on the scale required to combat climate change.

Rockefeller Brothers Fund (RBF) disinvestment from fossil fuels

For those who did not read the finance pages, The Rockefeller Brothers Fund, a charitable foundation set up in 1940, has been working from 2010 to align its endowment investments to be consistent with the foundations Sustainable Development program goals. 

RBF announced in September:

“Given the RBF’s deep commitment to combating climate change, the Fund is now committing to a two-step process to address its desire to divest from investments in fossil fuels. Our immediate focus will be on coal and tar sands, two of the most intensive sources of carbon emissions. We are working to eliminate the Fund’s exposure to these energy sources as quickly as possible. Given the structure of some commingled investment funds and investments in highly diversified energy companies, we recognize there may continue to be minimal investments in our portfolio in those energy sectors, but we are committed to reducing our exposure to coal and tar sands to less than one percent of the total portfolio by the end of 2014. As we take the steps to divest from coal and tar sands investments, we are also undertaking a comprehensive analysis of our exposure to any remaining fossil fuel investments and will work with the RBF Investment Committee and board of trustees to determine an appropriate strategy for further divestment over the next few years.”

This is amazing considering that Rockefeller's made their fortune from oil (Standard Oil), their heirs are now at the forefront of the disinvestment movement in fossil fuels. As Stephan Heintz, president of RBF, said:

“John D Rockefeller, the founder of Standard Oil, moved America out of whale oil and into petroleum. We are quite convinced that if he were alive today, as an astute businessman looking out to the future, he would be moving out of fossil fuels and investing in clean, renewable energy.

Universities

Glasgow has become the first university in Europe to announce they are going to dis-invest their $24 million from fossil fuels. Stanford has started the process of cutting their ties with fossil fuel investments announcing they would be dropping their coal holdings which are around $18 billion. Yale [LINK] has said they will look at if renewable energy investment might offer a better long term return.

Lord Robert May, former chief scientific adviser to the government has joined 67 academics asking Oxford University  to join the disinvestment campaign

Churches

The World Council of Churches , which represents some 590 million people in 150 countries has also announced that it is pulling its investments from fossil fuels. The Church of Sweden  has already removed its investment from fossil fuels the last being its investment in natural gas companies which happened in September.

Local Government

There are over 30 cities have also chosen to divest from fossil fuels these include Santa Monica, San Francisco and Seattle. "Divestment is just one of the steps we can take to address the climate crisis," the Seattle mayor, Mike McGinn,

In the UK the first city council to join the fossil fuel disinvestment was Oxford.

The Avengers

Motherboard’s Brian Merchant, interviewed Mark Ruffalo (Hulk) where he outlined his plans to personally divest from fossil fuels. “I’m in the process of divesting. I took the pledge,” he said, “between 3-5 years, to completely divest in any fossil fuels or anything climate change-related and put it into renewable or clean tech.”

He went on to say he was going to ask THE AVENGERS to join the disinvestment campaign:

“And that’s a pledge that I’m making here today to you. I’m asking all of my friends to do it. I’m going to ask Leo [DiCaprio], I’m going to ask all the Avengers, I’m going to ask Robert, I’m going to do the ‘put your money where your mouth is’ challenge. And it’s going to be: divest and invest.”

How much

The Carbon Tracker Initiative’s (CTI) latest study estimated that the world’s biggest 20 oil projects are putting $91 billion of investors’ money at risk.Andrew Grant, CTI analyst, commented: 

"This analysis demonstrates the worsening cost environment in the oil industry, and the extent to which producers are chasing volume at the expense of returns.

Investors will ask whether it is prudent for oil companies to bet on ever higher oil prices when they could be returning cash to shareholders.”

Bank of England

This then brings me to the recent announcement by Mark Carney the Governor of the Bank of England (the equivalent to Janet_Yellen the Chair of the Governors of the Federal Reserve System). At a World Bank seminar recently he is reported as saying Carney told a World Bank seminar that the “vast majority of reserves are unburnable” that is if the world wants the global temperature rises are to be limited to below 2C.

The seminar was one on the idea that companies should be reporting not only statutory financial information but also have integrated reporting on their environment social and governance. He went on to say:

With the right information [for example, on how a company’s business interacts with environmental needs], all groups can express their view, and influence the allocation of capital and credit today,”

The issue of integrated reporting was one raise by AVIVA and supported by a coalition of NGOS including Stakeholder Forum for Rio+20 and now for the SDG Summit. The value of integrated reporting, Carney argued, was to help investors think about “not just things that can be managed in the short term” but also “costs companies are likely to be exposed to as policy responds to challenges” like climate change.

Credit Rating Agencies, Sovereign Wealth Funds and Stranded Assets

One of the top Credit Rating Agencies Standard & Poor’s has now started publishing reports which assess the investment relevance of climate change for government and corporate bonds (S&P 2014).

The Norwegian Parliament in April it was agreed that Norway would have a review of whether it should divest the funds from its Sovereign Wealth Fund out of fossil fuel. Its SWF is enormous $840 billion and it owns 1% of all publicly listed companies investing in over 8000 companies worldwide.  Norway’s Prime Minister Erna Solberg said:

 "This government takes environmental problems very seriously but we need to have a good look at how to address through positive investments in renewable energy in sustainable companies overseas through the fund.’

The question then is if the movement to dis-invest from fossil fuel companies continues will share price drop for companies that have stranded assets on their balance sheets? If they don’t start to shift into other areas and show leadership could they fold? If so who picks up the cost? Is it us like we did with the Banks? These are key questions we need urgent new discussion on as we transition away from fossil fuels.

A final thought

For Republicans from HENRY M. PAULSON Jr.( Secretary of the Treasury under President Bush)

"The nature of a crisis is its unpredictability. And as we all witnessed during the financial crisis, a  chain reaction of cascading failures ensued from one intertwined part of the system to the next.  It’s easy to see a single part in motion. It’s not so easy to calculate the resulting domino effect.  That sort of contagion nearly took down the global financial system.

We need to act now, even though there is much disagreement, including from members of my own Republican Party, on how to address this issue (climate change) while remaining economically competitive. They’re right to consider the economic implications. But we must not lose sight of the profound economic risks of doing nothing. Republicans must not shrink from this issue. Risk   management is a conservative principle, as is preserving our natural environment for future generations. We are, after all, the party of Teddy Roosevelt.”