A coalition of 70 global investors managing more than $3 trillion in collective assets on Thursday launched the first-ever coordinated effort to spur 45 of the world’s top oil and gas, coal and electric power companies to assess the financial risks that climate change poses to their business plans.
The investors make up the Carbon Asset Risk (CAR) initiative, which is being coordinated by Ceres and the Carbon Tracker initiative, with support from the Global Investor Coalition on Climate Change.
Largely based in the United States and Europe, the investors sent letters to the fossil fuel companies last month, requesting detailed responses before their annual shareholder meetings in early 2014. Investors signing the letters include California’s two largest public pension funds, the New York State and New York City Comptrollers, F&C Asset Management and the Scottish Widows Investment Partnership.
Recent studies by the Intergovernmental Panel on Climate Change (IPCC) and the International Energy Agency (IEA) have suggested that, in order to limit global warming to 2˚C, the world will need to live within a set carbon budget, and a significant portion of proven global fossil fuel reserves will need to be left in the ground.
Earlier this week, the Climate Policy Initiative released a report that shows global investment in climate change plateaued at $359 billion in 2012, roughly the same as the previous year. This falls well below the $5 trillion the IEA projects is needed by 2020 to limit global warming to two degrees Celsius — and the gap is likely to widen. As it stands, the world is headed toward global warming of 4˚C or more, which the World Bank warned must be avoided in order to prevent catastrophic climate change impacts.
“We would like to understand [the company’s] reserve exposure to the risks associated with current and probable future policies for reducing greenhouse gas emissions by 80 percent by 2050,” the investors wrote in their letter to oil and gas companies. “We would also like to understand what options there are for [the company] to manage these risks by, for example, reducing the carbon intensity of its assets, divesting its most carbon intensive assets, diversifying its business by investing in lower carbon energy sources or returning capital to shareholders.”
According to the Unburnable Carbon report, in 2012 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. This investor initiative highlights the opportunity to redirect this capital, rather than it being wasted on high carbon assets that could become stranded.
“Demand for coal has been falling in key markets. Climate policy and economic changes in Asia mean this trend could soon become permanent. Analysts tell us that demand for oil could weaken too before long,” said Craig Mackenzie, Head of Sustainability at Scottish Widows Investment Partnership, one of Europe’s largest asset management companies. “Companies must plan properly for the risk of falling demand by stress-testing new investments to minimize the risk our clients’ capital is wasted on non-performing projects.”
“Fossil fuel companies are the biggest sources of carbon pollution by far, which means they are also uniquely positioned to lead the world in responding to global climate risks,” added Ceres president Mindy Lubber.
As of October 23, investors had received preliminary responses from 30 companies. Detailed answers to the investors’ questions will come in follow-up responses. Participating investors are asking their peers to support this effort.