The world’s stock markets are over-exposed to fossil fuels, putting investors at risk of a ‘carbon bubble’, according to a report by research group Carbon Tracker Initiative which calls for an overhaul of the way capital markets value risk.
The report looks at how fossil fuel reserves held by listed companies are assessed by the market and argues that up to 80% of the world’s fossil fuel reserves will be unusable if average global temperatures are to be limited to a 2°C rise, the level at which scientists believe global warming can be stabilised.
Carbon Tracker says there are proven fossil fuel reserves which would emit 2,795 billion tonnes (Gt) of carbon dioxide equivalent (CO2e) if burned. The top 100 listed coal miners and the top 100 listed oil and gas companies have reserves representing 745Gt of CO2e. However, the report says that only 20% of the total reserves can be burned unabated if carbon targets are to be met, “leaving up to 80% of assets technically un-burnable”.
Furthermore, the amount of fossil fuel reserves in companies listed on the world’s capital markets is greater than the recommended 20% limit, Carbon Tracker added.
The report points to recent UK listings by companies such as commodity trader Glencore, Indonesian miner Bumi and the Tony Hayward-led oil and gas company Vallares and says regulators did not consider the “potential systemic risks” to financial markets posed by these and other fossil fuel-intensive companies.
Capital markets have “locked a carbon-intensive future into their operating systems”, by rewarding companies for boosting fossil fuel assets, without regard to limits on consumption, the report argues.
Pension funds risk exposure to ‘stranded assets’
“Pension funds and other asset owners face the risk of being exposed to ‘stranded assets’,” it says.
James Leaton, project director at Carbon Tracker in London and author of the report, said much analysis has focused on past corporate emissions, but it is important to also consider how the market values and assesses the potential for future emissions.
“While people are critical of China for its emissions increasing, or Brazil or India, it’s actually the global capital markets that finance that,” he said.
Regulators should require tougher corporate disclosure of fossil fuel reserves and carbon emissions, and should improve the assessment of financial risk associated with unburnable carbon, he added.
The report was commissioned by Investor Watch and financed by the Rockefeller Brothers Fund, the Growald Family Fund, the Joseph Rowntree Charitable Trust and the Tellus Mater Foundation.
By. Charlotte Dudley
Source: Environmental Finance