An explicit new report published by the UK think tank Carbon Tracker and the London School of Economics describes the trillion dollar gamble that is currently being played out on the global financial markets.
According to the report, almost all investors and regulators seem to be ignoring the clear inconsistency between the accepted science of climate change and the behaviour of the top 200 global oil and gas and mining companies, on which the report focuses.
The report concludes that 60-80% of the coal, oil and gas reserves of these 200 publicly listed companies are ‘unburnable’ if the planet is to remain within the globally agreed ‘safe’ level of 450 ppm of CO2 in the atmosphere. In essence, these reserves are ‘stranded assets’ whose questionable value could have enormous implications for the robustness of pension funds and the wellbeing of the companies and people that invest in them. In fact, the Unburnable Carbon map illustrates why fossil fuels can be considered the new subprime.
In addition, these same 200 companies have invested up to $674bn in the last year in sourcing and developing more reserves and new forms of extraction. The analysis indicates that if this level of capital expenditure (CAPEX) continues at the same rate over the next decade this would result in over $6.74trillion in wasted capital developing reserves that are likely to be unburnable.
“Are there more fossil fuels listed on the world stock market than we can afford to burn?” asks James Leaton, director of Carbon Tracker, quoted in Greenbiz – “the answer is yes”.
The 2008 financial crisis revealed the short-termism endemic in financial markets – this existing investment perspective is very bad news for pension funds. The likely reduction in value of shares and investments in the stranded assets of coal, oil and gas industries has prompted Professor Lord Stern to raise the alarm for investors:
“[Smart investors] can see that investing in companies that rely solely or heavily on constantly replenishing reserves of fossil fuels is becoming a very risky decision.”
Professor Lord Stern in Carbon Tracker
To avoid the intensity of economic ruin caused by the rupture of the subprime bubble it would be prudent for all investments portfolios to be assessed for their carbon bubble ‘risk potential’ – redefining risk, dealing with uncertainty and strategising accordingly. This would allow businesses to make investment decisions based on the usable assets held by the fossil fuel industries, rather than the share prices on which these companies currently base their value.
Deflating this carbon bubble gradually through collaboration between investors, financial regulators, analysts and finance ministers could help avert the most devastating economic scenarios.