Is Your Portfolio at Risk from the 'Carbon Bubble'?

Is Your Portfolio at Risk from the 'Carbon Bubble'?

Image CC licensed by Flickr user Jeff Kubina

The portfolios of pension funds and institutional investors around the world may be too heavily weighted toward fossil fuel-based companies to survive the threat of a "carbon bubble."

The mainstream capital markets are loaded with companies that have fossil fuel assets that may lose their value should world governments enact laws limiting greenhouse gas emissions, warns a new report.

"Are there more fossil fuels listed on the world stock market than we can afford to burn?" said James Leaton, director of Carbon Tracker. "The answer is yes."

Scientists have for years warned us about the catastrophic effects that await if the world's surface temperature rises more than 2 degrees Celsius because of climate change. Driving climate change is the burning of fossil fuels, but the world's known fossil fuel reserves are five times greater than what can be burned if we are to reduce our chances of tipping temperatures past that 2 degree threshold.

Coal, oil and gas companies often turn to mainstream financial markets to raise capital to explore for more reserves, and their values are tied to their fossil fuel reserves. Pension funds and institutional investors passively track these markets.

"If you looked at companies individually, you wouldn't really pick up the risk," Leaton said. "You need to look at the portfolio to make sure you're not overweight in the issue and exposed to one particular market. If you follow the market, you're getting hugely intensive for fossil fuels."

So how can you -- or your investments -- steer clear of the carbon bubble? Start by scrutinizing your exposure. Leaton's report lists the top 200 listed companies by estimated carbon reserves, which account for about 27 percent of the world's proven reserves based on emissions potential, leaving the remaining 73 percent of global reserves in private or government hands.

Below are the top 10 listed companies in each category; you can get the full report on GreenBiz.com.

Top 20 companies by fossil fuel reserves

The relationship between asset owners and managers must change to address the situation, Leaton said.

"They have to change the incentives and benchmarks they're using so managers can actually move away from the mainstream composition of the market and take a more long-term view," he said. "They also need to look at how they're valuating companies. Regulators need to take a view of whether this is a systemic risk -- a bubble on our market we need to regulate for."