How should investors look at stranded assets?
Oil majors once again were playing down the risks associated with the "carbon bubble" this week, warning that markets and particularly poor countries would suffer if the world turned away from hydrocarbons.
Speaking at the IHS CERAWeek energy conference last week in Houston, Texas, ExxonMobil chief executive officer Rex Tillerson reportedly warned poor people today would be "condemned" to a life of poverty if fossil fuel use were restricted.
Meanwhile, BP's chief executive Bob Dudley said the world is too complex to simply turn away from fossil fuels even as alternative clean energy markets expand, according to Associated Press reporters at the event.
The comments are the latest development in the escalating battle between fossil fuel giants and growing shareholder and citizen pressure for them to keep fossil fuels in the ground.
The argument that burning more coal and other hydrocarbons can fix global poverty, rather than make it worse by exacerbating the extreme weather events expected to come with climate change, is well rehearsed. But there are growing signs that investors and influential analysts want to see a more sophisticated response from the fossil fuel industry.
BP shareholders last week voted overwhelmingly for the company to provide more detailed information on how it is managing climate change risks. The vote came in the same week that HSBC issued a research note (PDF) urging investors to protect themselves from stranded asset risks whereby tightening climate change regulation, low oil prices, or competition from alternative clean technologies lead to a slump in the value of some fossil fuel assets.
HSBC advocates investors first identifying which assets are most at risk from stranding, then choosing whether to divest or become an activist shareholder, increasing pressure on energy companies to ditch high-risk carbon intensive projects.
"Divesting fossil fuel stocks removes assets but dividend yields may suffer and portfolios become more concentrated," it stated. "Holding onto stocks allows investors to engage with companies and encourage best practice, although there are reputational as well as economic risks to staying invested. Companies can cut capex but risks remain in maintaining exposure."
The advice from HSBC further underlines how the debate among investors over whether to divest from fossil fuel assets or encourage fossil fuel firms to tackle climate risks is fast entering the corporate mainstream.
Meanwhile, four investor groups last week published a guide that suggests practical steps investors can take to protect their portfolios from the risks of climate change and seize opportunities arising during the transition to a low carbon economy.
And today the Carbon Tracker Initiative, the campaign group that kicked off the carbon bubble hypothesis back in 2012, will set out a new roadmap, warning fossil fuel companies that they could be heading for an abrupt "black swan" event that pushes high profile firms to the edge and destroys shareholder value unless they carefully manage the transition to low carbon.
Carbon Tracker stated companies such as Exxon fail to fully realize the threats they face. For example, it pointed out how Exxon's forecasts are not aligned with the International Energy Agency's baseline New Policy Scenario, which takes account of countries' pledges to cut greenhouse-gas emissions and phase out fossil-energy subsidies.
The roadmap argues companies need to pursue "capital discipline," focusing investment on high return projects and limiting exposure to low return ones. Carbon Tracker consistently has argued that high-cost investments in oil sands, the Arctic and deep-water exploration are at significant risk of not making an acceptable return should climate regulations tighten and new clean technologies continue to make progress.
The report was co-written by Carbon Tracker adviser Paul Spedding, previously global co-head of oil and gas research at HSBC. He says there may be a gap between a management's view of future risks and those resulting from action on climate change, technological advances and changing economic assumptions.
"Critically, the greatest impact will — initially — not be directly from reduced demand, but from the consequent pressure on commodity prices," said Spedding.
Whatever the future holds for fossil fuel companies, it is becoming increasingly clear that investors need to take an active interest in the future of these assets and no longer can rely on guaranteed returns from this fast-changing industry.
This article originally appeared on BusinessGreen.