May 09, 2014
Carbon Tracker Publishes First in Series on Stranded Assets
by Robert Kropp
The first of three reports analyzing the investment risks associated with stranded fossil fuel
assets coincides with Stanford University's divestment of coal stocks from its $19 billion
On Tuesday, Stanford became the first major US university to embrace the principles of the student
divestment campaign when it announced it would no longer invest endowment funds in companies whose
primary business is coal.
“Stanford has a responsibility as a global citizen to promote
sustainability for our planet,” University President John Hennessy stated. “The
university's review has concluded that coal is one of the most carbon-intensive methods of energy
generation and that other sources can be readily substituted for it. Moving away from coal in the
investment context is a small, but constructive, step while work continues, at Stanford and
elsewhere, to develop broadly viable sustainable energy solutions for the future.”
Stanford's decision was encouraged by the student-led Fossil Free Stanford organization,
and was based on a 1971 Statement on Investment Responsibility which allows for the consideration
of corporate practices that “create substantial social injury.” As a result of the decision by its
Board of Trustees, the University will divest the coal stocks that its $18.7 billion endowment
The Statement also states that the primary investment obligation is
maximizing financial returns,and members of the University's Advisory Panel on Investment
Responsibility and Licensing would do well—as would every other institutional investor—to consider
the implications of a new report from Carbon Tracker Initiative (CTI), entitled Carbon Supply Cost Curves: Evaluating financial
risk to oil capital expenditures.
The UK-based CTI was the first organization to report
extensively on the investment risks associated with stranded fossil fuel assets. In 2011, Unburnable Carbon
estimated that only 20% of the proven reserves on the books of public and private coal, oil, and
gas companies can be burned if the increase in global temperatures due to climate change is to stay
within the 2°C parameter.
Carbon Supply Cost Curves specifically addresses the risks of
investing in oil companies, especially those that engage in controversial operations such as
deepwater drilling, hydraulic fracturing, and oil sands development. In the report's foreword, CEO
Anthony Hobley wrote, “If demand for oil is not substantially reduced we are clearly heading for a
level of warming far in excess of 2°C. Which reveals that there is no free lunch here for
investors. Either policy and technological tipping points will reduce demand in line with our
analysis or we will face levels of warming described as catastrophic by many.”
report's exhaustive analysis, which accounts for such factors as demand, the future price of oil,
and types of production, reveals that there is approximately $1.1 trillion of capital expenditures
at stake for private oil companies over the next decade. Deepwater and Arctic drilling, the report
states, “do not make economic sense and confirmation is needed that they will not proceed under the
banner of replacing volumes.” Yet, the report finds, “Industry demand projections often assume
business as usual, and do not typically allow for significant changes in costs, competition,
efficiency or emissions constraints.”
The greatest risks among unconventional oil types
are found in the oil sands of Alberta, Canada.
“Who do we want to do what?” CTI asked.
“Investors to challenge company development strategies on capital expenditure plans on high cost /
high carbon projects. Investors to challenge financial analysts on demand/price scenarios.
Financial regulators to start requiring companies to demonstrate how their business model is
adapting to a low carbon future.”
Last year, a coalition of 70 institutional investors
organized by Ceres and Carbon Tracker wrote to
45 of the largest fossil fuel companies, requesting that the companies report on the exposure to
and management of risks associated with stranded assets. A number of shareowner resolutions have
been filed this year as well, requesting that companies engaged in fossil fuel extraction report on
the risks of stranded assets.