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January 31, 2015
Investors Urged to Challenge Fossil Fuel Industry Assumptions on Risk
    by Robert Kropp

Ceres hosts a press call in which investors express concerns that the oil and gas industry relies on a business as usual scenario in planning capital expenditures.


A major breakthrough for engagement with the fossil fuel industry occurred in 2011, when research by Carbon Tracker Initiative (CTI) demonstrated that as much as 80% of the reserves already on the books of fossil fuel companies will have to stay in the ground is the worst effects of climate change are to avoided. Popularized by a widely read Rolling Stone article authored by Bill McKibben of 350.org, the concept led to the divestment movement on college campuses. By 2013, sustainable investors has begun filing shareowner resolutions requesting that companies address the issue.

Even when successful engagement resulted in the withdrawal of such resolutions, the response by corporations has for the most part been insufficient. Both ExxonMobil and Shell reported on stranded assets, and both contended that they expect to burn all the reserves already booked. But, as a recent press call organized by Ceres indicated, sustainable investors continue to press companies on the issue. Their focus this year is on the financial risks associated with capital expenditures for further exploration, at a time when oil prices are at a historic low and meaningful climate change mitigation mandates that any additional reserves remain unburned.

Along with CTI, Ceres is coordinating the Carbon Asset Risk (CAR) Initiative, a coalition of 75 institutional investors with over $3 trillion in assets under management. CAR members have written to the world's 45 largest fossil fuel companies, measured by the volume of reserves counted as assets, requesting that they report on the potential impacts of climate change on their business models.

“Addressing carbon asset risk is at the heart of corporate governance,” New York State Comptroller Thomas DiNapoli said during the press call. “The industry should take meaningful steps to mitigate its financial exposure and protect shareholder value by ensuring that its capital investment strategy incorporates consideration and mitigation of climate change related risks.” Shareowner resolutions have been filed with at least a dozen major oil companies thus far.

As further indication of the industry's refusal to consider climate change a crisis that must be dealt with today, industry association IPIECA and consultant IHS Herold reported last year that “action on carbon emissions...is unlikely to lead to much change in demand over the next 10-15 years,” according to a new report from CTI. “They assume that proven reserves are at little risk from policy changes.”

“But the greatest threat to the industry comes from oil price changes impacting the cash flows coming from proven reserves,” CTI continued. “Every dollar released from proven reserves that is reinvested into new resources merely shifts value forward, often by 10-20 years, transferring it to future projects which are at greater risk from market, policy and technology changes.”

“Investors must question industry assumptions and challenge capital expenditure at the wrong end of the cost curve,” Jeremy Leggett, chairman of CTI, said. “It is not too late for the transition to a lower-carbon economy to be an orderly one, with fossil fuel companies steadily shrinking overall but delivering the best results for their shareholders by focusing on returns and per share metrics.”

“The oil majors should view this as an opportunity to transform their industry,” said Andrew Logan, oil & gas program director at Ceres. “The window is closing for Exxon, Shell and the other oil majors to position themselves for a future that is less dependent on fossil fuels.”

 

 
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