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May 01, 2015
Carbon Tracker Offers Roadmap for Energy Transition
    by Robert Kropp

Asserting that many executives in the oil and gas industry assume a business as usual approach in their planning, the NGO warns that unconventional exploration and price volatility will have negative impacts for investors.

In advance of November's SRI Conference on Sustainable, Responsible, Impact Investing, Conference host First Affirmative Financial Network conducted a survey of more than 500 sustainable investment professionals. The survey reveals the degree to which fossil fuel free investment strategies are becoming increasingly commonplace; over half of respondents indicate that they either manage portfolios that are fossil free, or plan to implement them in the near future.

As a financial incentive for divestment, over 60% of survey respondents consider stranded fossil fuel assets to be a growing financial risk. In a
recently published report, the Carbon Tracker Initiative (CTI)—the nongovernmental organization (NGO) largely responsible for formulating in 2011 the concept of stranded assets—both provides considerable detail about the financial risks facing oil and gas companies, and suggests pathways beyond a business as usual approach and toward a low carbon economy.

“Carbon Tracker believes senior management is overly focused on demand and price scenarios that assume business as usual,” report co-author Paul Spedding. By relying on a business as usual scenario rather than those that have been developed by the International Energy Agency (IEA), oil and gas companies are in danger of a “risk assessment ‘gap’ between a management’s view of the future and that which would result from action on climate change, technology developments and changing economic assumptions,” the report warns.

Providing a checklist (first question: Does management accept climate science?) that shareowner activists would benefit from consulting in their engagements with fossil fuel companies, CTI goes on to state, “Shareholders will only be protected from the business effects of an energy transition if management address the risks from climate change and take action to mitigate them.” Two key strategic routes outlined for companies in the report are capital management and diversification.

“The key approach to capital investment is capital discipline,” the report observes, “another common industry mantra that often seems to be ignored more than it is respected.” Shareowners will benefit, the report continues, if companies focus on high return assets rather than on high risk unconventional projects such as Arctic and deepwater drilling, tar sands, and hydraulic fracturing.

As for diversification, CTI refers to the rebranding a decade ago of BP from British Petroleum to Beyond Petroleum. The brand, and whatever business activities that might have accompanied it, were subsequently abandoned with the arrival of the CEO under whose management the disastrous oil spill in the Gulf of Mexico occurred. “The issue with diversification to lower carbon sources is whether it is clearly articulated, planned out, has metrics that can be measured, and is believable to investors,” CTI states.

The report notes that in April, an overwhelming 98% of BP shareowners approved a resolution calling for improved disclosure on risks associated with climate change. And the management of Royal Dutch Shell has expressed its support for a similar resolution on its proxy ballot this year.

But, as ExxonMobil's unsatisfactory report on stranded assets last year demonstrates, fossil fuel companies often seem more intent upon buying time for their business as usual scenarios that committing to meaningful systemic changes. Take Shell as an example. Despite management's avowed support for improved climate change disclosures, the NGO
Oceana filed a petition with the Securities and Exchange Commission (SEC) this week, requesting that it “open a formal investigation into disclosures...concerning the company’s activities in the US Arctic Ocean.”

“Shell has not adequately disclosed the risks of a catastrophic oil spill,” the petition states. Furthermore, “ Although Shell told federal courts and regulators that adverse litigation threatens its prospects in the Arctic, the company did not fully or promptly disclose this litigation to investors.”

With expenditures in the Arctic now exceeding $6 billion, Shell has yet to succeed in drilling even a single well. Yet it is currently asking the Bureau of Ocean Energy Management to approve the resumption of its Arctic exploration activities.

“As we learned from Shell’s experience in 2012, the Arctic Ocean is remote and unforgiving,” said Andrew Sharpless, CEO of Oceana. “Companies like Shell cannot run from the reality that proposed oil drilling creates enormous risks for the ocean and for the company. There is no proven way to clean up a spill in icy Arctic conditions, and Shell has an obligation to make investors aware of that.”

The current volatility of oil prices, CTI argues, means that projections based on merely historical data are increasingly likely to be insufficient. When combined with the global imperative of a transition to a low carbon economy, investors who choose to retain fossil fuel holdings in their portfolios have compelling reason to be concerned.


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