Investors ask fossil fuel companies to assess how business plans fare in low-carbon future

A group of 70 global investors managing more than $3 trillion of collective assets have launched the first-ever coordinated effort to spur the world’s 45 top oil and gas, coal and electric power companies to assess the financial risks that changes in demand and price pose to their business plans.

This is in response to Carbon Tracker’s April 2013 Unburnable Carbon report, which found that in 2012 alone, the 200 largest publicly traded fossil fuel companies collectively spent an estimated $674 billion on finding and developing new reserves some of which may never be utilized. This initiative highlights the opportunity to redirect this capital, rather than it being wasted on high carbon assets that could become stranded.

Investors are aware that assets are already being written down, with increasing competition between energy sources, air quality standards being introduced to reduce health impacts, and measures to reduce carbon pollution combining to change the energy landscape.

Coordinated by CERES, the investors sent letters to the fossil fuel companies last month, requesting detailed responses before their annual shareholder meetings in early 2014. Investors signing the letters include California’s two largest public pension funds, the New York State Comptroller, F&C Management and the Scottish Widows Investment Partnership.

“Companies must plan properly for the risk of falling demand by stress-testing new investments to minimize the risk our clients’ capital is wasted on non-performing projects.” said Craig Mackenzie, Head of Sustainability at Scottish Widows Investment Partnership – one of Europe’s largest asset management companies.

“Fossil fuel companies are the biggest sources of carbon pollution by far, which means they are also uniquely positioned to lead the world in responding to global climate risks,” said Ceres president Mindy Lubber, speaking during a call with reporters today.

Mark Fulton, a member of the Carbon Tracker’s Advisory Board and a Ceres adviser observed: “Fossil fuel companies will prove to be more responsible stewards of capital in the future if they take action now to manage the risks posed by climate change.”

“The market knows that avoiding high cost, high carbon, projects which are failing to deliver return on capital will improve shareholder returns. The fundamentals of demand and price are changing, but companies are spending capital as if it is business as usual.” commented James Leaton, Research Director at Carbon Tracker.

“We have a fiduciary duty to ensure that companies we invest in are fully addressing the risks that climate change poses,” said Anne Stausboll, CEO of the California Public Employees Retirement System (CalPERS)

The investors wrote.

“We would like to understand what options there are for [the company] to manage these risks by, for example, reducing the carbon intensity of its assets, divesting its most carbon intensive assets, diversifying its business by investing in lower carbon energy sources or returning capital to shareholders.”

“Institutional investors must think over the long-term, which means that we must take environmental risks into consideration when we make investments,” said New York State Comptroller Thomas P. DiNapoli, trustee of the $160.7 billion New York State Common Retirement Fund.

The market sentiment is starting to mirror this concern as analysts note that oil companies are spending ever more capital per barrel of oil they seek to find, requiring oil prices to continue rising just to stand still. The coal sector faces a structural shift, with the threat of peak coal demand in China looming ever closer, which would weaken prices, reduce revenues and devalue existing assets.