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“We are not going to stop using fossil fuels overnight, but capital needs to be invested in line with a reduction in demand, rather than assuming business as usual scenarios. Investors should engage with companies to ensure capital isn’t wasted on high-cost unburnable carbon, which won’t provide good returns in the future,” said
- James Leaton, research director at Carbon Tracker
LONDON, 12th February 2015 – Growing calls for divestment from fossil fuels on a global scale are a wake-up call for energy companies to stop burying their heads in the sand and to act responsibly to avoid dangerous and irreversible climate change, the Carbon Tracker Initiative said today.
The financial think-tank said the energy giants had a duty to their shareholders to spell out the inherent financial risks associated with continuing to invest in extracting fuels that can’t be burned if the world is to limit warming to an internationally agreed 2-degree threshold.
“We are not going to stop using fossil fuels overnight, but capital needs to be invested in line with a reduction in demand, rather than assuming business as usual scenarios. Investors should engage with companies to ensure capital isn’t wasted on high-cost unburnable carbon, which won’t provide good returns in the future,” said Carbon Tracker’s research director James Leaton ahead of Global Divestment Day.
The divestment campaign has put climate change on the agenda for investment institutions, and many pension funds now accept that Carbon Tracker’s analysis makes the financial case why they cannot ignore this growing risk (see interactive map). The think-tanks focus has been to highlight potential high-cost projects that will not create value for shareholders, and do not fit with a carbon budget needed for a low carbon world.
The oil price collapse to its lowest for six years has brought the argument for limiting new expenditure on high-cost, high-risk projects into sharp relief. Oil companies around the world have been slashing exploration and production budgets on projects that no longer make economic sense, a trend that Carbon Tracker said last year could follow a steep fall in oil prices. Daily there are reports of project deferrals and cancellations.
The oil giants have had to revise how much they’re going to spend on new projects, known as ‘capital expenditure’, potentially wasting huge piles of investors’ cash. Unconventional and high-cost oil projects (oil sands and deep water) are particularly vulnerable according to Carbon Tracker’s “Carbon Supply Cost Curves” analysis published in 2014.
Carbon Tracker cautiously welcomed comments made by Royal Dutch Shell boss Ben van Beurden at the International Petroleum Week annual dinner on Wednesday where, according to press reports, he acknowledged “climate change is real” and “that renewables are an indispensable part of the future energy mix.” Shell has recognized that a third of its current production is now making a zero percent return, which is not acceptable to shareholders.
There is also growing consensus that the market for exporting thermal coal is not going to return to the heady levels seen in recent years. Investment bank Goldman Sachs recently indicated that thermal coal had now entered into retirement. Preliminary figures from China for 2014 suggest Chinese production, consumption and imports, are peaking.
“Carbon Tracker is making the financial arguments for avoiding wasting capital on fossil fuels which don’t fit with a low carbon future. Given the poor financial performance of many coal companies, people should be asking why funds are still holding them,” Leaton said.
“The divestment campaign is asking valid questions about how funds manage climate risk,” said Carbon Tracker’s chief executive, Anthony Hobley.
“The answer won’t be divestment for many pension funds – and if that’s the case, they need to have a good answer about how their investments are maximizing the opportunities arising from the energy transition, rather than just following the decline of the coal sector,” he said.