Hot on the heels of a historic climate deal in Paris the Carbon Tracker Initiative and the Climate Disclosure Standards Board, two non-profits who seek to promote transparency in relation to climate risk, launched proposals for risk reporting by fossil fuel companies at the World Economic Forum 2016 in Davos.

The Paris accord confirmed the commitment of global leaders to limit dangerous warming to below 2°C but also promised to pursue an even stricter 1.5°C target, adding more pressure for companies, investors and regulators to act. The ‘Paris effect’ reinforces the political and market signals emerging that will aid the transition to a climate-resilient, low-carbon economy and some actions have already been taken to realize that goal.

These include, for example, the announcement at COP21 by Mark Carney, Governor of the Bank England and Chair of the Financial Stability Board, that Michael Bloomberg will head a new global Task Force on Climate-related Financial Disclosures (TCFD).  The TCFD is intended to be an industry-led body that seeks to identify and set out the information the capital markets and other stakeholders need to manage the transition.

This paper is designed to assist the TCFD members in assessing the ‘carbon bubble’ concept and ‘stranded asset’ risks inherent in the business-as-usual strategies of many fossil fuel companies.

Key Findings

Although an in-depth comparison has not been conducted for the
purposes of this paper, there seems to be much agreement between stakeholders on what should be reported by fossil fuel companies. At a very high level, some of the shared reporting themes include:

  • Disclosures regarding proven and probable reserves – Using reasonable future assumptions to quantify proven and probable reserves and production assets under current recognised standards;
  • Factoring the carbon budget into accounting and decisionmaking – Consider carbon budget implications for reserves accounting and what attributes of resource base need to be discussed to reflect carbon risks;
  • Strategic development
    • Report the company specific risks arising from CASR and operation in a climate-secure environment;
    • Analysis of how climate regulation impacts the demand for, and price of hydrocarbons, as well as capital expenditure strategies for exploration, acquisition and development;
  • Scenario analysis and stress testing – Scenario analysis and stress testing consistent with a low carbon energy transition, including sensitivity of reserve levels to future price projection scenarios that account for a price on carbon emissions;
  • Linking to mineral competent persons reporting – To ensure that there is a consistent approach taken to evaluation of mineral assets assumptions, CASR and asset valuation;
  • Embedded metrics
    • GHG emissions from fossil fuel companies, particularly carbon dioxide emissions embedded in their reserve and resource base;
    • Segmentation of capital expenditure plans.