Exposing Our Exposure: How Energy Companies are Risking our Future and their Balance Sheets

“We now have around $7trillion of subprime carbon assets in the global economy, and their value, like the subprime mortgages, is based on an assumption that is highly questionable,” Al Gore explained in his keynote speech to a sustainable business conference in San Francisco in 2011. Yet the idea that investments in fossil fuels will become risky business as we drive towards a low-carbon economy is largely ignored and ridiculed by the financial services. “I think it’s a bollocks subject,” clarified one oil and gas analyst quoted in the FT, concluding that, “I’m not interested in this kind of subject. I think this is complete hot air.”

Like all global dilemmas, climate change will create winners and losers. We are all too aware that changing weather patterns will have disastrous impacts, from widespread flooding in Bangladesh to acute drought in Sub-Saharan Africa. And more often than not, the losers are already suffering from poverty and see their misery compounded further by the effects of climate change. But not only the poor stand to lose – the financial system does, too. The quote from the unnamed energy analyst serves as a reminder that the industry is not fit to manage the systemic risks climate change poses.

At the UN climate change summit in Durban late last year, nations agreed to enact legally binding emission targets to limit global warming to 2°C. If these targets are rigorously applied, up to 80% of declared reserves owned by the world’s largest listed coal, oil and gas companies could become stranded assets, according to analysis by the Carbon Tracker Initiative. And this calculation excludes all known fossil fuel reserves and the billions of dollars being ploughed into frontier oil and gas through Arctic exploration. The economics simply don’t stack up: If we are truly committed to tackling the climate change problem, the long-term strategies of multinational energy companies are a bubble waiting to burst.

If the “it’s bollocks” brigade have their way and reserves are burnt the result could mean temperature rises of 5°C or more. At 5°C, the risks become unmanageable. Large biospheres would become extinct, the Greenland ice sheet would almost disappear, and extreme weather conditions would rampage across the globe. Our prosperity as a people and planet would be in ruins. Lord Stern, author of “The Economics of Climate Change”, hit the nail on the head recently when he argued there was “a profound contradiction between declared public policy and the valuations of these listed companies…. which appear to assume that the world will not get anywhere near its targets for managing climate change”.  He went on to add, “this contradiction is important. It means that the market has either not thought hard enough about the issue or thinks that governments will not do very much – or somewhere between the two. This presents problems for markets’ assessment of risk; for governments’ credibility; and for regulators, whose approach appears to contradict their own governments’ policies”.

Since the subprime mortgage scandal, we have learnt that the entanglement of financial services runs deep into our everyday lives. A taste of what lies ahead was the Macondo Oil spill in 2010. The Gulf of Mexico disaster was not only an environmental catastrophe; it damaged BP and left a scar on all who invested in it. Before the spill, £1 in every £7 paid in UK pension fund dividends by FTSE 100 companies came from BP. When the shares tanked, roughly 18 million people were affected, and public pension funds like the Yorkshire public sector workers took an £80 million hit.

As the world marches on towards decarbonisation (although we are currently failing to meet targets that would be sufficient to prevent the worst consequences of climate change), fossil fuels no longer look like a safe haven for business. In continuing to invest in this system, the banks, companies, and financial intermediaries will leave themselves totally exposed to worthless ‘assets’.

But what’s worse, investment in high carbon is often uninformed. Instead of actively thinking about the future of energy production, investors simply track the main indices of the stock exchange and place their money accordingly. This is no evil plot to bring more misery to the poor, but a systemic bias towards dirty energy.

The shift to a green economy cannot solely rely on the innovative potential of the fledgling green industry. Despite record growth in the renewables sector, the incumbent fossil fuel companies have ensnared actors across the political and financial communities to perpetuate the notion of a high carbon future. Only unravelling this web will enable the transformation of the economy towards a sustainable pathway.

Gore’s got it right. “Those who advocate sustainable capitalism are often challenged to spell out why sustainability adds value. Yet the question that should be asked instead is: ‘Why does an absence of sustainability not damage companies, investors and society at large?’ From BP to Lehman Brothers, there is a long list of examples proving that it does.”

By Liz Gallagher (@LizGallagher)