Yossi Cadan*

Given the accelerating effects of climate breakdown – established by scientific consensus and visible with our own eyes -, it is rational for investors to expect much tighter carbon regulation in the near future. These regulations of carbon at emission and at source will have deep economic effects, in many regions of the world. These policies are part of a bigger transition the world will have to face to avoid the worst impacts of climate change, and they are shifting our economies in the only direction possible – towards a zero-carbon economy.

It’s been two years now since Carbon Tracker, a London-based think tank researching the impacts of climate change on financial markets, issued its finding that 80% of the world’s proven fossil fuel resources cannot be consumed if we want to limit global warming within 2°C above pre-industrial levels. This number has been recently endorsed by the UN Environment body itself, updating to show that we are on track to produce 120% more fossil fuels by 2030 for the safer 1.5°C target. The implication of this is that fossil fuel companies’ share prices, based on their proven reserves, are grossly overvalued, and recently the shoe has dropped.

This past week Chevron has announced that is writing down the value of its assets by more than $10 billion. They say it is a concession that in “an age of abundant oil and gas” some of its reserves won’t be used or profitable anytime soon. They forgot to mention, though, that the oil and gas may still be abundant for quite some time under the ground, but the time for burning them is already over.

Chevron’s announcement comes on the heels of Repsol’s commitment to “net zero” its emissions in 2050 and further devaluation of their assets by 4.8 billion euros. So far this year, BP, Repsol, Equinor and Chevron together wrote down more than $20 billion in assets. According to analysts, oil and gas producers could wipe additional billions of dollars is assets in the months ahead.

A study from 2018 concluded that, if fossil fuel companies align their production with the Paris Agreement goal of keeping the Earth’s temperature rise below 2°C, their value could be up to $4 trillion lower than today. That’s because a considerable portion of existing reserves of fossil fuels will remain unused, and thus any investment in them is the equivalent of burying your money under the bedrock. This scenario will cause enormous losses for investors and the global economy, while the US, Russia and Canada economies will be hit the hardest.

In this context it is important to note that oil and gas reserves of fossil fuel companies account for the greatest proportion of their valuation. In order to keep this proportion up, these companies invest aggressively in finding more reserves regardless of whether they can be productive or not. As long as they can keep spending on new exploration and development, it signals to their shareholders that their current reserves are enough to keep production at the same level and therefore their stocks worth their price.

Up until now those fossil fuel companies’ devaluations were all publicly explained as being to do with the “oil price”. But of course, they could not publicly say that they are in fact stranded assets – i.e. assets that will not be productive/generate a yield and/or which will be essentially unsellable to a future buyer. It’s not clear just how far their value would fall if those corporations hinted that this endless search for reserves is near the end, but we expect that it would be a significant fall.

The risk of losses is one part of what has driven the global ‘divestment’ movement. It started due to a moral position that investing in the causes of climate breakdown was wrong, but today investors are looking at the $12 trillion of managed assets that have been shifted out of fossil fuels, and thinking it’s not only the morally right thing to do, but the financially smart thing to do too. Similarly, when public banks like the EIB, closes its doors to coal, oil, and gas – starving the industry of over half a trillion dollars a year – it’s easier to see how anyone would think twice before investing or lending to this killer industry.

Is the latest fossil fuel devaluations actually the first signal and acknowledgement of their stranded assets? Most signs show that we are not there yet. Currently, the fossil fuel industry is set to spend close to $5 trillion on new exploration and extraction activities over the next decade. However in the short term some analysts, such as Tom Ellacott from Wood Mackenzie, predict that the devaluation trend will continue, as price outlooks are adjusted down.

With the increased climate impacts we are witnessing on a daily basis all over the world, asset managers are facing a growing pressure to withdraw their money from fossil fuel stocks, as they are, by far, the largest contributor to global climate change, accounting for over 75% of global greenhouse gas emissions and nearly 90% of all carbon dioxide emissions. Investors are increasingly mindful of the ethical, reputational, environmental and social risks associated with these investments.

Regardless of the fossil fuel devaluations being related to the industry becoming aware of the role they play in the climate crisis or of the transition in the economic model that is already in place, one thing we know for sure: it is time for investors to take note of this trend and divest from coal, oil and gas before they see their money being buried along with them.

 

*Yossi Cadan is Global Divestment Campaign Manager