In September 2013, the investor group Ceres launched the Carbon
Asset Risk Initiative. Carbon asset risk ("CAR") is the
idea that the world's fossil fuel companies hold more oil, gas, and
coal reserves "than can realistically be burned in order to
avoid catastrophic global warming." This initiative was part
of an effort by investors to obtain greater
disclosure from these fossil fuel companies of information related
to these "stranded assets." On June 30, 2015, Ceres
issued the report Carbon Asset Risk: A Review of Progress and
Opportunities.
The report begins by discussing a "paradigm shift" in the
fossil fuel industry. Previously, the concern was running out of
fossil fuels, or not being able to access them cheaply enough.
Recent developments, however, have shifted the concern to the
buildup of unburnable carbon assets. The report attributes this
paradigm shift to three changes in the industry: (i) hydraulic
fracturing and other technological innovations have drastically
increased the exploitable reserves of oil and natural gas; (ii) a
movement to slow the burning of carbon fossil fuels in the face of
mounting evidence of climate change has been gaining momentum; and
(iii) technological advances have driven down the cost of clean energy alternatives. Report at 3. Part of the
CAR Initiative's objective was to address the tension between
the fact that companies are spending increasing amounts of capital
to find and develop fossil fuels reserves, while the value of those
reserves is becoming increasingly less stable.
The Initiative set forth two goals: (i) to prevent shareholder
capital from being wasted on developing carbon assets that may
become "unburnable," and (ii) to drive companies to
acknowledge and plan for the escalating physical impacts of climate
change. Report at 5.
The Initiative employed two strategies for achieving these goals.
First, there was a push for better disclosure by companies of the
kinds of information that would help investors to assess the scope
of CAR that each company faces. Further, companies have been urged
into action through shareholder resolutions and pressure to change
company practices relating to climate change.
The report highlights five keys changes that Ceres believes the
Initiative has spurred or accelerated in the industry. First, the
report notes that in response to investor requests, more than 20
companies have disclosed information on how the company treats CAR.
Ceres notes that these "first-ever disclosures" have
provided "information that has been used to challenge faulty
demand assumptions and create new awareness about the risks and
uncertainty in investing in fossil fuels."
Second, the report states that growing concerns over CAR have
caused fractures in the usual alliances in the fossil fuel
industry. Notably, the report points to the fact that several
European oil companies have adopted shareholder resolutions on
climate change and have started to publicly support the
environmental benefits of natural gas over coal.
Third, the report notes that mainstream acceptance of CAR is
growing among investors, regulators, and analysts. Fourth, Ceres
notes that technological breakthroughs have made renewable energy
more efficient and cost-effective. These advances have subsequently
undercut the carbon demand assumptions that drive major investment
decisions at large fossil fuel companies.
Finally, the report notes that investors have become increasingly
aggressive in forcing companies to address CAR, by pushing
shareholder resolutions requiring the company to disclose
information related to CAR, as well as nominating board members
with expertise on climate issues. In fact, as noted above, several
companies have adopted shareholder resolutions that require
additional reporting on CAR.
While the report indicates that the CAR Initiative has been quite
successful in its objectives, it also points to several
opportunities for future progress. The report asserts that more
action is still needed in the regulatory sphere. While several
companies have started to disclose CAR information in response to
shareholder resolutions, the overall rate of voluntary disclosure
remains low. In fact, an increasing concern among investors over
this lack of disclosure led Ceres to send a letter to the SEC in April requesting agency
action regarding the alleged failure of companies to disclose CAR
information.
The report also suggests that companies should start to integrate
low-carbon scenarios into capital planning and take steps to manage
CAR. Ceres points to the International Energy Agency's
suggestions of ways that companies can address the risks posed by
climate change: (i) reducing the carbon intensity of their assets; (ii)
divesting from their most carbon-intensive assets; and (iii)
diversifying their business by investing in lower-carbon energy
sources. Report at 26. Looking ahead, we expect Ceres to continue
to press forward with its CAR Initiative, heightening the focus on
businesses potentially affected by CAR.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.