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.

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