Day Of Reckoning For Fossil Fuel Industry
The fossil fuel industry is facing its day of reckoning – and not just because one of the world’s most prominent religious leaders, Pope Francis, is calling for action. In fact, the industry’s moment of crisis has been in the making for years, as a variety of trends – from rising production costs to cheaper renewable energy and expanding carbon-reducing rules – have taken stronger hold.
Today, the fossil fuel monolith is under attack from some of the same people it used to count as its closest friends – Wall Street analysts, investors and governments – because fossil fuels are no longer a safe bet. It has become impossible to ignore the systemic financial risks inherent in the production of coal, oil and other fossil fuels.
Perhaps the most glaring, pressing risks are those associated with carbon reserves still in the ground. Better known as “carbon asset risks,” the bottom line is that the world’s fossil fuel companies hold at least three times more oil, gas and coal reserves than can realistically be burned without causing potentially catastrophic climate warming.
An aerial view of the tar sands in Alberta, Canada. Credit: Howl Arts Collective/Flickr.
Almost two years ago, as part of the Carbon Asset Risk Initiative, 75 investors representing $3.5 trillion in assets called on the biggest players in the industry to fess up to these risks – and modify their business plans to deal with them.
Here are some of the key changes we’ve seen in the financial landscape, some of which are the result of escalating investor pressure:
First, cracks are emerging in the once-united fossil fuel industry. European oil companies are breaking with their U.S. peers and with coal. While climate-related shareholder resolutions passed at Shell (98.9%), Statoil (99.95%) and BP (98.3%), Chevron and Exxon opposed similar resolutions. Meanwhile, Shell, BP, Total, Eni, Statoil and BG Group have thrown coal under the bus by writing an open letter to the United Nations extolling the climate virtues of natural gas over coal and calling for a price on carbon pollution.
Secondly, the world’s largest importer and exporter of oil have both gone on record in ways that completely undercut bullish oil demand scenarios the industry uses to justify its business decisions. The head of Sinopec said that China’s demand for diesel fuel could peak as early as 2017 and demand for gas could peak by 2025. Meanwhile, Saudi Arabia’s oil minister is predicting that his country may no longer need fossil fuels in 25 years and that the future lies in clean energy. Furthermore, the Bank of England has commissioned an analysis on the risk of stranded carbon assets and the G-20 has asked the International Financial Stability Board to review global economic risks.
The third shift has been driven by investors, as over 20 fossil fuel companies have released detailed information about how they view their exposure to carbon asset risks including: whether they put an internal price on carbon, what screening prices they use for sanctioning projects, whether they assess their resilience to a 2 degree limit on global warming, and how they are planning for climate impacts.
While the quality of these disclosures varies, they have provided valuable information that investors have used to challenge faulty assumptions and boost awareness about the risks and uncertainty of investing in fossil fuels. In some cases, we’re seeing an impact within companies. Former coal giants like BHP Billiton and Exxaro, for example, have affirmed the consensus on climate science and the need to reduce greenhouse gas emissions. Meanwhile, Total has made major investments in solar and Statoil has created a new renewable energy division focused on offshore wind.
The fourth big indicator of change can be seen in the growth of renewables. Solar photovoltaic technologies for example, are already cheaper in many parts of the world than fossil fuel power, and UBS has predicted solar will replace nuclear and coal to become the “default technology of the future to generate and supply electricity.” Furthermore, extreme weather events from droughts to flooding to heat waves and wildfires weigh in favor of more distributed energy systems built around renewables and energy storage, to promote resilience.
Finally, members of Ceres’ Investor Network on Climate Risk, led by the New York City Comptroller and CalPERS, have ramped up pressure on boards of directors at 33 fossil fuel companies, which faced resolutions calling for “proxy access” or the right of major investors to nominate independent directors to company boards. Despite opposition from companies, many of the proposals received majority support at annual meetings, including Chevron’s. Shareholders also forced boards and CEOs to address their failure to adequately manage carbon asset risk by pushing resolutions aimed at adding board members with expertise on climate or directly challenging continued capital expenditures on high-risk projects.
Companies like Exxon and Chevron are betting that the next 100 years will look a lot like the last 100 years, even though the facts suggest otherwise. Investors, analysts, and even the Pope can see the writing on the wall: the global transition to a clean-energy economy is happening, and the fossil fuel majors are at risk of being left behind.