The Intergovernmental Panel on Climate Change (IPCC) recently published the first of three reports to assess the impact of climate change and global warming. The IPCC concluded that fossil fuels are behind the majority of the increase in CO₂ concentrations, and this is largely due to human activities. The global community recognizes that it will need to take action.
The non-profit organization Carbon Tracker Initiative (CTI) brought the concept of stranded carbon assets to the fore. The CTI scrutinizes fossil fuel reserves held by publicly listed companies globally, and challenges the value associated with them.
In their report ‘Unburnable Carbon – Are the world’s financial markets carrying a carbon bubble?’ the CTI estimated that if all proven oil, gas and coal reserves were exploited, an alarming five times the carbon budget would be released into the atmosphere.
This leaves approximately 80% of these assets technically unburnable, and they will therefore remain in the ground for now.
In the current situation, the oil, gas and coal companies who explore and exploit these reserves are funded largely by institutional investors. This relationship has been a loyal one for decades. Without clear regulatory pressures or economic opportunity, the majority of institutional funds are unlikely to divest in historically rewarding sectors like coal or oil.
The carbon bubble is beginning to draw the attention of investors. A group of 70 global investors who manage more than $3 trillion recently wrote to 45 of some of the world’s largest oil and gas companies explaining the financial impact this could have on their business.
Pension funds, which typically have long-term investment horizons, are re-evaluating their hydrocarbon investments, or have already diversified their portfolio to reflect lower carbon risk exposure. For example Storebrand, a Norwegian pension fund, has already divested thirteen coal and six oil companies from their portfolios.
Whether or not global leaders come to settle a binding agreement at the annual climate summit in Paris in 2015, a shift to a low carbon economy model will be needed to avoid dangerous climate change and to stay within the carbon budget.
If we begin to see more institutional funds like Storebrand divest and reallocate large amounts of capital in low carbon investments, it could have a significant impact on the needed change towards a sustainable and low carbon economy.