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Investors worth $3tr warn oil and gas firms to diversify – or die

Coalition of investors sends letters to 45 companies calling on them to present detailed climate assessments by 2014

(Pic: Arnold Paul)

(Pic: Arnold Paul)

By Nilima Choudhury 

A coalition of 70 investors have launched the first-ever coordinated effort to spur the world’s top fossil fuel companies to assess the financial risks that climate change poses to their business.

The investors, collectively worth $3 trillion, sent letters to 45 fossil fuel companies predominantly across the US and Europe last month, requesting detailed responses before their annual shareholder meetings in early 2014.

The signatories include California’s two largest public pension funds, the New York State Comptroller, F&C Management and the Scottish Widows Investment Partnership.

The letter said: “We would like to understand what options there are for [the company] to manage these risks by, for example, reducing the carbon intensity of its assets, divesting its most carbon intensive assets, diversifying its business by investing in lower carbon energy sources or returning capital to shareholders.”

Fossil fuel companies continue to spend billions of dollars each year to find and develop new reserves despite the fact that about two-thirds of existing reserves will likely have to stay in the ground if the international goal of limiting global warming to 2˚C is to be met.

Changing tactics

Craig Mackenzie, investment director and head of sustainability at pension fund company Scottish Widows said fossil fuel companies will agree to the letter and use their money more wisely by divesting assets rather than expanding an existing portfolio.

“There are really significant discussions underway with the oil sector about whether the recent massive splurge of capital on growing reserves has now run too far and there’s a need for much greater capital discipline and thinking much harder about the possibility of demand risk and delivering higher returns for investors.

“Scottish Widows divested from these [fossil fuel] companies not on ethical grounds but because we think they’re not a very good investment decision. That view is shared very widely in the investment community.”

In April this year the Unburnable Carbon report found that in 2012 alone, the 200 largest publicly traded fossil fuel companies collectively spent an estimated $674 billion on finding and developing new reserves some of which may never be utilised.

Investors are aware that assets are already being written down, with increasing competition between energy sources, air quality standards being introduced to reduce health impacts, and measures to reduce carbon pollution combining to change the energy landscape.

Rising costs

The market sentiment is starting to mirror this concern as analysts note that oil companies are spending ever more capital per barrel of oil they seek to find, requiring oil prices to continue rising just to stand still.

The coal sector faces a structural shift, with the threat of peak coal demand in China looming ever closer, which would weaken prices, reduce revenues and devalue existing assets.

Jack Ehnes, chief executive officer at the pension fund California State Teachers’ Retirement System said: “We’re concerned that fossil fuel companies are heading down a path that is financially unsustainable.

We’re concerned that the fossil fuel companies we own are pursuing the long term business plans that seem to depend on the world not taking climate change seriously.

“Companies like Exon Mobil are betting billions of dollars of our shareholder capital on a future that looks a lot like the present in terms of our fossil fuel use. Yet scientists tell us more of the same is a recipe for a disaster.

Ehnes continued: “The letter is not a point of protest but a point of engagement. The path to getting to a better place is through understanding why companies have chosen a certain path. Change can only come in the act of conversation.”

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  • Peter Thurrell

    AS long as oil companies are allowed to depreciate their “found” but unused reserves (a tax avoidance process called depletion) they will never stop searching for more reserves. It is just too profitable as it provides them with billions of dollars of tax losses that offset the taxes they would otherwise pay on their profits from sales of oil.