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Fossil fuel companies 'paying lip service' to climate risk

Carbon Tracker study finds almost all oil, gas and coal companies acknowledge climate change as an issue but very few are integrating it into strategy

Coal, oil and gas companies almost universally recognise climate risks to their businesses, but fewer than one in 10 are integrating these threats into spending decisions.

That is the conclusion of the latest research by the Carbon Tracker Initiative (CTI), which analyses the disclosures of 49 oil and gas companies and 32 coal companies, including BP, Statoil, ExxonMobil, Chevron, BHP Billiton and Rio Tinto, and finds many are simply paying "lip service" to climate risk

Its report, published in partnership with Ceres, CDP and CDSB, shows every company in the sample acknowledges the existence of climate change as an issue. Meanwhile, 86 per cent of companies consider climate change to pose physical risks and 99 per cent deem climate-related regulation, such as carbon taxes or cap and trade schemes, to be a risk to their business.

However, the paper says these companies are subsequently "failing to connect the dots" by feeding this knowledge into their risk-management strategies - just seven per cent of companies are "providing evidence of adequately integrating this risk into corporate project and capital expenditure assessments", it states.

Four out of five oil, gas and coal companies showed no evidence of running climate scenarios analyses of the impact of different temperature increases, while only around 10 per cent of oil and gas companies – and just one coal company – stress-test projects against a climate goal of limiting warming to 2C. Perhaps this is less surprising, given just two of the 32 coal companies responding to the report's survey accept the 2C warming limit that governments are committed to via international climate agreements: 25 "acknowledged climate change", but only five of them went on to "acknowledge climate change requires emissions reductions".

CTI says fossil fuel companies' failure to disclose how they propose to deal with the transition to a low carbon economy or how business models will be affected by a 2C future should sound warning bells for investors, who are not receiving sufficient information on the vulnerabilities of fossil fuel companies to fluctuations in demand and price futures.

It calls for financial regulators and reporting standard setting bodies to increase their scrutiny of the assumptions fossil fuel companies make about future climate trajectories in order to build "climate literate" capital markets.

"Governor of the Bank of England Mark Carney acknowledged last week that the majority of oil reserves are 'unburnable' and that when it comes to the environment, there is a 'tragedy of horizons'," said Mark Campanale, founder and executive director of Carbon Tracker. "To ensure financial actors look more to the long-term on these matters, regulators must increase scrutiny on how climate risk is properly disclosed by listed fossil fuel companies, the most affected sector.

"With the IEA forecasting that $23tr will be invested in expanding the fossil fuel sector up to 2035, putting this amount of capital at risk doesn't leave much room for complacency in how climate risks are disclosed."

Other recommendations in the new report include mandating that companies publish the carbon embedded in their coal, oil and gas reserves and resources, alongside details relating their resilience to low price and demand scenarios. Earlier CTI research on coal and oil assets has shown projects worth billions of dollars are likely to be left stranded should prices dip further.

"Stranded assets present a material risk to the global economy which has parallels with the risks that precipitated the financial crisis in 2008," said Paul Simpson, chief executive of CDP. "Institutional investors need better disclosure from fossil fuel companies on the potential of their reserves to be stranded and details of how they intend to respond to this risk. Given that current accounting rules do not require this, institutional investors and financial market regulators must also take urgent action to ensure this risk is assessed, disclosed and managed."

The risk for fossil fuel companies is that if they do not respond they could become vulnerable to the growing divestment movement, which has successfully convinced a number of universities, churches, pension funds, and other big institutional investors to shed their oil, gas, and coal assets. The Swedish city of Örebro this week became the 30th local authority committing to pull its funds out of fossil fuels, following hot on the heels of Glasgow University - the first European academic institution to join the movement.

ExxonMobil last week published a long blog on divestment, accusing the campaign of being "out of step with reality", at odds with poorer nations' need to access energy, and the necessity of fossil fuels playing a major role in the global energy mix for decades to come.

"Divestment represents a diversion from the real search for technological solutions to managing climate risks that energy companies like ours are pursuing," wrote Ken Cohen, Exxon's vice president for public and government affairs.

But it is an argument with increasingly few proponents, given the growing body of climate legislation, burgeoning green economy, and increasingly urgent calls for action from not just scientists, but politicians outside the climate remit, such as UK Foreign Secretary Philip Hammond, who used his first speech on climate change this week to warn of the security threats it raises.

Fossil fuel companies find themselves on the opposite side of the debate not only to green businesses and NGOs, but also the Pentagon, the White House, Downing Street, and investment guru Warren Buffett. Paying "lip service" to climate risks is unlikely to convince investors for too much longer.

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Published on:
October 15, 2014
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