Our thinking about the role of future environmental politics on capital markets has extended to another asset class – fixed income. Carbon Tracker recently collaborated with global credit-ratings agency Standard & Poors to publish 'What a carbon-constrained future could mean for oil companies' creditworthiness'. This report assesses the fact that lower emissions levels will affect the price and demand for oil operators such that they run the risk of being downgraded. In particular, companies focused on the oilsands saw their ability to maintain dividends and capital investment impaired. Perhaps most significantly the scenario saw the fundamental business model of these companies called into question. The uncertainty regarding the economic viability of future production meant further CAPEX was no longer justifiable. You can also view a video of Standard & Poors analysts discussing the analysis on its Credit Matters website.
On the equity side, HSBC conducted research looking at the impact of an emissions ceiling on European oil and gas majors. Applying the IEA's 450ppm scenario negated the need for some production. However the larger impact was from the knock-on effect of reduced demand to lower prices. This scenario would result in a 40-60% drop in market capitalisation for these companies.
Carbon Tracker and the IEA presented at a recent IIGCC roundtable for investors and analysts to identify useful future research around climate change risk. This demonstrated the increasing investor demand for properly integrated sell-side analysis, as well as the willingness of analysts to engage with alternative future energy scenarios.
Interpretations of the carbon bubble thesis continue to develop, reaching different geographies and audiences. Building on discussions in the US, South Africa and Norway, new coverage from China and Australia, as well as additional efforts in the US, have truly put the concept of unburnable carbon on the map.
– At a time when the cost of air pollution in China is attracting significant media attention, Carbon Tracker's article for China Dialogue, 'Sizing the carbon bubble', came as a timely reminder of the possible drive towards cleaner energy in China.
– Carbon Tracker's thinking is also making an impact in corporate reporting as presented by the Climate Disclosure Standards Board in South Africa using the Unburnable Carbon report to emphasise the risk climate change presents to companies dependent on particular value chains.
Mark Campanale, Carbon Tracker's Founding Director, and Jeremy Leggett, our chairman, recently contributed to Investment and Pensions Europe presenting the unburnable carbon analysis thus far and commenting on how institutional investors should interpret it.
The concept of 'stranded assets', which is central to our work, has continued to gather speed. The Smith School at the University of Oxford has launched a four-year programme backed by HSBC, Aviva, WWF-UK and Climate Change Capital, to help investors identify assets that could be left stranded by actions taken to drive a low-carbon future in light of climate change risk.
Further work needs to be done to ensure the regulators of the world's major financial markets have the right information to enable them to track this risk. This is why Carbon Tracker has proposed companies should report the greenhouse gas potential of the coal, oil and gas reserves they have an interest in.