Fossil fuel giants failing to disclose investor risk, study warns

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The FINANCIAL — Oil and gas firms are largely failing to disclose the information investors need to accurately assess their exposure to risk associated with climate change and the transition to a low carbon economy, according to a report by financial think tank Carbon Tracker.

The findings are the latest in a string of studies warning that the energy sector is exposed to billions of dollars of so-called transition risks as the world pivots to a low carbon economy in line with Paris climate goals.

Fossil fuel firms remain largely dependent for future income on discovering and exploiting hydrocarbon resources, a process that requires significant capital expenditure. But it is precisely these future resources and reserves that are at greatest risk of being stranded in a world which keeps warming beneath two degrees, the study, titled Reporting for a Secure Climate, warns.

The analysis concludes the corporate disclosure practices intended to render transparent the risks a company is exposed to – and the actions they are taking to mitigate these risks – are lacking in this crucial area, leaving investors unable to make informed decisions.

“The long-term financial impacts of climate change are clearly material to the upstream oil and gas sector, yet current company disclosures do not go far enough to communicate the extent to which their capital expenditure plans are addressing this risk,” said Robert Schuwerk, executive director at Carbon Tracker.

Its conclusions are likely to accentuate investor concerns, which have already been heightened following a series of recent studies highlighting incompatibilities between fossil fuel investments and international commitments to slash carbon emissions.

Analysis issued last month by the NGO Global Witness identified $4.9tr of planned investment in exploration and extraction from new fields that “is incompatible with reaching the world’s climate goals.”

“Investors will rightly be concerned that despite industry rhetoric to the contrary, the oil and gas sector’s spending plans are so drastically incompatible with limiting climate change,” said Murray Worthy, senior campaigner at Global Witness.

Previous Carbon Tracker analysis identified $1.6tr of investment that faced being stranded if government policies were tightened to the degree necessary to meet the Paris Agreement, which pledges to keep warming well below 2 degrees.

Meeting these targets will require a “rapid and far reaching” transition across the economy, according to the UN’s most recent report on climate change. A study earlier this year by the Network for Greening the Financial System (NGFS), a coalition of 34 central banks and supervisors, outlined between $1tn and $4tn of potential losses to the energy sector as a result of transition-related climate risks.

Today’s Carbon Tracker report concludes that if investors are to be able to accurately assess these risks, disclosures will need to ensure transparency in relation to expected future capital expenditure on exploration and development activities as well as on the assumptions that underpin a company’s upstream strategy.

“Investors want reassurance that upstream oil and gas companies are factoring climate-constraints into their capital expenditure strategy. We believe that they could be doing a lot more to communicate this to their investors,” said Kate Woolerton, lead author of the report.

Responding to the report, Jeanne Martin, senior campaigns officer at pressure group ShareAction, said: “Oil majors are failing to come clean to investors about whether their assets will be stranded in a below 2C world. Is that because increased transparency would reveal that these companies have no intention of driving the low-carbon transition, as claimed in their glossy sustainability reports?

“With the 2019 AGM season in full swing, investors should use their full shareholder rights to support climate shareholder resolutions and vote against boards that continue to demonstrate inaction on climate change.”

There are growing signs that some investors are responding to this call. A survey of fund managers responsible for $10tr of assets, found this week that 86 per cent of managers wanted oil firms to align with the Paris 2015 UN goals, while two thirds want to switch their investments to low-carbon solutions.

Meanwhile, leading German corporate giants RWE and BASF today responded to calls from activist investors at the Climate Action 100+ group and confirmed they would undertake a full review of their lobbying activity to ensure it is supportive of the goalsof the Paris Agreement.

“Union Investment highly appreciates BASF’s and RWE’s positive first responses to the IIGCC/Climate Action 100+ engagement,” said Henrik Pontzen, Head of ESG at Union Investment. “Transparency is a prerequisite for making good and informed investment decisions. We therefore very much welcome the important commitments both companies have made to review and publish the results regarding the Paris Agreement alignment of their lobbying activities.”

Carbon intensive businesses can expect calls for greater reporting transparency to continue to intensify as more and more investors wake up to the stranded asset risks that have to date been hidden in their portfolios.

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