Fossil fuels are sub-prime assets, Bank of England governor is warned
Published by MAC on 2012-01-31Source: Carbon Tracker, Guardian
In an Open Letter to the governor of the Bank of England, a high-profile UK coalition of investors, politicians and scientists has warned that "overexposure to high-carbon assets by London-listed companies risks creating a ‘carbon bubble'"
The letter claims that: "The global drive to reduce carbon emissions could mean billions of pounds of fossil fuel reserves will rapidly lose value" and cause "a major problem" for institutional investors and pension funds.
Using terminology only too familiar to the financial chaos and collapse of 2008 onwards, the coalition says that the huge reserves of coal, oil and gas, held by London-listed companies are "sub-prime" assets, posing a systemic risk to economic stability.
The letter's authors point out that "five of the top 10 FTSE 100 * companies are almost exclusively high-carbon and alone account for 25% of the index's entire market capitalisation" and that this risk will exist in other indices and in bank loan books.
Another signatory, David Nussbaum, chief executive of WWF-UK, noted that other assets held by investors could be damaged by climate change:
"It's clear that we cannot burn all the fossil fuels currently listed on the world's financial markets without seriously impacting the value of other listed assets - which would affect the future pensions on which we'll all depend."
Tracking Carbon
In a separate report, the Carbon Tracker Initiative reveals that coal reserves held by 16 London-listed companies will release 45bn tonnes of CO2 when burned, equivalent to 86 years of annual UK emissions - already the tenth highest in the world.
Concern over the long-term risk posed by high-carbon assets has also been raised in the US, where the Investor Network on Climate Risk, a group of 100 institutional investors with collective assets of $10 trillion, recently said:
"In order to fulfil our fiduciary duty to safeguard the long-term interests of our clients and beneficiaries, we believe that it is essential to take action now that will result in substantial reductions in global greenhouse gas emissions within a timeframe that minimises the risk of serious impact."
Comment by Nostromo Research: At first read the Carbon Tracker report is highly significant. Nonetheless, some of its data seems to leave questions unanswered.
For example, reserves of coal "embedded" in investments on global stock exchanges stands at 49.35 Gt for the UK (figure 4). But the total for individual companies listed on the London Stock Exchanges (figure 5) appears considerably higher, at over 60 Gt.
Also (in figure 4) Indonesia is listed at the top in terms of coal reserves, while (in figure 2) Indonesia doesn't even appear as a major repository of global reserves.
It's arguable that - at least from a campaigning point of view - the mere listing of coal reserves, as opposed to figures for production, is not the most useful benchmark.
The role of London-listed Bumi plc, for example, is neglected (despite its being Indonesia's biggest producer and exporter of coal).
There's a caveat (page 12), relating to the assessment of the carbon burden of Rio Tinto and BHP Billiton, pointing out that this should not be based on the companies' total market capitalisation.
After all, as diversified mining and metal companies, they are responsible for considerably more activities than the primary production of fossil fuels.
Nonetheless, Rio Tinto, BHP Billiton, Glencore, ENRC et al (among UK-listed companies) are also responsible for a major toll of CO2 emissions from their steel, aluminium and other sectors.
* The Financial Times' list of most highly market-capitalised companies on the London Stock Exchange.
London Stock Exchange - occupied by coal
Carbon Tracker
19 January 2012
New analysis from Carbon Tracker endorsed by WWF shows how the growing number of coal mining companies listing in London exposes the financial market to a significant systemic risk. Investors tracking the FTSE AllShare Index are facing increasing efforts across the world to regulate the carbon dioxide (CO2) emissions from coal-fired power generation, most recently in Australia.
Carbon Tracker estimates that coal reserves equivalent to 44.56 GtCO2 are held by companies listed on the London Stock Exchange. This is equivalent to 400 years of emissions from coal power stations in the UK, which currently stand at around 0.1Gt CO2 per annum.
Where are the reserves?
A third of coal listed in the UK is actually located in Australia, where the government has recently agreed to deliver a carbon tax and emissions trading scheme. So "UK" investors are potentially exposed to climate change regulatory risk in Australia. However, Australia and Indonesia export around three-quarters of their coal production. So, in fact, around half of the coal owned by UK-listed companies is supplying developing economies in China, Russia, India and South Africa.
A financial system fit for purpose
Many asset owners and fund managers representing $20trillion of capital reiterated their call for the Durban climate negotiations at the end of November to deliver a 2°C policy framework. Now is the time for them to also ask financial regulators to deliver a 2°C degree capital market system.
The FSA needs to address the systemic risks of reserves concentrating on the London Stock Exchange and monitor the levels of fossil fuels listed in London.
Asset owners investing in the UK market should request that the FSA introduces limits to the levels of overseas fossil fuel reserves.
Accountants and analysts should review which reserves are lower quality due to risk of climate regulation, and climate change, and discount their value accordingly.
Read the pdf (704.8 kB)
A coalition of groups have written to the Financial Policy Committee, which is the body within the Bank of England charged with ensuring financial stability. The signatories - which include fund managers, Members of Parliament and NGOs - have requested the Committee reviews the potential for the high concentration of fossil fuels on the London Stock Exchange to cause a systemic risk. Read the BoE letter
Fossil fuels are sub-prime assets, Bank of England governor warned
Open letter to Sir Mervyn King says overexposure to high-carbon assets by London-listed companies risks creating a 'carbon bubble'
Damian Carrington
Guardian
19 January 2012
The huge reserves of coal, oil and gas held by companies listed in the City of London are "sub-prime" assets posing a systemic risk to economic stability, a high-profile coalition of investors, politicians and scientists has warned Bank of England's governor, Sir Mervyn King.
In an open letter on Thursday, they tell King that the global drive to reduce carbon emissions could mean billions of pounds of fossil fuel reserves will rapidly lose value and cause a "major problem" for institutional investors and pension funds.
At the most recent UN climate change summit in December, 194 of the world's nations agreed to enact legally binding curbs on greenhouse gas emissions within three years to limit global warming to 2C. But meeting this limit would mean just 20% of existing fossil fuel reserves could be burned, according to recent research.
"These high-carbon assets pose significant strategic challenges for the future prosperity of Britain that just can't be ignored," said investment manager James Cameron, who is a member of the prime minister's business advisory group. "Investors continue to pour cash into unsustainable assets without understanding the risks associated with these investments, such as climate change, local pollution, fossil fuel price volatility, political risk and catastrophes such as Deepwater Horizon."
The letter is also signed by the government's former chief scientific adviser Sir David King, Zac Goldsmith MP, former environment minister John Gummer and 17 others. It urges action to investigate the risk of the "carbon bubble".
Mervyn King chairs the Financial Policy Committee (FPC) set up in 2011 to "identify and take action to remove or reduce systemic risks to protect and enhance the resilience of the UK financial system." The letter's authors point out that "five of the top 10 FTSE 100 companies are almost exclusively high-carbon and alone account for 25% of the index's entire market capitalisation" and that this risk will exist in other indices and in bank loan books.
A separate report published on Thursday by the Carbon Tracker Initiative reveals that coal reserves held by 16 London-listed companies will release 45bn tonnes of CO2 when burned, equivalent to 86 years of annual UK emissions, which are the tenth highest in the world. Most of the coal is in other countries such as Australia and South Africa.
The letter states: "At present, regulators are not monitoring the concentration of high-carbon investments in the financial system and have no view on what level would be too high." It demands an urgent investigation of the issue by the FPC.
"We need to prevent the deep and profound harm that could be wrought by an overexposure to high-carbon assets and a rapid shift in their values," said Ben Caldecott, head of policy at investment company Climate Change Capital, who signed the letter along with Aviva Investors. "Unlike sub-prime mortgages before the financial crisis, this time regulators must act to prevent the build-up of systemic risk in our financial system."
Sir David King, now director of the Smith School of Enterprise and the Environment at Oxford University, said: "Sustainable economic growth is achievable. Those industries than can combine efficiencies with growth will be the winners in the low-carbon economy. And given the rise in global oil prices, those that find alternatives to fossil fuels will be well placed." 2011 was the first year in which the average price of Brent crude oil was over $100.
Another signatory, David Nussbaum, chief executive of WWF-UK, noted that other assets held by investors could be damaged by climate change: "It's clear that we cannot burn all the fossil fuels currently listed on the world's financial markets without seriously impacting the value of other listed assets - which would affect the future pensions on which we'll all depend."
Concern over the long-term risk posed by high-carbon assets has also been raised in the US, where the Investor Network on Climate Risk, a group of 100 institutional investors with collective assets of $10 trillion, said last week: "In order to fulfil our fiduciary duty to safeguard the long-term interests of our clients and beneficiaries, we believe that it is essential to take action now that will result in substantial reductions in global greenhouse gas emissions within a timeframe that minimises the risk of serious impact."