"We don't want to see the Fall of Saigon scenario".

Carbon Tracker Quarterly: “The beginning of December saw Carbon Tracker announce our first CEO. Anthony Hobley will take the helm on February 1 2014 and Carbon Tracker founder, Mark Campanale, becomes Executive Deputy Chairman.” “Anthony leaves his position as global head of sustainability and climate change at Norton Rose Fulbright LLP. Anthony is also president of the Climate Markets and Investment Association, a lobby group favouring carbon markets. Anthony told the press ‘The Carbon Tracker Initiative is not about destroying value or closing down companies. It’s about avoiding financial instability. We don’t want to see the ‘fall of Saigon’ scenario where investors are scrambling to get into the last helicopter’. Watch the full interview with Anthony on FTFM.
In addition to the exciting appointment of a CEO, Carbon Tracker also got some good news courtesy of Investment Week, who awarded us the Award for Innovation at their ESG Investment Week Awards 2013. And what with good things only coming in threes, Carbon Tracker was also rated the 2nd most influential NGO relative to available resources by UK Environmental Grantmakers out of 140 organisations.
This quarter saw over $3trillion worth of investors support the Carbon-Asset Risk (CAR) Initiative – a joint project between Carbon Tracker and CERES to spur the world’s 45 top oil, and gas, coal and electric power companies to assess the financial risks of changes in fossil fuel demand and price. Investors signing the letters include California’s two largest public pension funds, the New York State Comptroller, F&C Management and Scottish Widows Investment Partnership, whose head of sustainability, Craig Mackenzie, said:
‘Companies must plan properly for the risk of falling demand by stress-testing new investments to minimise the risk our clients’ capital is wasted on non-performing projects’.
This initiative follows Carbon Tracker’s ‘Wasted Capital & Stranded Assets’ analysis which highlighted the opportunity to challenge CAPEX spending on developing fossil fuels. Where companies are unable to justify new projects, or identify alternative opportunities, investors are looking for capital to be returned to them.
A new report released in December has found that 80% of asset-owners are failing to manage climate change risks, possibly exposing them to the ‘carbon bubble’. The Asset Owners Disclosure Project’s (AODP) Global Climate Index rated 458 asset owners who responded to their survey on their management of climate risks, concluding that just 6% would likely survive a ‘carbon crash’. The UK’s Environment Agency Active Pension Fund was the top rated for managing climate change.
Julian Poulter, executive director of AODP said that ‘while we can see some leaders emerging, many haven’t acknowledged their dangerous and foolhardy addiction to investments riddled with climate risk, let alone checked themselves into rehab’.
This analysis follows hot on the heels of Share Action launching the Green Light campaign which is mobilising pension beneficiaries to push their funds to managing climates, and promoting best practice amongst investment institutions. An Oxford initiative is trying to bridge the generations by providing a new topic of conversation on Boxing Day. Push your parents is trying to use the environmental concerns of young people to enlighten the investment choices of their parents.
The notion of stranded carbon assets continues to gather pace with Generation Investment Management releasing their white paper for 2013 on the topic. Entitled ‘Stranded carbon assets: Why and how carbon risks should be incorporated in investment analysis’, the report analyses how regulation, market force and socio-political pressures can all be the drivers that lead to the loss of value of carbon-intensive assets.
Bloomberg LP has taken this thesis one step further, providing users of Bloomberg terminals with the opportunity to test the effects of varying demand and, therefore, coal, oil and gas prices on companies’ business models. The Carbon Risk Valuation Tool goes some way to communicate the stranded assets issue from climate and sustainability groups to investors and traders. While the tool lacks the project level detail that investors crave to truly understand how much of a commodity can still be profitably sold at different price levels, it is a first step.
To follow all the latest news on the risk of stranded carbon assets, follow our new Twitter account @strandedassets, as well as the full update service @Carbonbubble.
The proposed Keystone XL (KXL) pipeline in Northern America has become a symbolic piece of infrastructure in terms of keeping fossil fuels in the ground. Carbon Tracker enlisted the help of three wise men (well top analysts anyway) to produce a scrupulous look at the economic viability of the project. We found that approval would encourage investment into risky high-cost, high-carbon projects, dependent on rising oil prices:
‘The vision of improved prices KXL promises could quickly be wiped out by increasing costs, meaning investors who believed the mirage of improved oil-sands economics with KXL will be left disappointed,’ said advisor Mark Lewis.
“KXL will improve returns in the short-term, which means that it will help catalyse new investment, more oil-sands production, and additional greenhouse gas emissions,” adds co-advisor Mark Fulton.
Reid Capalino picked apart the industry costs data, which indicated that the rail alternative was not attractive financially either. Another reason why investors should be challenging any company set to sink more capital into developing oil sands production.
KXL is a microcosm of the great lengths the oil and gas industry are having to go to find additional reserves to keep up with depletion rates. The industry is under severe pressure from shareholders, disgruntled at the increasing levels of capital spending for less and less oil. As such, analysts are increasingly getting in board with one of Carbon Tracker’s recommendations for these companies to ‘shrink to grow’, i.e. reduce capital spending in favour of higher dividends and share buybacks. This process allows means that companies will be focusing more on delivering shareholder value, and less on production at all costs.
No coal in the stocking this year?
After sustained campaigning from a number of civil society groups, the European Bank for Reconstruction and Development (EBRD) have agreed in their latest strategy review to follow the World Bank, European Investment Bank and US Export-Import Bank in restricting coal financing in ‘rare and exceptional circumstances’ – the Asian Development Bank and some other institutions may still find some coal in their stocking this year though. EBRD also received a visit from Carbon Tracker advisor, Mark Fulton and our founder, Mark Campanale, who presented on ‘unburnable carbon’ to a senior team of EBRD policymakers and energy staff at their HQ in London.
And the bad news keeps coming for coal. The Labour Party of Norway has called for the $800bn Sovereign Wealth Fund (NBIM) to sell out of coal assets. A spokesman said that the move is the natural follow-up to the agreement made between the Nordic countries and the US, which spells bad news for BHP, Xstrata/Glencore, E-On and RWE, of whom the NBIM is a large shareholder.
As an example of the fossil fuel industry on the whole, BHP Billiton have been bearing the brunt of the unburnable carbon thesis more than most of late, amid vociferous calls for them to fully consider climate risk. Former chairman of the Australian Coal Association, Ian Dunlop, campaigned for a seat on BHP’s board to provide a voice warning of the carbon bubble as well as the physical impacts of climate change.
Australia’s Local Government Super supported Dunlop stating ‘to protect the value of investments…this is an issue that the board need to take ownership of,’ and reports are now surfacing that the fund is considering selling out of coal altogether. Bloomberg report that coal is seen as the new tobacco, sparking an investor backlash.
However it is Xstrata that is actually still piling in the cash to new coal projects out of the big diversified miners – so one to take a close look at in the new year.
Christmas on a (carbon) budget
November saw the annual meeting of the UNFCCC COP, this time in Warsaw. This process saw a partial agreement towards setting the groundwork for the crunch conference in Paris in 2015. Carbon Tracker played its role in highlighting our unburnable carbon and carbon bubble theses, with founder Mark Campanale presenting at two well attended side-events, including one with CDP at the Warsaw Stock Exchange.
It also saw the carbon budget take a more central role in policymaking discussions than ever before. Christiana Figueres, executive director of the UNFCCC, said in the run up to COP19 that ‘I don’t think it is possible [to allocate carbon budgets]. Politically it would be very difficult.’ Nevertheless a number of experts and scientists consider it a useful and important tool, led by economist Lord Stern who believes talks must start urgently on the world’s carbon budget. As Jon Williams at PwC highlighted, positive outcomes at the UNFCCC COPs are vital because ‘we seem to be adding to the carbon bubble rather than trying to deflate it’.
Luke Sussams and Mark Campanale presented in Brussels to a combined meeting of DG Energy, DG Markts and DG Clima staff as we look forward into 2014, at how we can see financial markets regulation harmonise with climate and policy objectives.
Stuck for a stocking filler – our chairman, Jeremy Leggett’s book, The Energy of Nations, is flying off the shelves and gives a bar stool view of the changing energy landscape here. It focuses on snow blindness and the road to Bethlehem, or was that risk blindness and the road to renaissance – read it and find out…”