The financial risk of holding fossil fuel stocks in public (or private) portfolios has been skyrocketing. However their stock prices do not reflect this escalating risk because the companies are not transparent and do not correctly predict the losses associated with their stranded assets (assets that suffer premature write-downs) and with their potential legal liability as suits filed by communities suffering from climate change seek compensation from those deemed responsible.
A report by Lloyd’s of London Insurance Company and Oxford University urges the insurance industry to require companies that they insure to act on climate change to avoid stranded assets, and to report their climate-related activities.
We already know the math of stranded assets (the amount of fossil fuel reserves that must remain in the ground to stay within a specific limit, called “unburnable carbon”): in order to stay under 2°C rise in temperature limit set by the United Nations COP 21 (Paris 2015), we must keep 80% of known coal reserves, 50% of known oil reserves, and 33% of known gas reserves in the ground. Bill McKibben, founder of 350.org, published the first math calculations in the Rolling Stone, and began the movement called “Keep It In the Ground”.
Here are some facts from the Lloyd’s report:
- Constraining the consumption of fossil-fuel reserves to the 2°C scenario will collectively cost upstream oil companies revenues of $20 trillion, gas companies $4 trillion, and coal companies $5 trillion.
- The 2°C scenario allows an additional global “carbon budget” of 1,000 GtCO2. With oil providing about 40% of global emissions, the oil-specific carbon budget is 400 GtCO2, compared to current oil reserves that are 1.6 times this (up to 2050).
- Under the 2°C scenario, 60-80% of listed companies’ fossil-fuel reserves would be “unburnable”. These firms had stock capitalizations of $4 trillion and corporate debt of $1.27 trillion in 2012.
Big Oil has not incorporated their already-known stranded reserves into their asset sheets. Any investments to develop potential reserves, or to find new reserves, are wasted money. Yet Big Oil continues exploration and development.
Legal liabilities are only beginning to take shape. New York sued Exxon for hiding their research that demonstrated that burning oil created CO2 emissions that heated the atmosphere and caused climate change, and thus Exxon did not inform shareholders about the related financial risk. Three California communities have filed lawsuits to recoup damages from the storms and floods they have experienced as a result of the extreme weather that is part of climate change.
These potential legal liabilities of the fossil fuel companies will skyrocket, as happened when people started suing the asbestos and tobacco industries for damages. Scientists have presented the methodology for calculating the damages caused by the coal, oil, and gas industries. Now the legal community has the basis for calculating the monetary damages and attributing it to activities of individual companies, which is essential in a lawsuit. The authors of the study published it in the journal Climatic Change. The authors write,
“[N]early 30% of the rise in global sea level between 1880 and 2010 resulted from emissions traced to the 90 largest carbon producers…More than 6% of the rise in global sea level resulted from emissions traced to ExxonMobil, Chevron and BP, the three largest contributors.”
For these reasons, public pension funds (and all reasonable portfolio holders) should divest their fossil fuel companies because of their large and growing financial risks. Insurances companies face substantial legal defense fees and pay-outs unless they stop providing insurance to fossil fuel companies at costs substantially below their financial risk.
Now is the time to act, while the stock prices are not reflecting the known financial risks. Once the public refuses to hold fossil fuel stocks and insurance companies refuse to insure them, then these companies will either transform into clean energy companies, or go out of business.
We must Keep It In the Ground, or the planet will become uninhabitable for humans as we push the Sixth Extinction along.