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July 08, 2013

Climate Risk Means Financial Risk

Oil moneyThe response to climate change poses a major threat to financial markets, and it's time for investing institutions and the governments that regulate them to take note. Just last month, Australia's Climate Commission and executives from Macquarie Bank warned that the country's coal and gas industry will take a serious hit as the world is forced to respond to climate change.

Scientists and institutions such as the International Energy Agency have long warned of the dangerous consequences the world will face if we allow warming to exceed 2˚C. Research from Carbon Tracker and the Grantham Research Institute at LSE shows that in order to stay below 2˚C, 60 to 80 percent of the coal, gas, and oil reserves publicly listed in the world's stock exchanges must stay in the ground, making these unburnable carbon sources hugely overvalued.

Carbon Tracker refers to this scenario as a carbon bubble, much like the housing bubble that precipitated the global recession, and they are not alone. HSBC economist warn that companies like BP and Shell could lose 40 to 60 percent of their market value, since their gas and oil holdings would be off-limits.

Yet, despite all the warnings, the holdings of these companies have not changed.

Investors seem either unfazed or unwilling to comprehensively incorporate the fact that most fossil fuel resources will never be fully exploited into their risk analysis. For example, a proxy vote by shareholders of Consol Energy Inc. only delivered 19.7 percent support to request a report on how the company will respond to the fact that much of its holdings "may become unusable, unmarketable, or otherwise not economically viable as a result of greenhouse gas restrictions." This troubling disconnect between investments based on current fossil fuel reserves and the likely decline in the value of these investments in the future puts us on a course to financial and environmental disaster.

Coal is already proving to be a bad investment. China has indicated that it plans for coal use to peak within the next five years, beginning a decline in usage that directly contradicts the unchecked demand the coal industry claims will go on indefinitely. In India, major coal plants have faced massive losses and even bankruptcy. Puzzlingly, not only are investors failing to pull their money out of fossil fuel reserves, many are continuing to try to expand and develop coal and other fossil fuel resources.

The financial sector needs to quickly respond to the policies that are being put in place to curb the devastating consequences of climate change. Carbon Tracker has several strong recommendations, including disclosing estimated emissions from existing reserves and government mandated structures for risk analysis. But while financial heavyweights, including HSBC, Citi, and IEEFA are sounding the alarm, the industry writ large would prefer to keep their heads buried in the sand. It is time to wake up, before our economy, and our planet, are forced to face the consequences.

-- Vrinda Manglink, Sierra Club International Campaign intern

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