Capital markets ignoring risk of unburnable carbon: report

A new report has warned that financial markets are failing to account for global action on climate change, keeping investors in the dark about the future impact of carbon budget constraints and putting trillions of dollars worth of shareholder assets at risk.

The report, ‘Carbon Avoidance? Accounting for the Emissions in Hidden Reserves’, released on Wednesday by the Association of Chartered Certified Accountants (ACCA) and the Carbon Tracker Initiative, finds that current financial reporting standards, stock market listing requirements, industry reporting frameworks and non-financial reporting guidelines do not alert investors to the risks of reserves associated with climate change.

The report comes as the Australian government unveils its proposed legislation to become the first country to wind back a carbon price. The report’s focus is on the fossil fuel and extractive industries,and it challenges the way in which coal, oil and gas reserves are accounted for and reported, and the broad-ranging failure to factor in the risk that some of these current reserves may not be combusted. It comes as the Australian government

And it’s a real risk. In June, the International Energy Agency repeated and intensified its call for the world to leave nearly all its supplies of undeveloped thermal coal in the ground.

The IEA – a highly conservative organisation created after the 1970s oil crisis to ensure the developed world had sufficient access to energy supplies – said that to meet the 2°C global warming targets, the world could only afford to use less than one-third of its current proven fossil fuel reserves before 2050, unless carbon capture and storage (CCS) is widely deployed (which it probably won’t be).

But a reporting survey by the ACCA and Carbon Tracker Initiative has found that the issue of unburnable carbon is not being addressed, with current strategies laid out in annual reports still talking of growth that is incompatible with emissions limits.

The report recommends disclosure could be improved if companies were required to convert reserves into potential carbondioxide emissions; produce a sensitivity analysis of reserves levels in different price/demand scenarios; publish valuations of reserves using a range of disclosed price/demand scenarios, and; discuss the implications of this data when explaining their capital expenditure strategy and risks to the business model.

“Accounting standards require reasonable assumptions to be applied,” said James Leaton at Carbon Tracker Initiative. “Given that fossil fuel reserves already exceed the global carbon budget, it seems reasonable to start assuming not all of them will be burnt.”

The report says there is a need for capital markets to become more ‘climate literate’, and counsels that investors need more complete, forward looking and integrated information on greenhouse gas emissions.

A key message in the report is that capital markets have huge importance for the global economy and if they are to function effectively, they need to integrate material short-term andlong-term climate-change risks into their reporting.

A similar case has also been made by the Organisation for Economic Co-operation and Development, with OECD Secretary-General Angel Gurría warning earlier this month that ignoring the risks posed by climate change is even more dangerous than the risks posed by a breakdown in the financial sector.

“In parallel, over these same years, governments have also been grappling with how to cope with the risk of climate change. Here the time frames are much longer but, unlike the financial crisis, we do not have a ‘climate bailout option’ up our sleeves.”

Gurría also warned against “stranding” further assets in fossil fuels at the risk of doing the same to the planet.

“It is worth recalling that the investors are in so many cases people like you and me. The Asset Owners Disclosure Project estimates an average of over 55 per cent of pension funds’ portfolios is being invested in high carbon assets or sectors greatly exposed to climate change physical impacts and climate change-related regulation. The looming choice may be either stranding those assets or stranding the planet,” he said.

“The fact is that any new fossil resources brought to market — conventional or unconventional — risk taking us further away from the trajectory we need to be on, unless there is a firm CCS requirement in place or governments are prepared to risk writing off large amounts of invested capital.”