As concerns mount over fossil fuels becoming ‘stranded assets,’ experts warn of looming financial crisis

By Benjamin Hulac | 10/30/2015 08:14 AM EDT

For years, Jeremy Leggett and his peers at the Carbon Tracker Initiative, a London think tank that has made a name for itself in the realm of energy, climate and economic wonks, have said the world’s financial system and the experts who study and regulate it aren’t properly scrutinizing the economic hazards connected to climate change.

In 2011, Carbon Tracker released a report warning that energy companies control coal, oil and gas reserves far too large to safely burn. It provided the framework of a so-called carbon budget.

That analysis, Leggett explained this week, didn’t make a big splash and didn’t express a fresh message.


But in April two years later, within a report subtitled, "Wasted Capital and Stranded Assets," the group’s analysts expressed several financial concerns: Regulators were failing to slow or probe the buildup of money in the fossil energy industry and connected risky assets. Institutional money managers focused on short-term profit, not long-term threats. And other experts, like actuaries, analysts and accountants, weren’t examining the markets’ "overall integrity" and the economic jolt a widespread shift toward cleaner energy sources might bring.

Supporters of Sen. Rand Paul demonstrate in Frankfort, Ky., a state where mining jobs are declining. | Photo by Gage Skidmore, courtesy of Flickr.

Put together, these and other factors led to a nuanced conclusion that investors and firms stand to lose tremendous amounts of money if policymakers pass climate legislation barring companies from extracting resources — measures meant to stay below the 2-degree-Celsius threshold — as markets effectively make those hydrocarbon pockets too expensive to pursue.

Whether or not they agree with it, many now know that concept as the "stranded assets" theory. It was a bold statement, and it came with data.

Between 60 and 80 percent of the coal, oil and gas pockets that public companies own can’t be burned if the world is to meet the 2-degree-by-2050 target, the report said, even though energy firms spent more than $600 billion looking for new supplies in 2012. And at the time the report came out, the New York and London stock exchanges contained $1.5 trillion and $538 billion worth of holdings, respectively, tied up in coal, oil and gas companies. (The World Bank valued Australia’s economy at about $1.5 trillion and Belgium’s at a little less than $538 billion last year.)

"Smart investors can see that investing in companies that rely solely or heavily on constantly replenishing reserves of fossil fuels is becoming a very risky decision," Nicholas Stern, the author of the famous Stern Review on "The Economics of Climate Change" and a contributor to Carbon Tracker’s 2013 report, said at the time. "The report raises serious questions as to the ability of the financial system to act on industry-wide long-term risk, since currently the only measure of risk is performance against industry benchmarks."

In a conference call this week, Leggett again presented the case CTI and others gloomily trumpet: Companies and financial markets are not adequately prepared for an inevitable shift away from a world powered by fossil fuels, nor are they ready for the financial fallout that would follow.

"We are manifestly in a great global energy transition," said Leggett, nonexecutive chairman of CTI, underscoring three inventions challenging the current energy systems — solar power, electric storage and electrified transportation.

A ‘huge’ speech from a regulator

After the 2013 report, Leggett said the message he and his colleagues shared with the energy industry and other corporate managers was, "Really, guys, you need to be scrutinizing the risk here."

Some companies pushed back, saying they had good, marketable assets that wouldn’t be "stranded," Leggett recalled, or they simply refuted the idea of carbon risk and doubted policymakers would pass carbon-cutting legislation.

Four weeks ago, a top financial watchdog spoke up.

"Changes in policy, technology and physical risks could prompt a reassessment of the value of a large range of assets as costs and opportunities become apparent," Mark Carney, governor of the Bank of England, said in a speech last month, referring to stranded asset concerns (ClimateWire, Sept. 30). The exposure for U.K. investors to shift from fossil to renewable energy is "potentially huge," he said.

It was the most conspicuous sign from any regulator that stranded assets present financial red flags.

Leggett said the impact of Carney’s speech was "huge." He said it was an expression of what CTI has been studying for years.

"He said that stranded asset [risk] is real," Leggett said of Carney. He added, paraphrasing the central banker: "It’s rooted in science, assets will be stranded."

On Tuesday, Leggett drove to Sacramento with Danny Kennedy, managing director of the California Clean Energy Fund, a nonprofit with an investment arm that reinvests funds for renewable energy and other projects.

They planned to meet with several experts and policymakers to discuss the risk of fossil fuel investment and pitch the pros of stocking up on renewable energy holdings.

Yet both said they’ve been met with disbelief and surprise over the idea of climate risks on their road show. People haven’t bought into the idea, Kennedy recounted.

Kennedy said there isn’t enough focus on the negative financial and climate hazards as the world shifts from fossil energy to renewable options.

"And those risks are mounting," he said. "I’ve been surprised again of how little is known of the carbon bubble thesis."

Fielding a call from Kentucky from a man asking how he could break more harsh news to people in Appalachia that the energy is changing, Kennedy called the shift an "inevitable" transition.

"We need them to be accountable on the state story," Kennedy said of corporate boards failing to account for the labor and unemployment costs of the shrinking coal industry. "There’s human costs to this transition that we need to be mindful of."

The Financial Stability Board, an adviser group to the Group of 20 coalition of nations, met in September and talked about climate change and financial perils. The board has said it’s studying climate and financial threats and will report to the G-20.