FINANCE

'Cynical' market shrugs off latest climate warning on fossil fuels

Headlines may move markets, but the latest news on climate change has so far failed to disturb fossil-fuel investors.

It's not for want of information. One week ago, this headline flashed across Wall Street traders' screens: "Fossil Fuels Need to Stay Unburned to Meet Climate Target."

The story, by Bloomberg, referred to a major study by the U.N. Intergovernmental Panel on Climate Change. The IPCC had said that to keep global temperatures from rising beyond 2 degrees Celsius, humanity has to follow a carbon budget.

That budget, previous research has shown, is far less than the carbon dioxide embodied in the world's proven coal, oil and gas reserves.

In principle, that should have investors concerned about a "carbon bubble" -- the idea that if governments decide to corral climate change, the value of fossil-fuel companies will dive.

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But the IPCC data didn't pop the carbon bubble. For now, the market's mysterious movements are being chalked up to the budget showdown and shutdown in Washington, D.C.

"The market is quite cynical, and they know the difference between what's good to do and what people are going to do," said Nell Minow, a corporate governance expert and former head of the proxy advisory firm Institutional Shareholder Services Inc.

"I think they might act on news of some new regulatory action, but they're not going to act on some scientific report when so many reports are ignored and when so much money is being poured into discrediting them," she said.

The IPCC said that to have a 50 percent chance of holding global warming to 2 degrees Celsius, mankind can release up to 1,210 gigatons of CO2. The IPCC estimated that mankind has already released 531 gigatons. That implies some 680 gigatons of headroom.

There are various estimates for how much carbon is locked in humanity's current supply of fossil fuels, but all say it's more than can be released under a 2-degree plan.

"No more than one-third of proven reserves of fossil fuels can be consumed prior to 2050 if the world is to achieve the 2°C goal, unless carbon capture and storage (CCS) technology is widely deployed," the International Energy Agency said last year.

The IEA said two-thirds of the carbon is in coal. Broken down by region, two-thirds of it sits in North America.

But investors seem unmoved. The Market Vectors Coal ETF (exchange-traded fund), one basket of global coal companies, has held above $19 a share, just where it was when the IPCC issued the first part of its report. And stock prices for the major oil and gas firms have held steady as a group.

That doesn't surprise Bennett Freeman, senior vice president for sustainability research and policy at Calvert Investments, which manages $12.6 billion in assets and treats sustainability as a core strategy -- even in its fossil-fuel holdings.

Freeman said the carbon bubble is a useful idea for the market to begin considering, but it takes regulation to grab the attention of investors.

"Reports aren't going to do the trick here," he said. "What's going to do the trick is the political will that will translate into the kind of decisions that we need to protect the long-term environmental and economic health of the planet."

James Leaton, who helped do the original research behind the idea of the carbon bubble, had another explanation: The markets lack the long view.

"The markets do not seem to be able to factor in longer-term global trends so well, which perpetuates the status quo in terms of the energy sector and where capital is spent," said Leaton, project director with the Carbon Tracker Initiative, by email.

The world's stock exchanges have 762 gigatons of CO2 represented in their coal, oil and gas reserves, Carbon Tracker said this year. That already exceeds humanity's carbon budget, the group said, but fossil fuel companies are still seeking to expand their reserves -- potentially doubling the amount of CO2 listed on stock markets.

To the "carbon bubble" school, that is the equivalent of amassing typewriters right before the computer age.

But at the same time, it's not clear that Wall Street offers ways to hedge against the risk. Analysts focus on quarter-by-quarter results and annual strategy. Companies buy contracts to hedge against oil and gas prices, but typically not further than a couple of years ahead.

Ben Tsocanos, an energy analyst with credit-rating agency Standard & Poor's, said he wasn't aware of any long-term tools that could cover a fossil fuel company's "existential" risk.

"I can't think of one, unless you're going to go long renewables or something like that," he said.

The main financial instruments used today are short-term compared to climate change, and there aren't enough traders to create a real market, he said.

"The market just isn't liquid enough, isn't there to hedge more than two to three and at the outside, five years," Tsocanos said.

If the markets aren't preparing for the carbon bubble, adherents say, at least the theory is gaining traction. They point to a handful of Wall Street reports -- issued by Goldman Sachs, Citigroup and HSBC, for example -- as signs of enlightenment.

Paul Bugala, senior sustainability analyst at Calvert, said investors are getting closer to measuring the carbon intensity of various companies -- and how much carbon policy would threaten their business.

"Right now, we're all in a bit of limbo," he said.

Coal's plight

Coal, the most carbon-intensive fuel without CCS, has the most at stake. U.S. environmental policies, as well as low-cost shale gas, have seemingly crimped its domestic future.

To show investors they have growth markets, some coal firms have begun to tout their business abroad. Arch Coal Inc., one of the world's largest coal producers, recently opened offices in Singapore and the United Kingdom.

This spring, one investor in CONSOL Energy Inc. asked the company to describe its risk if governments crack down on fossil fuels.

CONSOL denied the request, saying current U.S. coal plants can run for decades more. Developing countries offer a growing source of demand. And CCS could always achieve a breakthrough.

"Thus, it is not a certainty that there will be a long-term substantial diminution in the demand for coal and the future may hold more promise for coal than risk," CONSOL said.

Some think oil has an even stronger claim to stability. The calorie-packed fluid remains the most efficient way to supply energy to vehicles, and the market knows it, said Tsocanos of S&P.

"We're a lot farther away from replacing oil-based transportation fuels than some of the other substitution questions," he said.

In a March analysis, S&P found that carbon controls would deliver a financial blow to medium-sized companies with large positions in Canadian oil sands. Their bet on a high-cost, high-carbon resource would endanger credit scores, S&P said.

Oil majors, with greater financial scale and diversification across fuels, would weather the storm better, S&P said.

The wild card

At least one skirmish in the investment world has turned against the bubblers. Yesterday, Harvard University President Drew Faust announced that Harvard will not divest its $32.7 billion endowment of fossil fuels.

"The endowment is a resource, not an instrument to impel social or political change," she wrote in a public letter. "I believe there are a number of more effective ways for Harvard both to address climate change and to enhance our commitment to sustainable investment."

Faust was responding to a yearlong student campaign -- one of many across U.S. college campuses -- to terminate the endowment's coal, oil and gas holdings. Students likened the movement to those that caused divestments from Big Tobacco and South African apartheid.

The movement was largely inspired by climate activist Bill McKibben, who described the "carbon bubble" concept in a Rolling Stone article last year.

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