Can fossil fuel companies be transformed into allies in the fight against climate change?
As unlikely as it might seem, a coalition of environmental groups and investors is trying to persuade coal, oil and gas companies to turn away from carbon-polluting sources of energy and invest in low-carbon alternatives.
Ceres, a Boston-based network of investors, companies and nonprofits, and Carbon Tracker, a London-based nonprofit that has popularized the notion of a “carbon bubble,” have organized a new campaign around carbon asset risks.
The campaign aims to get fossil fuel companies first to disclose the risks created by their dependence on carbon-intensive assets, and then, as Ceres puts it, “ensure they are using shareholder capital prudently” in a world that takes “the economic threat of climate change seriously”. Not today’s world, needless to say, but a world that the groups fervently hope will arrive in the not too distant future.
The campaign released a letter on Friday from more than 50 global investors, who manage $2tn in assets, calling on the US Securities and Exchange Commission to improve oil and gas companies’ disclosure of climate risks. Climate risks, including the possibility of reduced demand and lower prices for oil, could affect the industry’s profitability and valuations. Particularly if companies find themselves owning “stranded assets” – oil or gas reserves that lose value in a carbon-constrained world.
In 2010, the SEC issued what Ceres then described as ground-breaking guidance that clarified what publicly-traded companies need to disclose to investors in terms of climate-related risks. Since then, according to Ceres, “there has been a lack of meaningful, substantive carbon asset risk disclosure”.
So much for ground-breaking.
In the new letter, Ceres and its investor allies ask the SEC to get serious about carbon risk disclosure, citing what they call inadequate disclosures from ExxonMobil, Chevron and Canadian Natural Resources as evidence that the agency needs to put some muscle behind its guidance.
While this will no doubt keep lawyers busy, the strategy raises a number of questions, chiefly: what’s the theory of change, what’s the likelihood of success and what, ultimately, would success look like? To seek answers, the Guardian spoke with Shanna Cleveland, a Ceres senior manager who works on the Carbon Asset Risk Initiative.
If the SEC can be persuaded to enforce its rules, Cleveland said, oil companies will be required to talk publicly about how reduced demand for petroleum, persistently low or even moderate oil prices for oil, and regulation or taxation of carbon emissions would affect their business.
“Right now, companies are not publicly disclosing, in many cases, the assumptions their capital planning is based on,” Cleveland said. “It may be that some just can’t imagine a world in which we don’t get back to $90 a barrel oil.” Oil prices are now in the $55-$60 per barrel range.
Over time, the argument goes, better disclosure of climate risks will change the behavior of investors, boards of directors and industry executives, particularly when they make crucial decisions about long term capital investments. Global capital expenditures for oil and gas exploration and production projects are expected to be about $571bn in 2015, according to Cowen and Co’s annual study of 476 oil and gas companies’ capex budgets published in the Oil and Gas Journal.
“Investors need to know which fossil fuel companies face the greatest risks in a climate-constrained world,” Cleveland says. “More importantly, if a company actually does the analysis and sees what its vulnerability is, its board of directors should be moved to either consider a new strategy, or understand whether the company is on a trajectory to survive in a carbon-constrained world.”
Cleveland is realistic about the limits of this approach. “It’s unlikely that we would convert ExxonMobil into a solar company,” she says. “What we could see is significant reduction in the amount of capital that’s being plowed into these high-cost, high-risk reserves, and a shift of that capital into, at worst, natural gas and, at best, meaningful investment into other energy technologies.”
If ExxonMobil could be persuaded to shift even 5-10% of its capital investments away from high-risk fossil fuel projects and towards low-carbon options, that would matter. ExxonMobil has said its capital spending will be about $34bn this year.
There is some precedent for such hopes. When climate regulation loomed during the 2000s, fossil fuel companies invested in renewable energy. From 2000-2010, US oil and gas companies invested roughly $9bn in renewable technologies such as wind, solar, and biofuels – roughly one-fifth of the total US investment in renewables over the same period, according to Pembina, an environmental nonprofit. But Shell and BP, among others, have sold wind and solar units since then, as the political climate shifted.
Waiting for the SEC to push the industry will require patience; the agency isn’t known for its speed. Dodd-Frank financial reforms enacted in 2010 required public companies to disclose the ratio between the pay of their chief executives and the pay of their median workers. The rule was left to the SEC to enforce, and five years later it has yet to be put into effect.
Nor has the fossil fuel industry been much affected by past shareholder resolutions about climate change from Ceres and its allies. Leslie Samuelrich, president of Green Century Capital Management, a socially responsible investment firm that is divesting from fossil fuel companies, said recently: “There have been no significant direct reductions in the production of fossil fuels achieved through shareholder advocacy over the last two decades – and there are none on the horizon.”
Unlike the insider-oriented disclosure and engagement strategy, divestment creates the potential to build a grassroots political movement to support climate action. Samuelrich puts it bluntly: “Why trust dirty energy companies to lead a clean economy?”
Of course, Ceres isn’t trusting the energy companies. It’s pushing them, and it’s not alone. A recent analysis by Goldman Sachs found that nearly $1tn worth of future oil and gas projects would not be profitable if oil prices remain below $70 a barrel. The oil companies aren’t likely be swayed by environmentalists, but they just might listen to their bankers.
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