3

Oct

2015

Assets come home. Has the financial sector accepted the reality of ‘stranded assets’?

 

“Stranded assets” and the risks to the fossil fuel sector from concerted efforts to address climate change have been widely discussed amongst those campaigning for divestment, and largely dismissed by the financial sector – until now.

In a speech entitled ‘Breaking the Tragedy of the horizon’ at Lloyds of London, Mark Carney, the Governor of the Bank of England, explicitly acknowledged the risk of fossil fuel assets becoming stranded. Without doubt it’s a significant step, but have the full implications of a fossil free world really being heeded?

What do you do if your business is extracting, refining and selling fossil fuels and the world decides that the risks of doing this far outweigh the benefits? That’s the conundrum facing the fossil fuel sector.

It is now widely acknowledged that identified reserves of fossil fuels far exceed the quota which can be burned if we are to preserve a viable atmosphere and oceans. This means that only a fraction of the identified reserves can actually be extracted, processed and burned. That’s a problem because the share value of oil, coal and gas companies is in-part based on an assumption that all of the identified reserves can and will be exploited, and that the pot is continually refilled as they are consumed.

If the global community enforces a commitment to avoid uncontrolled climate change then a large proportion of fossil fuel assets would fall in value and become ‘stranded’.

The logic of this has long been understood by those campaigning for disinvestment as an issue not just for fossil fuel companies, but all of us given the sector’s reach into pension funds and so many other parts of the economy. Not surprisingly the companies themselves have been dismissive of the risk, and the financial sector has tended to acknowledge it only obliquely.

But at the end of September, Mark Carney used a speech at Lloyds to address the issue directly. Despite the dinner jacket and the measured tone the Governor was forthright in setting out what he described as the “Tragedy of the Horizon”.

The catastrophic impacts of climate change, he said, will be felt beyond the traditional horizons of most actors, and beyond the business, and political cycles. Acknowledging the link between IPCC temperature targets and carbon budgets he said that the carbon budget for a 2 deg C limit “amounts to between one-fifth and one-third of the world’s proven reserves of oil, gas and coal”. And “if that estimate is even approximately correct it would render the vast majority of reserves “stranded” – oil, gas and coal that will be literally unburnable without expensive carbon capture technology, which itself alters fossil fuel economics”.

For Carney to acknowledge the risk of “stranded assets” so directly is highly significant not least because it provides space and legitimacy for others to discuss this. But there remains a world of difference between acknowledging a risk and acting upon its full implications. Publicly the statements from fossil fuel companies are very much business as usual, presumably in the hope that this is will just go away or that they can sell the notion of a 4, 5 or 6 C degree temperature rise to a compliant world.

Within the financial sector the signs are more encouraging with talk of “future takers” becoming “future shapers”, but the default position still tends to be that “we’ll need fossil fuels for decades to come”.

The problem is that this oft repeated assertion creates an illusion of decades of time in which to ween ourselves off fossil fuels when the scientific and financial realities are the we need to be doing this now.

EU leaders recently committed to being fossil free by 2050. That’s just 35 years from now. To have any prospect of hitting that target we need to start working today.