The evidence is mounting that energy companies and investors are failing to take the urgent action needed to prepare for the low-carbon transition - and that lack of action threatens the stability of the entire financial system.
The coal industry is the poster child for climate vulnerability, and its reach across the power industry means many energy investors are on shaky ground. That was made clear by the latest studyfrom analyst firm Carbon Tracker, released last month, which found that not a single company with coal capacity examined by the non-profit is currently aligned with the Paris Agreement.
The study is based on more than 100 profiles of power utility companies compiled by Carbon Tracker, which provides research to the Climate Action 100+ investor group. According to Carbon Tracker's analysis, for a firm to be Paris-aligned it needs a coal retirement schedule consistent with a credible climate scenario, and a date assigned to each coal unit. None of the power utility companies with coal capacity profiled in the Climate Action 100+ currently meet these criteria, a fact that presents a significant transition risk for investors, in part due to strong competition from renewables, the study says.
But coal isn't the only contributer to the network of climate risk energy investors must navigate. What applies to coal now applies to other fossil fuels, including oil and gas.
Carbon Tracker said it focused on coal because the fuel represents around 80 per cent of carbon emissions from power generation. But a further ten per cent come from gas generation, and future analysis will encompass carbon emissions from this source, it said.
Meanwhile, the threat from oil exposure is starkly illustrated by the case of BlackRock, the world's largest fund manager. With $6.5tr of assets under management, BlackRock's total value exceeds the GDP of Japan, the world's third largest economy.
By ignoring the financial risks of putting money into fossil fuel-dependent companies, this financial behemoth has lost investors more than $90bn in value destruction and opportunity cost over the past decade, according to a new paper this week from the Institute for Energy Economics and Financial Analysis (IEEFA).
Entitled Inaction is BlackRock's Biggest Risk During the Energy Transition, the report assigns this lost value to a handful of specific holdings. Some 75 per cent of the losses are due to investments in just four companies: ExxonMobil, Chevron, Royal Dutch Shell and BP, all of which have severely underperformed in the past decade, according to the report's analysis.
Shell's quarterly results released yesterday underscore this point, with the oil major revealing a 25 per cent slump in profits, far below analyst expectations.
And echoing Carbon Tracker's findings, IEEFA also pointed to BlackRock's holdings in utility General Electric (GE) as part of the problem. "Any reasonable assessment of stranded asset risks relating to climate change would recognize that coal and gas turbine demand has been clearly impacted by a global pivot towards renewable energy," it noted. "Rather than identifying and managing this risk, GE doubled down on thermal power in 2015 with its acquisition of Alstom and then again with Baker Hughes in oil and gas. Since then, GE's market capitalization has declined by over US$150bn (-67 per cent)." As a result, BlackRock lost its investors $19bn on General Electric alone, the IEEFA concludes.
Another $2bn was lost in 2017 as coal firm Peabody Energy succumbed to bankruptcy. Further losses racked up from investments BlackRock held in coal miner Cloud Peak Energy, which filed for bankruptcy three years later.
The report also suggested just 0.8 per cent of the fund's overall portfolio is invested in environment, social and governance (ESG) oriented funds, belying stated commitments to sustainable investment.
"As the world's largest universal owner, BlackRock wields an enormous amount of influence and shoulders a huge responsibility to the wider community," said Tim Buckley, IEEFA director of energy finance studies and co-author of the report. "It has the power to lead globally to address climate risk, yet to-date it remains a laggard."
The IEEFA flags potential conflicts of interest within BlackRock's Board of Directors, with six out of 18 board members previously having worked in companies with strong ties to the fossil fuels sector, according to the report.
"If the world's largest investor makes it clear the rules have changed, then other globally significant investors like Fidelity, Vanguard and Japan's sovereign wealth fund will rapidly replicate and reinforce these moves, reducing stranded asset risks for all," Buckley added.
BlackRock said most of its funds track indices which include fossil fuel firms, claiming it is not directly responsible for the investment losses. It stressed it also offers clients ESG funds to invest in as an alternative.
In April, the Bank of England said climate change could wipe out $20tr of assets, with sudden and severe losses incurred by anyone holding stranded assets in the form of unburnable carbon, sending shockwaves through global capitalism. These new analyses from Carbon Tracker and the IEEFA highlight just how exposed segments of our financial system still are to these energy-related threats.
