Companies May Need to Disclose Fossil-Fuel Exposure: UK Energy Secretary

By | December 11, 2014

U.K. Energy Secretary Ed Davey called for a debate on forcing companies to disclose their exposure to fossil fuels so that investors know the risks they face as cleaner forms of energy are required.

“There’s a case for making it mandatory,” Davey told reporters in Lima, Peru, where he was attending talks about global warming organized by the United Nations. “In the interests of pensioners, their precious savings, they need to know if there are extra risks that are attached as we transition to a low-carbon economy.”

Scientists say less than a third of known fossil fuel reserves can be burned if the world is to keep climate change to manageable levels. Capping the increase in temperatures at the 2-degrees Celsius (3.6 degrees Fahrenheit) level endorsed by UN envoys would require reductions in burning oil, coal and natural gas. Those companies have $28 trillion at risk over the next two decades, according to Mark Lewis, an analyst at Kepler Cheuvreux SA in Paris.

One option proposed for the UN talks is to adopt a goal to phase out fossil-fuel emissions by 2050. Davey said he wrote Bank of England Governor Mark Carney to ask for a meeting about the topic, known as “stranded assets.”

Bank of England Letter

“It is clearly important that we understand the wider economic implications of the transition away from the use of fossil fuels,” Davey wrote in his letter to Carney, dated Dec. 10. “I am particularly interested in hearing about how you are working with other central banks globally.”

Carney said in a letter to Parliament’s Environmental Audit Committee on Oct. 30 that the bank’s Financial Policy Committee is examining whether there’s a risk to investors posed by the notion of “unburnable carbon.”

Scientists convened by the UN estimate that total emissions since the late 19th century must be contained to 3,000 gigatons of carbon dioxide in order to stand an even chance of capping the temperature rise at 2 degrees.

Fossil Fuels

Of that, 1,900 gigatons had already been emitted by 2011, leaving about 22 years of emissions at current levels left. The panel said known fossil fuel reserves that are economically recoverable contain emissions totaling 3,700 gigatons to 7,100 gigatons.

Davey said the Bank of England and other central banks abroad as well as other financial regulators may need to take action on stranded assets. He also suggested stock exchange regulation may be needed.

“If there’s a whole set of assets out there for which the risk profile is incorrect because people haven’t factored in the risks posed by the transition we’re going to go through over the next few decades, then it does seem to me that it’s incumbent on governments and regulators and central banks and others to really begin to address this,” said Davey.

‘Tip of the Iceberg’

The U.K. government already requires FTSE-listed companies to report their carbon emissions, said Alison Doig, climate change adviser to the development charity Christian Aid, said in an e-mailed statement.

“This only shows the tip of the iceberg,” Doig said. “Underneath lie trillions of dollars worth of assets that could be financially as well as environmentally toxic. Investors need full disclosure of fossil fuel assets if they are to make smart decisions and invest in a safer future.”

Global efforts to devise a treaty to rein in global warming and reduce the burning of fossil fuels may hit companies with investments in those forms of energy, Davey said. There’s a “logic” to conclude that “coal assets are probably riskier than oil and gas assets,” he said.

The discussions in Lima are intended to chart the path towards an agreement to be sealed in Paris next December, drawing in commitments to limit emissions in all nations for the first time.

“We’re seeing a move from carbon capitalism to climate capitalism, and the climate change talks are one, but a very important part of that move,” Davey said. “The key thing for a regulator is to ensure that investors understand the risks, and if there are asset classes that become riskier, then that should make the case for more disclosure.”

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