Global Investors Call on Energy Companies to Disclose Financial Risks of GHG Emissions

 
A group of 70 global investors managing more than $3 trillion of collective assets has called on 45 of the world’s top energy companies (including Suncor Energy Inc., Canadian Natural Resources Ltd., Exxon Mobil Corp., Royal Dutch Shell PLC and Total S.A.) to assess the financial risks that climate change poses to their business plans. The investor effort, called the Carbon Asset Risk (CAR) initiative, is being coordinated by Ceres and the Carbon Tracker initiative, with support from the Global Investor Coalition on Climate Change.

In a letter sent to energy companies in September 2013, investors wrote: “We would like to understand [the company’s] reserve exposure to the risks associated with current and probable future policies for reducing greenhouse gas emissions by 80 percent by 2050…We would also like to understand what options there are for [the company] to manage these risks by, for example, reducing the carbon intensity of its assets, divesting its most carbon intensive assets, diversifying its business by investing in lower carbon energy sources or returning capital to shareholders.”  Investors signing the letters include California’s two largest public pension funds, the New York State and New York City Comptrollers, F&C Asset Management and the Scottish Widows Investment Partnership.  The investors have requested detailed responses before their annual shareholder meetings in early 2014.

Most energy companies produce sustainability reports and use a shadow carbon price to assess the viability of projects, but the financial risks of climate change driven policies are not usually disclosed.  According to the report Unburnable Carbon 2013: Wasted Capital and Stranded Assets  , the 200 largest publicly traded oil and gas companies collectively spent an estimated $674 billion on finding and developing new reserves in 2012 alone – some of which may never be utilized. The CAR initiative is part of a growing trend to assess the present value of fossil fuel companies and their long-term reserves, based on expectations that government policies will lower demand for the most carbon-intensive energy sources in the longer term.  Analysis from HSBC suggests that equity valuations of some oil and gas companies could be reduced by 40 – 60% in a low emissions scenario where a portion of their reserves would become stranded assets. This highlights an opportunity to redirect this capital, rather than investing it in high carbon assets that could become stranded.


SEC Issues New Guidance on Disclosure of Climate Change Risk

U.S. Securities and Exchange Commission (SEC) issued new guidance on what publicly traded companies must disclose to investors in terms of material climate change risks.

On January 27, 2010, the U.S. Securities and Exchange Commission (SEC) issued new guidance on what publicly traded companies must disclose to investors in terms of material climate change risks. The SEC’s guidance is an interpretive release and does not create new legal requirements or modify existing ones. Rather, the guidance is intended to help public companies determine what climate change-related disclosures need to be made pursuant to existing disclosure rules relating to a company’s risk factors, business description, legal proceedings, and management’s discussion and analysis (MD&A). The SEC highlighted the following areas as examples of where climate change and its consequences, if material to a company’s business, may trigger disclosure requirements:

– costs of compliance associated with pending laws and regulations;

– impacts on business of climate change-related international accords and treaties;

– physical impacts of changing weather on assets and operations;

– opportunities for trading in new carbon markets;

– changes in demand for products or services resulting from climate change impacts.

Previously, the SEC required that public companies disclose legal and financial risks posed by environmental challenges; climate change was not specifically named. Given the lack of clarity around climate change-specific disclosure, it was difficult for investors to make well-informed decisions because of inconsistent disclosure of climate change-related risks. As a result, stakeholder groups petitioned the SEC to require full corporate disclosure of climate-related business impacts in financial filings. The objective of the new guidance is to facilitate more accurate and consistent reporting of bottom-line risks posed by climate change to shareholders.

For further details, please see the SEC’s press release: www.sec.gov/news/

or refer to the SEC’s guidance document: http://www.sec.gov/rules/interp/2010/33-9106.pdf.