Investments and Climate Change
Updated: Jul 8, 2020
As the world transitions to a zero carbon economy, traditional fossil fuel investments are increasingly risky for investors.
The world must reduce emissions by nearly 50% by 2030 and be net zero emissions by 2050 in order to keep warming to 1.5C. Warming over 1.5C will be catastrophic, beyond the capability of our modern world to mitigate. Limiting warming to 1.5C will ensure we have a chance to recover and rebuild so that our childrens' futures have as much opportunity as ours did.
Governments are using record amounts of resources to keep fighting forest fires and floods, and cities are rebuilding infrastructure to be more resilient and mitigate some of the effects of climate change.
There are two paths before us: meet the emissions reductions required, or exceed the emissions budget left. In the first case, we will see a major retooling of our global economy on a scale that has never been seen before. In the second case, we continue with business as usual and our global economy plunges into chaos as the planet can no longer support the systems that sustain humans.
In either event, fossil fuel demand will plunge dramatically either in the short or medium term. Simply, fossil fuel firms are overvalued because part of their assets will be written down. The concept of stranded assets is particularly pertinent to understanding why investor caution is needed. Stranded assets occur when, due to regulatory or demand changes, assets such as untapped oil fields are written off because they will never be utilized.
Fossil Fuels Slide
Fossil fuels no longer reign as a sure thing in the stock markets. According to an article in The New York Times, over the last 10 years the S&P 500 energy gained just 2%, when the broader S&P 500 gained nearly 300%. Teck Resources Inc. recently announced a $1.13B writedown on the Frontier oilsands project, which it abandoned. Coal companies have been declaring bankruptcy in increasing numbers, as demand for coal is at it's lowest level in 40 years.
Bank of England's Mark Carney has been brutally direct in his assessment of fossil fuel investments. He warns that the global total committed projects bring the planet 4C of warming, which is incompatible with climate change targets and sustaining human life. Some projects will be abandoned and he estimates direct losses of $1-4 trillion. Further, he is concerned about the exposure of banking institutions to the shocking losses and is implementing stress tests for banks to ensure their continued viability.
Here in Richmond
Higher insurance premiums are affecting us all, as natural disasters grow in intensity and frequency. Governments are using record amounts of resources to keep fighting forest fires and floods, and cities are rebuilding infrastructure to be more resilient and mitigate some of the effects of climate change. None of this is free, and for Richmond the 2012 estimate to raise the dykes protecting the city is $300 million. Cost estimates have since ballooned due to inflation and cost escalation for construction activities.
We have adopted the IPCC emissions targets and are working hard to achieve them. It is problematic for us to continue to be invested in fossil fuels, as our future depends on the cessation of most fossil fuel extraction. We physically need to ensure we meet emissions targets, or we will be under sea level. We have committed to reducing our emissions by 50% in 10 years and net zero in 30 years. If we have committed to that action, why would we "bet our money" on not achieving those targets? Finally, we have a fiduciary responsibility to residents. The city has $1.26 billion in committed and uncommitted reserves, and we need to safeguard that value to meet our commitments to residents.