The Danish government has set an ambitious target of weaning Denmark off fossil fuels by 2050. That may partly explain why in early March 2015, six Danish pension funds managing total assets of around EUR 32 billion presented a series of resolutions to their members proposing the exclusion of investments in the 100 largest coal companies by 2018. If passed, the resolutions will also require the pension funds to engage in and document a dialogue with the oil and gas companies in which they are invested so that these companies exclude from their investments high-risk extraction projects such as deep-water and Arctic drilling or tar sand extraction.
A month prior to the move in Denmark, Norway’s Government Pension Fund Global (GFPG – one of the world’s largest sovereign wealth funds) published its first report on responsible investing. The report revealed that in 2014 GFPG had disinvested on environmental and climate grounds from 114 companies on the basis that their business models were incompatible with the objective of slowing the pace of global warming.
Research published in the review ‘Nature’ in 2014 suggests that the “unabated use of all current fossil fuel reserves is incompatible with a warming limit of 2°C” and that on a global basis a third of oil reserves, half of gas reserves and over 80% of current coal reserves should remain unused from 2010 to 2050 in order to meet the target of 2°C.
Last October, Mark Carney, the governor of the Bank of England, weighed into the debate saying that in his view, the “vast majority of reserves are unburnable” if the rise in global temperatures is to be limited to below 2°C. The ‘unburnable’ reserves Mr Carney refers to could amount to as much as 80%, 30% and 50% respectively of global coal, oil and gas reserves otherwise worth trillions of dollars, according to a recently published study in Nature.
The “carbon bubble” theory warns that fossil fuel assets, such as coal, oil and gas, could be significantly devalued if a global deal were to be reached at, for example, COP 21, to tackle climate change. COP 21 will seek a binding and universal agreement on limiting climate change. Such an agreement eluded participants at the last global climate summit held at Copenhagen in 2009.
In a speech on 3 March 2015 Paul Fisher, the Bank of England’s Deputy Head of the Prudential Regulation Authority and Executive Director of Insurance Supervision, addressed the risk of insurers investing in assets that could be left ‘stranded’ by policy changes limiting the use of fossil fuels. Mr Fisher gave a stark warning, I quote:
“As the world increasingly limits carbon emissions and moves to alternative energy sources, investments in fossil fuels and related technologies – a growing financial market in recent decades – may take a huge hit. There are already a few specific examples of this having happened.”
We have been warned! As 2015 unfolds towards what is hoped will be a defining 21st Conference of Parties binding agreement on climate change in Paris next December, the issue of limiting fossil fuel-burning is moving up policymakers’ agendas (that statement being based on the fact that I’ve never previously heard a central banker make such explicit comments on fossil fuel risks).