Liberate Capital from Carbon Risk

The Note for October 2013 ]

If we do not work collaboratively and thoughtfully to change current practice, trillions of dollars of private investment capital will remain stranded in outmoded fossil fuel operations. Those carbon-focused business lines carry with them diverse varieties of long-term risk, linked to the pervasive externalization of costs and secondary impacts, related to the use of fossil fuels. Such exposure is known as carbon asset risk. We need to liberate that capital to protect future life and build the creative collaborative clean energy economy that will sustain us in a low-carbon future.

Many fossil fuel-dependent enterprises are effectively trapped in an outmoded business model driven by heavy global incentives and a lopsided marketplace status quo. There is now mounting global concern among investors that they may face significant exposure to carbon asset risk: overinvestment in new fossil fuel operations could lead to investment dollars being wasted on catastrophic financial losses.

This month, a group of leading investment managers sent a request to forty-five leading fossil fuel companies, requesting information about their strategies for diversifying business operations and extricating themselves from extreme carbon asset risk. The move was prompted by the general understanding that these businesses had no serious strategic plan for ceasing activities centered on extraction and sale of carbon-based fuels and transitioning to a robust, long-term viable clean-energy business transaction portfolio.

Jack Ehnes, CEO of the California State Teachers’ Retirement System (CalSTRS), the nation’s second largest public pension fund with $172 billion under management, explained the investors’ concerns as follows: “As long-term investors, we see the world moving toward a low-carbon future in which fossil fuel reserves that companies continue to develop may actually become a liability, which could take a toll on shareholder value.” Of the forty-five fossil fuel purveyors they have asked for information—of which their funds are part owners—thirty are reported to have provided preliminary or provisional reporting. None of the firms in question is yet engaged in funding a comprehensive clean energy transition strategy, allowing them to maintain market presence, profit margins and transactional relationships, while disengaging from carbon-based fuels.

The investors’ request is in itself historic, in that it marks the first time that major investors have demanded that the fossil fuel companies begin the transition to clean fuels internally, with a focus on the ethical question of risk exposure for investors. It is possible to liberate carbon-trapped capital and avoid extreme carbon asset risk, if we apply a market-wide consumer-centered revenue-neutral price on carbon-based fuels. Doing so will give certainty to investors, to motivate the transfer of major capital investment to resources that will reduce externalization of carbon-impact costs and free people and communities to live in sustainable prosperity.


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