Long gone is the narrative of climate change as a crisis manufactured by bleeding-heart liberals. Institutional investors are moving assets away from fossil fuels to the tune of $3.4 trillion. Stranded fossil fuel assets are pegged at $2.2 trillion. And regulatory bodies like the U.S. Securities and Exchange Commission have mandated that companies disclose climate change risks to their investors.
No, bleeding hearts won’t solve the climate crisis — or lead to a bold resolution coming out of Paris. It will be the pursestrings of big-money investors and multinational companies that will make the difference, as Ceres CEO Mindy Lubber underscored at a COP21 side-event focused on stranded assets.
“As we, as a community, take on the complex issue of climate change and its implications for humanity, for the environment, for public health, for national security, for our children, some people don’t hear that message quite well enough,” Lubber said on Thursday. “The issue with climate change is also one of the greatest financial risks facing us, which is why companies and investors are acting — and acting now in greater ways than they have before.”
Earlier Thursday afternoon, former U.S. Vice President Al Gore compared the financial risks associated with stranded assets to the sub-prime mortgage bubble — a notion Lubber doubled-down on in her remarks.
“We saw sub-prime mortgages … nearly take down our economy internationally,” Lubber said. ” … Whether you want to believe every scientist or not — we may want to, other skeptics may not — this is a financial issue of unknown proportions.”
After thinking a moment on that last bit, she rephrased: “Well, frankly, we now know it. But we’ve got to look at it, and we’ve got to act on it.”
A reality check for the fossil fuel industry
The price of oil is plunging. At press time, prices sat at $39.98 a barrel, down from just under $100 a barrel this time two years ago. Late last month, Barclays released a white paper predicting prices would settle at around $60 a barrel by 2016, but even that puts a serious dent in oil company profits. But somehow the industry has yet to accept these realities.
“Right now, the fossil fuel industry somehow thinks that, in most cases, they can keep going on the track they’re going. But oil is no longer $100 a barrel,” Lubber continued. “It is a very high-priced industry. They can’t succeed and be a good bet for the financial community if in fact the price of oil goes down to $60 as Barclays says, or it goes down to $40 or $50 as we’re seeing [now], and survive as a profitable industry. They just can’t.”
Citing changes in the energy market, she added, “They also can’t survive if demand keeps going down.” She referenced two underlying factors driving down demand for fossil fuels:
Falling renewable prices and rising electrification: As oil prices continue in a free-fall, the cost of renewable energy technologies, much to the chagrin of the fossil fuel industry, continues to do the same. And investors are taking notice, moving their money away from risky fossil fuel assets and into promising new clean-technology solutions.
“As the vice president said, this is the first year in history we’ve seen more money invested in renewables than in fossil fuels — and that’s only going to grow,” Lubber emphasized on Thursday. The continued electrification of the transport sector, a trend we’re already seeing around the world, will only further the drop in fossil fuel demand, Lubber added.
Efficiency driven by big data: “The other reason demand is going down, well beyond just the obvious … is the big-data world,” Lubber continued. “We are seeing changes — whether it is in the way railroads are run, how aviation is run, how technology is used — that is changing the dynamic overnight.” The aviation industry, Lubber explained, is already projecting a 10 to 20 percent decline in its fossil fuel needs due to efficiency improvements driven by big data. A similar drop is expected in the rail sector, Lubber said.
“The bottom line is: We have an industry that can function at $50 a barrel or at a lower demand, and that is changing the mix in the eyes of investors — again, not because it’s the right thing, the moral thing, the compelling thing, but because it is a financial risk that no longer makes sense,” Lubber continued, with a forthright pragmatism that would make even Milton Friedman sit up and take notice.
In response, Lubber explained, investors are beginning to demand transparency about climate change risks — a trend TriplePundit first noticed last year. The SEC guidance, issued in 2010, is also helpful. Lubber noted that it’s not always executed properly, but that it’s a step forward on the way to appropriate disclosure of risks. “There’s more focus particularly because of the size of the stranded assets,” she explained. “It is hard to deny that is a material risk that every fossil fuel company that files an SEC filing ought to be showing.”
Additionally, led by Ceres, 70 global investors managing more than $3 trillion in collective assets petitioned 45 of the world’s largest fossil fuel companies in late 2013 to stress-test the financial implications of conducting business in a 2-degree world (i.e., a world in which we stay below a 2 degrees Celsius temperature rise, considered by scientists to be the climate tipping point).
“It can be done,” Lubber insisted. “BHP Billiton did it, and other companies are starting to say they will — Shell and BP committed to doing it. But those other 40 companies that the investors have sent letters to are part of negotiations and part of shareholder resolutions, and they will be in play this year.”
A new messenger
So now, in this new scenario, rather than patchouli-wearing activists waving the climate action flag, it’s the big-money stakeholders in their custom Brooks Brothers. And, predictably, that’s changing the tide quickly.
“What makes this Paris set of discussions different than any before is that the financial leadership and corporate leadership are here in strength, saying we need to act on climate; we need a price on carbon; and we need to move sooner rather than later,” Lubber said firmly. “That wasn’t the case at Copenhagen; that wasn’t the case at COPs before that.
“The message has changed. The messengers have changed. The arguments are stronger; they’re more compelling. And I think with the strength of the financial and corporate community coming together with the policy community, the NGO community, the city and state community, we’ve got a great shot at moving forward — and I think we’re going to see it this week.”
Image credit: Mary Mazzoni