Why Nations Will Meet Paris Climate Agreement Goals

Paris Agreement and Climate Change Risk:

The Paris Agreement was the first time all countries came together to work toward a reduction in global greenhouse gas emissions in an effort to mitigate climate change. In a 2015 study published in Nature if the world was able to maintain its commitments toward meeting the Paris Agreement goals then it could be expected that:

  • A third of oil reserves
  • Half of gas reserves
  • 80% of known coal reserves

will stay in the ground. Although this would be good for the overall health of the planet by reducing impact of climate change, it would be disastrous for resource extraction based companies. However, with recent reports, companies that work on the extraction of oil, gas and coal may not have much to worry about if current trends continue. Even with the Paris Agreement accords we see many countries not meeting their goals and actually increasing their emissions. Globally, we see more coal plants coming online to support developing countries appetite for growth. Also, we continue to see increases in emissions from the transportation sector.

Is this growth in emissions a hiccup and expected to be short lived? Some would argue that it is.

Why could this be just a hiccup?

Due to growing global climate change risk countries and companies continue to take steps to transition from the burning of fossil fuel. With decreasing costs of fossil free alternatives, the effort to debarbonize is becoming much easier.

The most recent levelized cost of energy studies, show all PV solar and wind to be cost competitive with natural gas and coal fired power plants. This was not necessarily the case at the signing of the Paris Agreement. Costs will continue to decrease for these generation assets and it will be more difficult to fund more expensive fossil-fuel alternatives. Further, as more renewable energy facilities are built out, the diversity of locations for these systems will reduce the intermittency issues that have been a concern for power grid operators. Not only the number of systems and the diversity of location are a benefit, but so is the significant ongoing decrease in the price of battery storage. On a regular basis, new reports are published on the ongoing decreasing cost of battery storage.

The technology is coming quickly and is ready for deployment. Much of the barrier is now political. Globally, risk adverse elected officials responding to very powerful fossil fuel interests, has resulted in an unlevel playing field with markets and regulations not properly accounting for and allowing new clean energy technologies.

What happened after the Paris Agreement?

 It was expected that when the Paris Agreement was signed  everyone was ready to go and begin to implement all these climate change mitigating measures. The fact of the matter is that there were many well meaning pledges, but the economic and political reality was not yet there for many parts of the world. Although we needed these goals to be met sooner rather than later, it takes time.

Technologies needed to be further developed and costs had to continue to decline. The financial markets and capital providers had to become more comfortable with valuing and funding these new technologies. Government regulators and policy makers had to better understand the barriers to deploying these systems and start making the appropriate changes that would not hinder the deployment of clean energy systems. Finally, the clean energy sector needed more allies and a bigger voice to compete with the more powerful fossil fuel lobby. 

Winds of Change

Financing and Investment in Clean Energy

Things are looking up. Specific to investing in clean energy, in 2017, clean energy investment outpaced fossil fuel investment by a significant amount, $333 billion vs $144 billion, respectively.  A specific funding instrument growing in popularity are green bonds. They are becoming one of the largest investment vehicles for energy efficiency and renewable energy investments. In 2018, it is expected that there will be $250 billion in green bond new offerings. This is 60% higher than 2017, which was $155 billion.  2017 saw a 60% increase in investment from 2016 (See graph below).

Source: Bloomberg

Political Winds are Changing

On the political side, at least outside of the US, we see a more robust shift to taking serious steps toward decarbonization and reducing climate change risks. The European Parliament is getting more serious in supporting plans to facilitate EU capital markets to meet long-term sustainability goals, which includes decarbonization, disaster resiliency and resource efficiency.

On May 29th the European Parliament adopted the sustainable finance resolution. Which includes:

  • Rules to orient financial markets towards environmental objectives
  • Policy framework to encourage investments into sustainable assets
  • Divestments from fossil fuels and unsustainable energies

The first two items are key areas that all countries must further develop to ensure Paris Agreement goals are met and exceeded. Without the proper market and regulatory framework in place, the investment community and companies will be less willing to transition to cleaner technologies. Item three, divestments are already happening. They will only become more rapid as the rules and frameworks around clean energy are developed.

Divestment Continues

What we are seeing in the market in regards to divestment should provide some hope for clean energy and concern for fossil fuel interests.

For example, hedge funds are seeing a 50% increase in demand for responsible investment offerings from current and prospective investors. This is according to a survey of about 80 managers from the Alternative Investment Management Association.

Another significant move was made by the state of New York and and New York City to actively divest from existing and future fossil based investments. To date, endowments and portfolios managing over $6 trillion are actively divesting from fossil fuel assets. Pension funds have come to the realization that they must protect their portfolios from climate change. Fossil fuels are not the future and their investments are at risk.

Stranded Assets Due to Climate Change

As divestment occurs, one of the primary concerns is the threat of fossil fuel stranded assets. These are largely reserves that will not be used as global markets move to clean energy resources.

What is a stranded asset? According to University of Oxford Smith School and Enterprise and the Environment, a stranded asset are “assets that have suffered from unanticipated or premature write-downs, devaluations, or conversion to liabilities and they can be caused by a variety of risks.”

At risk are assets listed on the financial statements of energy producers and a reduction in anticipated cash flows for future production which may be reflected in company stocks.

Risky Business

Oil and gas companies may see transitioning their business model to clean energy as risky. Some have made some initial transitions, Total, Statoil, Shell and BP for example. At this time, their clean energy investment is still minor compared to their overall fossil fuel investment strategies. For example, of Shell’s $30 billion investment budget only $2 billion goes to renewables.

Although this climate change transition may be risky, not paying serious attention and taking serious steps toward transitioning to clean energy assets may be even more risky. There is a lot of uncertainty as to the speed to which this transition will happen. A miscalculation in the speed of this trend could have dire consequences for fossil fuel companies. A recent report by the Oxford Institute for Energy Studies, “The Rise of Renewables and Energy Transitions,” lays out the significant risks of stranded assets that could be faced by those who do not choose wisely ( a little Indiana Jones reference). Moving to be an integrated energy company rather than an oil and gas pure play is probably the most appropriate choice in the current energy landscape. A recent study by Wood Mackenzie, finds that over the next 20 years renewables will be the fastest-growing primary energy source worldwide. They anticipate average annual growth rates of 6% for wind and 11% for solar. In contrast demand for oil, is anticipated to grow about 0.5% per year.

Growth in Renewable Energy vs. Fossil Fuels

Concerns over climate change risk are real and are being taken seriously by financial decision makers and policy makers. This would suggest that fossil fuel companies can no longer take a wait and see approach. The technology and markets are changing rapidly and for their own viability and of the communities they serve, they probably should get on board.

 

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With Climate Change, Where Will Be the Next Energy Capital?

No matter how civic leaders try to spin it, the Houston economy is still very much tied to oil and gas. Below are three reports that recently came out on the state of the economy of Greater Houston area. You will see that each report highlight the fossil fuel industry as being the economic engine for Greater Houston area. There is little mention of any other economic factors, other than services, which are largely here to support the fossil fuel industry. When we look at the global activity to decarbonize the economy to mitigate climate change, this continued reliance on a single economic driver may be a problem.

Economic Outlook for Greater Houston

Texas A&M Outlook for the Texas Economy –

  • Houston posted the largest monthly increase with 8,000 jobs, half of which occurred in professional
    and business services (often linked with the region’s energy sector).
  • The Greater Houston region added 30,000 jobs in the first quarter alone amid strength in the energy and manufacturing industries. (the manufacturing is largely oil and gas related.)
  • Increased drilling activity and weaClimate Change and Texas Economykness in the U.S. dollar supported 5,800 manufacturing jobs over
    the past two months. At the metro level, manufacturing employment surpassed 4 percent growth seasonally adjusted annual rate (SAAR) in both Austin and Houston, translating to 900 and 1,800 industry jobs this year, respectively.
  • The wave of professional and business service jobs grew higher, adding more than 50,000 jobs across the state in just six months. Many of these jobs supplement the energy industry and are located in the financial sectors of Dallas and Houston.

Greater Houston Partnership – Economy at a Glance

  • The region’s leading exports in ’17 were petroleum products ($18.2 billion), basic chemicals ($12.9 billion), oil and gas extraction ($11.5 billion), agricultural, construction and mining machinery ($3.5 billion) and plastics and resins ($3.4 billion).

Greater Houston Partnership Employment Forecast 2018

Approximately one-third of Houston’s GDP is tied directly to oil and gas. This figure doesn’t include energy’s impact on wholesale trade, transportation, and professional services. Nor does it account for how much of their paychecks energy workers spend at the grocers, in local restaurants or at the drug store. Factor in those expenditures and energy’s impact on local GDP is significantly higher.

Risk of Decarbonization

Although it may be less apparent in the US, there is a global push to decarbonize our energy and transportation systems. My concern is that the Greater Houston region is underestimating the pace of this global energy transition. This is problematic for the Gulf Coast in the mid to long-term. For the short-term things are looking pretty good with oil prices lingering around $70 a barrel. However, when we look at global factors relating to the decarbonization of our world economy, it is hard to be as optimistic. Much of the world is taking climate change seriously and is taking steps to mitigate greenhouse gas emissions.

Some indications of the risk include:

Climate Change Policies
Carbon Brief Map of Climate Change Policies

Oil and Gas Majors Are Taking Note of Climate Change

The large major oil and gas companies are taking note of the global climate indicators and appear to be conceding to some degree that business-as-usual may need to change. Shell and BP are both publishing reports in 2018 that will provide greater insight into operational risks due to climate policy. The realize the near term political climate is pushing for policies that are intent on keeping the planet below two degrees Celcius temperature increase. Chevron has provided some insight as to what the near to mid-term would look like with lower oil demand due to climate-related policies. Chevron does not see peak demand in the near term but concedes that there is a future where there will be less oil demand. This will increase competition among oil and gas companies and result in lower cash flows. Exxon Mobil and BP both see peak demand coming in the next couple of decades. The peak is driven by a shift to renewables and to electric vehicles, as well as improved efficiency of internal combustion engines.

Greatest Risk is Shift to Electric Vehicles

As seen in the LNNL graph below 72% of petroleum goes to transportation. The longevity of the oil and gas market is driven by the continued consumption of oil by the transportation sector. However, forecasts point to a growing number of EVs and improved efficiency of autos which will lessen oil demand.

Climate Change Changes Energy Mix

Lawrence Livermore National Lab US Energy Consumption 2017

BP predicts 300 million electric vehicles by 2040. This will account for 15% of all vehicles. The most recent Bloomberg New Energy Financing research estimates that by 2040 there will be 530 million EVs on the road. This potentially could displace 8 million barrels of oil per day, 336 million gallons. By 2040, over 50% of car sales will be EVs. Recently, Aurora Energy Research reported in Oilprice.com that similar to the BNEF report, it sees 540 million EVs on the road. EVs will make up a little over one-quarter of total vehicles on the road. More concerning is that the firm estimates that with EVs and improved efficiencies of internal combustion engines (IEC) total revenue loss by oil and gas companies may be around $21 trillion.

China Leads the Way

Who is leading the pack? China. Being a leader in EV technology and high-tech manufacturing is one of the key focus areas of China.  As part of its Made in China 2025 strategy, the government is pouring billions of dollars into EVs to make it happen. When the worlds second largest economy is looking to electrify the transportation sector, primarily driven by strategic concerns related to importing much of its oil and gas supply and the choking smog largely attributed to the internal combustion engine, it may be time to think beyond the short-term gains being reaped from the most recent resurgence of the regions oil and gas sector.

Natural Gas May Not Pick Up the Slack

As more EVs are on the road more power generation will be needed.

It is possible that combined cycle natural gas plants will be built to provide the additional power required to power the fleet. However, with unsubsidized renewables having a similar levelized cost of energy as natural gas plants,

building more natural gas plants to offset the decrease in fossil fuels used to fuel the transportation sector is not certain.  A recent Greentech Media analysis finds lithium-ion storage looks to compete head to head with gas peakers by 2022 and beat out peakers by 2027. See below.

Climate change and energy storage

Greentech Media Image – Storage and Nat Gas Peakers 

Where are Public Leaders?

In the Greater Houston area there needs to be more leadership to diversify beyond the oil and gas sector. There has been much excitement around how the Greater Houston survived much of the last oil bust cycle due to its growing export market. However, when you look at what was being exported, a good bit of it was and continues to be petroleum products.

The Greater Houston area must take concrete steps to seriously diversify the region’s economy. The Amazon HQ snub should be a wake-up call. Dallas is more attractive than Houston to Amazon.

Exporting more oil and gas products vs. importing is not really diversification. Further, it does nothing to limit the reliance of the economy on the fossil fuel industry. Houston is not seen as anything more than an oil and gas town. Otherwise, we would not have been the only large city not making it to the top 20 of the Amazon search.

There was a step forward with the announcement of the new Innovation District in Midtown. This is a $100 million project led by Rice University, in partnership with the city and business leaders, to kick-start the high tech start-up community. Hopefully, there is more being planned than this one initiative.

Lack of Climate Action, puts Texas Economy at Risk

Is the Houston region doing enough to convince key stakeholders that it is taking Hurricane Harvey and more generally climate risk, seriously? In some recent meetings I Car_off_cliff_signhave attended, the answer seems to be trending to no. There is significant growing concern that the Houston region is not going to take the necessary steps to mitigate against future climate risk whether that is flooding, extreme heat and drought. Although Harris County appears to be taking some action, there has not been a lot of action taken by other jurisdictions. In some cases, it appears to be business as usual.

Houston industry has a lot to lose if it appears appropriate actions are not taken to mitigate climate risk. Highly talented individuals needed for a diverse and robust economy have choices. Will those already here choose to stay, particularly those that are tied other industries other than oil and gas? Further, will our existing companies be able to attract new talent if it is business as usual in regards to mitigating climate risk?

Not only should we be thinking about the viability of our existing businesses and economy, but we must also consider how lack of inaction impacts future investment. The question of whether Houston is doing enough is not only coming from businesses that are already located here, it is also coming from businesses and investors that consider investing in the region. Much of corporate America believes in climate change and see that real risks exist. Decisions are being made as to whether to invest in certain geographies and industries based on environmental and climate risk.

Moody’s Says Texas at Risk

The consequences of a lack of inaction became much more real in November. Inaction to mitigate climate risk for states and communities that are seen as vulnerable is getting the attention of credit rating agencies. For the last couple of years Moody’s, one of the three primary bond rating agencies, has been working on how to include climate risk vulnerability in its bond ratings for state and local governments.  In November it made an announcement that it will start taking account of climate risk in its credit ratings.

To date, climate risk had not been a factor in bond ratings. This is a little disconcerting when you are talking credit-worthiness of large, long-lived infrastructure projects whose performance is highly likely to be influenced by near-term climate shocks. With climate shocks, such as floods, droughts, extreme heat, fires, etc., communities are displaced and businesses are disrupted. If people locate elsewhere and businesses cannot operate, tax revenue goes down. At the same time, while revenue decreases need for investment to rebuild increases. Less revenue will be available to pay for existing debt service, as well as to cover new debt service for rebuild efforts. Ability to pay back existing debt decreases and creditworthiness is in the toilet. This makes it much more difficult to borrow at an affordable rate.

What Moody’s has done is a shot across the bow to four states, Texas being one of the them. It has not provided a timeframe as to when exactly climate risks will be used directly to measure credit risk. However, it is clear that climate risk is being tracked. It is likely to play a role in the very near term.

When looking at climate risk, Moody’s will focus on multiple factors including, share of economic activity in coastal areas, hurricane and extreme weather damage over the last several years, and percent of properties located in a floodplain.  These factors only cover a portion of a community’s risk, primarily short-term, high-intensity storm events. It does not take into account the risks to a community from extreme heat, long-term drought, disease vectors, etc. All of these factors impact a community’s economic productivity and infrastructure performance. They should be quantified in a manner to be included to some degree. However, it is a good step forward.

Work Being Done Along Gulf Coast

There are a growing number of initiatives in the Houston region that are pushing for change to address climate risk. My employer, HARC, is currently developing the Community Adaptation and Resilience Alliance (CARA). CARA is being developed to work toward real, region-wide efforts to mitigate climate risk, from flooding to extreme heat to drought. CARA is looking to coordinate strategy and planning efforts across the region, bring resources and build capacity.  Through this effort, we have identified a large number of efforts that are responding to Hurricane Harvey. It is key to keep this momentum moving ahead. Also, we must move the focus beyond Harvey and flooding and include a more comprehensive, holistic approach that can identify and work toward solutions to the multitude of climate threats we are currently experiencing and will encounter in the near-term. Maybe it will happen. The Sustainability Director for the City of Houston, Lara Cottingham, was on Houston Public Media, talking about a Climate Action Plan this week in reference to the Moody’s report. This is a first. Maybe we have turned a corner.

Lack of Action on Climate Change Threatens the “Texas Miracle”

The Texas Miracle is at risk. With Harvey recovery underway, there has been a lot of discussion on how to prevent this from happening again, or at least reduce the damage by the next big one. There are two distinct discourses happening at this time. One arguing for business as usual and another arguing for significant change from the status quo of development.

What actually happens will likely fall somewhere in the middle. Policy makers will feel some pressure to take action of some sort, however, there will be significant pressure to limit how far the pendulum swings to mitigate future storm risk. Mitigating risk and improving resilience and adaptive capacity is expensive. However, we are also seeing that recovery and restoration are becoming pretty expensive, as well.

The Price Tag for Delaying Climate Action

Check out the chart below to see number of billion dollar storms in Texas since 1980. A good bit of them have happened since 2008. The black line is the average and it is on a steady incline. Right now we are clocking in at 2.5 billion dollar plus events a year. Several of them over a $10 billion price tag. Prior to Harvey the highest cost was over $30 billion in 2008. Harvey looks to more than double this at $75 billion. How many more of these events do we need to justify moving from business as usual?

billion dollar disasters NOAA update
NOAA National Centers for Environmental Information (NCEI) U.S. Billion-Dollar Weather and Climate Disasters (2017). https://www.ncdc.noaa.gov/billions/

What are Some Options? 

There is not an easy answer. Texas has been victim to a number of different types of natural disasters? Hurricane storm surge, flooding, drought, extreme heat, etc. Investing to mitigate in one event type won’t necessarily help to mitigate risk of other events. For example, building the Ike Dike, a storm surge barrier in front of the Houston Ship Channel, would not have limited any of the damage brought on by the Tax Day Flood, Memorial Day Flood, Harvey or the 2011-2012 drought. All of these billion dollar events happened since Hurricane Ike. Surprisingly though, (or maybe not Texas A&M has a significant amount of clout at the State House), the Ike Dike reached the top of the agenda for the State after Harvey. The Netherlands derived idea has been floundering about for years since Hurricane Ike devastated Bolivar Peninsula and Galveston, but it takes a non-related flooding event for it to get real attention. (To be fair, Ike Dike did get some traction in the State House this last legislative session but died in the spring. )

In any case, the big question is what do we prepare for next? Other than the resurgence of the Ike Dike after Harvey, which would require a special session to get it funded, the most pressing focus is on storm water management and flood mitigation. There is a significant amount of discussion about dealing with this flooding issue, but there is not any real money being made available. It is estimated that Harris County alone needs about $26 billion to upgrade its storm water infrastructure. Without significant changes in the way Harris County does business, they not have that kind of money.  Governor Abbott has refused to take any direct action or open up the rainy day fund,

need for repairs
Harris County Flood Control Map of Post-Harvey Damage

which is the largest in the country at $9.7 billion, to cover any of these costs. FEMA is over burdened and does not have the funds. Further, FEMA’s Director Long has already made it clear that the federal government is getting tired of bailing out communities.

 

This is politics as usual, particularly for Texas. The state expects the communities to fend for themselves or the Fed’s to provide the resources. It is OK for Texas to ask for disaster assistance funding, but other states better think twice.  Speaking of reaching for a handout, Florida did a 75/25 split with FEMA, Florida covering 25% of its recovery costs; Texas negotiated a 90/10 deal.  I am assuming we need the other 15% to enforce Senate Bill 4, the Sanctuary City bill.

Moving Forward

So what is going to move us ahead, away from business as usual? Right now we starve our infrastructure of funding, particularly on maintenance. There is absolutely no political will to raise taxes, even temporarily to just cover recovery costs, much less resilience. Contrary to what many politicians would have you believe, US citizens are willing to pay higher taxes to have better services and infrastructure. 90% of Americans are willing to pay their fair share of taxes if they know where the spending is going. I am not advocating that higher taxes are the best way to go, maybe there are other funding approaches such as public-private partnerships (some debate on the efficacy of these providing a public good) or resilience bonds and green bonds. So finding the appropriate funding resources is also not necessarily a problem. Further, knowing how to make our infrastructure more resilient is also not a problem. There are a growing number of voluntary resilience standards that can be used and plenty of Cities taking action.

The real problem, I would argue, is overall lack of mobilization from the private sector, primarily our oil and gas industry. The funding can be found, the resilience standards are available, the science and engineering capacity is boundless, the ability to innovate and lead is found across the region. Unfortunately, with all of this capacity and opportunity, we have allowed our City and Region to develop in a way that is not sustainable and is highly susceptible to hurricanes, flooding, drought, extreme heat, etc. Our largest economic sector, the oil and gas industry, has largely been silent, to the detriment of itself and the overall community.  The Houston region needs new industry and new talent. We will make our ability to recruit and retain high value and productive industry increasingly more difficult, if the private sector stays silent and does not push for change.  The Texas Miracle is already on life support. Is Houston up to the challenge to keep it alive?

 

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Houston and Detroit – Twin Cities?

Why is Texas letting the clean energy transition move ahead without it? There are a lot of people asking this question. The new head of the Greater Houston Partnership affiliate Center for Houston’s Future, Brett Perlman was recently  asked this question by the Houston Chronicle. He suggested that if Houston does not get its act together, the City may no longer be a relevant player in the energy industry as the transition moves forward.

Why is it important to ask this question? Because the transition is real and it is enginehappening at a pretty decent clip. In the latest issue of the Economist there is an article about the coming demise of the internal combustion engine due to recent technological breakthroughs of electric vehicle battery technology.  Battery prices have gone from $1,000 per kWh in 2010 to $130-$200 per kWh today. With this reduction in pricing it is anticipated that by 2025 EV’s will make up 14% of total global car sales, per the Economist article. This number of EV’s may continue to raise as more countries and automakers make statements of going fossil fuel free by 2040 and shifting resources to EV R&D and production. How much of this is greenwashing, time will tell. However, with decreasing technology costs and changing consumer attitudes we may be close to that uptick in s-curve.

Houston is a bit vulnerable to the oil and gas roller coaster as has been demonstrated time and time again. This vulnerability was demonstrated during a time when oil and gas was the only game in town. Granted there was some really expensive hydrogen options, some very short range EVs and a bunch of compress fossil fuel options. However, now there are some true alternatives and these alternatives are quickly coming to price parity with our traditional transportation fuels and their range is becoming just as good as the internal combustion option.

A recent University of Houston Bauer College of Business Institute of Regional Forecasting report presents a good picture of how the Houston economy is still very much dependent on the oil and gas market and one can draw some interesting conclusions on what may happen to the Houston economy if prices remain low or go lower. in reality we are already in a long-term low price market. Shell CEO Ben van Beurden predicted we are in a “lower forever” oil price environment. This is at a time when demand for transportation fuel has been increasing due to growing transportation demands. So what happens if demand starts to fall due to EV’s?

Much of this oil and gas activity has some tie to Houston and Texas. Oil and gas is  a global industry but Houston has some involvement at some point whether it is R&D, refining, transportation, manufacturing, oil field services, financial/transactional, etc. We are responsible to some degree for the 36.9 quadrillion BTU’s of petroleum production in the US and make much of the 27.9 quads used in transportation. See the LLNL chart below.
Energy_US_2016

Houston is a major player in the transportation market due to our position in the production of oil and gas and refining fuels. So, why not build on this, extend a bit beyond fossil fuels. The City has the engineering expertise and the industrial base to play an active role in making a clean energy transition. If we do not do so, we face a double climate risk. Risk from physical climate change and risk from an economy that is stuck in time and being left behind. I discuss this in an earlier blog post

There is no definite timeline for when this transition will really ramp up and significantly reduce demand for fossil fuels. There is plenty of skepticism among if and when this will actually happen. However, different from the past, the technology is quickly becoming cost competitive with traditional fossil fuel transportation options. The infrastructure needs to be built out, attitudes and perceptions of electric vehicles will need to be changed, costs will need to continue to come down, etc.

Much of it appears to be dependent on battery storage. The deployment of EVs is anticipated to increase significantly as the price points, size and weight of batteries decreases. The intermittency problem of renewables also is largely dependent on battery and other physical storage options.

 

Jumping the Gun on Climate Asset Risk Disclosure?

sinking oil rigOne of the primary focus areas of this site is to push for greater transparency in the market around climate risk to the private sector (here and here). I mentioned in a previous post that the oil and gas sector alone could potentially see $2.2 trillion of stranded fossil fuel assets, with the United States potentially seeing the greatest loss. It is vital for the sustainability of the private sector and our global economy that shareholders and stakeholders are aware of what potential risk that may be faced by companies. The practice of disclosure will benefit both the company and its shareholders. It will force companies to take a hard look at their operations and risk management strategies and assess what actions may need to be taken to mitigate this risk. It will help current and future shareholders to better understand the risk they face when investing in a company.

For the last 15 years, the Climate Disclosure Project (CDP) has been working to get companies, as well as the public sector, to voluntarily disclose their greenhouse gas emissions and carbon related activities. The belief is that disclosure of this information by both the private and public sector will result in more effective management of carbon, as well as better management of climate risk. In their most recent report,  CDP was able to have over 1,000 companies disclose their climate data, out of a pool of 1,839. Not a bad number for a voluntary disclosure program. Of those reporting, the highest percentage of reporting came from the IT and healthcare industry, while, not surprisingly, the lowest percentage came from the energy and utility sector, 40% and 38%, respectively.

However, although we are seeing a lesser percentage of the energy sector participating in the 2016 CDP report, we may be seeing a growing number in the next few years. In the last couple of years we have seen a growing trend in the number of carbon asset risk resolutions that are being presented to company boards. According to the CERES Shareholder Resolution Database, 75 resolutions were brought before shareholders. The majority of these resolutions for carbon asset risk disclosure are power companies and oil and gas companies. There were also a smattering of banks, a real estate company and some mining companies. The mining companies appear to have the most success in getting these resolutions passed. They went three for three in the resolutions proposed and passed. These mining companies include Rio Tinto, Anglo American and Glencore Plc.  Although we saw over 40 oil and gas companies with resolutions proposed, only 10% of them passed. This includes ExxonMobil and Occidental Petroleum, on their second try in two years, as well as Suncor in 2016, BP in 2015 and Royal Dutch Shell in 2015. Chevron and Anadarko withdrew their resolutions in 2017. However in 2016, they were pretty close with more than 40% of shareholders voting for carbon risk disclosure.

In any case, what we are looking for are small wins and I think we saw some this year. Further, it is likely that we will continue to see more disclosure resolution activity as the SEC further defines its materiality requirement in its Guidance Regarding Disclosure Related to Climate Change. Under this guidance, the SEC only requires disclosure of climate risk if there appears to be a material risk to the company. There is still some interpretation as to what is “material” related climate risk to a company. That is why we see the ongoing push back by much of the energy sector on disclosing these risks. They argue there is still significant climate, consumer and regulatory related uncertainty that makes this risk difficult to quantify at this time. It is anticipated that this argument may lose some of its strength as we continue to refine our global climate models and the downscaling of these models.

A group that is out front that is trying to better define climate risk and promote the disclosure of this risk is the Task Force on Climate-related Financial Disclosures.  They are actively developing resources, guides and scenario tools to help companies better determine their risks and report on them. At the end of 2016 they came out with their recommendations for how companies should prepare and provide climate risk-related financial disclosures. The focus is on helping the business community, lenders/investors and regulators through the development of a framework that makes providing, understanding and using this data a bit easier.

There is some argument that at this time the Task Force has gone a bit too far. The IHS Markit organization has just come out with its own report that pushes back on the TCFD recommendations arguing that although it is a good framework that is useful for assessing climate risks, it is difficult to tie these climate risk indicators to actual financial impacts. They argue there is still too much uncertainty on the scale and timing of these climate risk factors and financial decisions by investors could be skewed by these indicators.

My take on this, is that it is good to have a healthy dialogue between these groups. There is still some uncertainty on the scale and timing of climate events, regulations and changes in customer preferences. It is possible that investors may take this climate risk disclosure information and potentially jump the gun and divest when it would be fine for them to stay invested for the near to mid-term. So, we need to continue to refine our frameworks, models and scenario tools to ensure we have the best information available. However, we don’t need to wait until it is perfect with 100% certainty. sinking oil rig

Jumping the Gun on Carbon Asset Risk Disclosure?

sinking oil rigOne of the primary focus areas of this site is to push for greater transparency in the market around climate risk to the private sector (here and here). I mentioned in a previous post that the oil and gas sector alone could potentially see $2.2 trillion of stranded fossil fuel assets, with the United States potentially seeing the greatest loss. It is vital for the sustainability of the private sector and our global economy that shareholders and stakeholders are aware of what potential risk that may be faced by companies. The practice of disclosure will benefit both the company and its shareholders. It will force companies to take a hard look at their operations and risk management strategies and assess what actions may need to be taken to mitigate this risk. It will help current and future shareholders to better understand the risk they face when investing in a company.

For the last 15 years, the Climate Disclosure Project (CDP) has been working to get companies, as well as the public sector, to voluntarily disclose their greenhouse gas emissions and carbon related activities. The belief is that disclosure of this information by both the private and public sector will result in more effective management of carbon, as well as better management of climate risk. In their most recent report,  CDP was able to have over 1,000 companies disclose their climate data, out of a pool of 1,839. Not a bad number for a voluntary disclosure program. Of those reporting, the highest percentage of reporting came from the IT and healthcare industry, while, not surprisingly, the lowest percentage came from the energy and utility sector, 40% and 38%, respectively.

However, although we are seeing a lesser percentage of the energy sector participating in the 2016 CDP report, we may be seeing a growing number in the next few years. In the last couple of years we have seen a growing trend in the number of carbon asset risk resolutions that are being presented to company boards. According to the CERES Shareholder Resolution Database, 75 resolutions were brought before shareholders. The majority of these resolutions for carbon asset risk disclosure are power companies and oil and gas companies. There were also a smattering of banks, a real estate company and some mining companies. The mining companies appear to have the most success in getting these resolutions passed. They went three for three in the resolutions proposed and passed. These mining companies include Rio Tinto, Anglo American and Glencore Plc.  Although we saw over 40 oil and gas companies with resolutions proposed, only 10% of them passed. This includes ExxonMobil and Occidental Petroleum, on their second try in two years, as well as Suncor in 2016, BP in 2015 and Royal Dutch Shell in 2015. Chevron and Anadarko withdrew their resolutions in 2017. However in 2016, they were pretty close with more than 40% of shareholders voting for carbon risk disclosure.

In any case, what we are looking for are small wins and I think we saw some this year. Further, it is likely that we will continue to see more disclosure resolution activity as the SEC further defines its materiality requirement in its Guidance Regarding Disclosure Related to Climate Change. Under this guidance, the SEC only requires disclosure of climate risk if there appears to be a material risk to the company. There is still some interpretation as to what is “material” related climate risk to a company. That is why we see the ongoing push back by much of the energy sector on disclosing these risks. They argue there is still significant climate, consumer and regulatory related uncertainty that makes this risk difficult to quantify at this time. It is anticipated that this argument may lose some of its strength as we continue to refine our global climate models and the downscaling of these models.

A group that is out front that is trying to better define climate risk and promote the disclosure of this risk is the Task Force on Climate-related Financial Disclosures.  They are actively developing resources, guides and scenario tools to help companies better determine their risks and report on them. At the end of 2016 they came out with their recommendations for how companies should prepare and provide climate risk-related financial disclosures. The focus is on helping the business community, lenders/investors and regulators through the development of a framework that makes providing, understanding and using this data a bit easier.

There is some argument that at this time the Task Force has gone a bit too far. The IHS Markit organization has just come out with its own report that pushes back on the TCFD recommendations arguing that although it is a good framework that is useful for assessing climate risks, it is difficult to tie these climate risk indicators to actual financial impacts. They argue there is still too much uncertainty on the scale and timing of these climate risk factors and financial decisions by investors could be skewed by these indicators.

My take on this, is that it is good to have a healthy dialogue between these groups. There is still some uncertainty on the scale and timing of climate events, regulations and changes in customer preferences. It is possible that investors may take this climate risk disclosure information and potentially jump the gun and divest when it would be fine for them to stay invested for the near to mid-term. So, we need to continue to refine our frameworks, models and scenario tools to ensure we have the best information available. However, we don’t need to wait until it is perfect with 100% certainty. sinking oil rig