The carbon investment conundrum. SELL

At last, a deal at the UN Framework Convention on Climate Change (COP17).  More than 190 countries accepted the "Durban Platform for Enhanced Action" that commits all of them to cut carbon for the first time through a legal treaty. Including the world’s three biggest emitters: USA, China and India. Although not universally loved, it is now all nations on board.  However, it is an agreement to reach an agreement.  Further, it delays real action.    Time which my prior blogs suggest that we do not have.

In substance this is how the Guardian is reporting it…

“……..that would deliver a global, overarching legal agreement to cut emissions…………. more or less agreed on a series of measures aimed at protecting forests, widening global markets and establishing by 2020 a $100bn fund to help poorer countries move to a green economy and cope with the effects of climate change………. The treaty will be negotiated by 2015 and coming into force from 2020. The deal also paves the way for action to address the "emissions gap" between the voluntary emissions cuts countries have already pledged and the reductions experts say are needed to effectively tackle climate change”

However, from where we are today, it would take about 100 years for carbon dioxide (CO₂) to disappear [to sustainable levels] from the atmosphere if emissions stopped completely.  I do hail the fact that something is being done and there is renewed impetus.

Quoting Tessa Tennant on the UN outcome, co founder of the Carbon Disclosure Project, “It is great to see all countries back on track in recognising the material implications of carbon”.

And the first task of this new impetus should be to establish a global taskforce to examine the massive reserves of oil, gas, and coal on our listed and unlisted companies.  It should be an imperative that this is the single most important issue.

Quoting the CarbonTracker report, Unburnable Carbon, in my earlier blog I wrote…..

They report that the global carbon budget for 2000-2050 is 886 GtCO₂.  In the first decade alone we have used 321 GtCO₂ already, or 36%.  This allows only 141 GtCO₂ for each of the next four decades. That is a big drop from 321 GtCO₂. 

They then report that all known fossil fuel reserves are 2,795 GtCO₂ (65% coal, oil 22% and gas 13% - in both listed and non-listed companies). Three times the aforementioned carbon budget.  And for Directors and Officers, this becomes even more alarming (especially to an ex global equity analyst) when the top 100 listed coal, oil and gas companies are reported to have reserves on their balance sheet of ~745 GtCO2. They go on to say “if the 2C degree target is rigorously applied [on a blended basis across both listed and private companies], then up to 80% of declared reserves owned by these companies …..are subject to impairment.” Thank goodness I am not the auditor or Director and Officer signing off on those balance sheets as true and fair. This report makes clear the systemic risk from not understanding more about Directors and Officers near term risks.

To re-iterate that point.  Of the listed companies today, with oil, gas and coal reserves [assets] on their balance sheet – and off – 80% must be written off.  You know, like when a bank makes a massive loss due to write-offs of their assets.  With respect to (carbon) fossil reserves, think Anglo American, BHP Billiton, Xstrata, Rio Tinto, Exxon Mobil.  Frankly their share prices are all doomed.

 

Is your fund manager investing in these companies with your lifetime savings?

 

The report suggests that it requires “unprecedented intervention” to co-ordinate how these global companies manage these reserves; however it also provides the blueprint within its recommendations for action.  To me this suggests only the UN Environmental Commission has the resources and global reach to effect change.

The work has been done by Carbon Tracker, so let’s act.

However, the outstanding issue for me is that credit [debt] and equity analysts around the world have not picked up on this.  Where are they?

Why have they not got a "sell" on every bond and share issued by these companies when we know with a high probability that they will suffer severe impairment of their assets?

Why are the Directors and Officer not writing off their reserve assets as unusable?  Under existing regulations they are required to do so by law.  Maybe they are relying on the now obvious delays incurred with the global call to action on carbon.  However that has changed overnight, and you cannot walk around any country without the populace knowing that climate change is occurring from their own experience.

Why would anyone want to invest in companies whose assets are highly likely to be impaired, and whose product is also killing their children and grandchildren.

It is a conundrum!

IMPORTANT DISCLOSURE:  This blog is not licensed to given investment advice.  You should not rely on anything published in this blog.  If this blog sparks an interest, then you should seek advice from a licensed investment advisor.