Check the share portfolio for CARBON

In January this blog suggested that carbon companies were a SELL.  It became one of our best recorded posts.   Much of that commentary was based on the excellent research conducted by the Carbon Tracker Initiative.  That website is listed at the bottom of this page.


Now the Rolling Stone magazine has given their work much greater coverage with a fantastic article by Bill McKibben; himself one of the renowned authors in this field.  It is five pages but provides an excellent summary of where we have been and are headed.  I exhort you to read it.  Most of the following comes from his article. 

And he starts of with the fact there are only a few numbers anybody needs to know when considering carbon dioxide (CO₂₎ in the atmosphere.  The first is that the temperature around the world has increased 0.8 degrees Celsius.  Which I have written about previously.

The international community has agreed that beyond 2 degrees Celsius is catastrophic for the weather and humans.  So we are nearly half way there already. 

But some reports calculate that even if we stopped increasing CO₂ now, the temperature would likely still rise another 0.8 degrees, as previously released carbon continues to overheat the atmosphere. That means we're already three-quarters of the way to the 2 degree limit target.

The second number that it is important to know is that to reach that 2 degrees,  by mid century humans can only release another 565 gigatons of carbon dioxide into the atmosphere. 

The third important number is that in 2011, the International Energy Agency said that CO₂ emissions rose to 31.6 gigatons. So by the end of this year, that means that we have only 16 years remaining before we must stop emitting ANY CO_2. 

Not just reducing, but stopping.  Cars, power plants, fires, planes, etc.

Now here is the next important number (and a return to our investing theme) the number of CO₂ contained in confirmed coal / fuel / gas fields is 2,795 gigatons.  That is, 5 times higher than what we can burn. 

That is, this is the known reserves in the ground and excludes any future discoveries from exploration. 

Now we can put some further analysis around those numbers.  The first point to make is that for children entering primary school this year, when they graduate, they will face a very frightening world (as McKibben points out).  That is how soon it is.

The second is in our investment portfolios.  At some stage in the next 16 years, we are going to realise – through more catastrophic weather events – that owning shares in the companies that produce this fuel is not a good idea.  

And that is because those 2,795 gigtons is actually on the companies’ balance sheets, and is built into the share price as an asset, and we simply cannot burn it all and survive.  The Carbon Tracker Initiative lists all those companies and you can look it up if you like.  Al Gore puts the number at US$7 trillion of value in carbon related companies, of which one fifth is US$1.4 trillion -  an overvaluation of US$5.6 trillion.

So can we then derive that those company balance sheets are possibly 5 times over-valued? I guess it is a toss-up really.  Kids or carbon.  Australian legislation on what has become known as the "carbon tax" is not the first to introduce it, but it became effective this month.  And as McKibben points out, it is the only way to stop these behemouth companies in their tracks and save this planet. Oh, but sell the shares first huh!

Directors and Officers, Peak Everything and New Regulations

I had intended to walk away from the series, Peak everything written on this blog earlier.  However, the tension keeps rising, and almost daily, new information is either published by highly reputable groups, or I discover another erudite and blood-pressure-raising piece of research.

It is so profoundly obvious that companies are not accurately measuring, analysing and reporting their key risks from the resource depletion I wrote about in Directors and Officers [D&O] and Peak Food, Oil, Carbon, and Water.  I think I showed in this blog that not only does international regulation exist that obliges Directors and Officers to be capturing and reporting this information, but also that their fiduciary responsibility to their company makes it mandatory given the urgency.

The key point being that my conclusions were that the regulation already exists to measure, analyse and report key risks from resource depletion, it just needs to be enforced.  And that means by regulators. 

A report I missed for the previous blogs was from a new group that has emerged, under the auspices of Force for Good.  They have come to a completely different conclusion to mine.  They seem to conclude that a new reporting regime is required. Well of course they would, that will create at least another million jobs in the accounting profession alone. 

This group is named the International Integrated Reporting Committee, and with august representation.  Mostly drawn from standard setting entities such as A4S, GRI, FASB from America, IASB, IFAC, IOSCO, the Big Four (accounting firms), in July 2010 they sat around a conference table and decided to commission a report.  This is because they had concluded “that financial reporting was not sufficient to make an informed assessment about the sustainability of a business in the new economy.”

To be frank, financial reporting was never sufficient to make an informed assessment about a business, its sustainability or anything else.  I mean, that is a foregone conclusion. That is why Management Discussion and Analysis reporting [“MD&A”]  was created, and is now mandatory in for example USA and Canada.

Moving on from that point, the report that they commissioned was published in April this year.  And within it, they ask a question by way of analogy about climate change and the lack of action by investors.  About the GFC they asked at page 13 “Why did so many investors and other stakeholders not spot the build-up of troubled loans? And if they did, why did they choose to ignore them?”

Well I would have thought that the answer to that was because they were all making so much money, using other people’s money.  They had no down side, and still don’t.

Indeed the FBI itself from 2004 onwards was speaking publicly of the systemic fraud within the USA mortgage industry, so investors could not have been ignorant about the problems.  They just didn't care.  So far, almost nieve!

The report looked at the role of the auditor in the corporate reporting system, and showed how in the past few decades it has been extended to cover aspects of other information; risk, governance, remuneration, internal controls and MD&A, and not just financial reporting. 

And the report noted with clarity, as I said above for good reason, that in conducting their research investors would not engage with them. They suggested that this was due to the dominance of technical trading versus long term investment;  that the system offers incentives to short term horizons, at the expense of long term performance.  So why would investors be interested in longer term systemic changes?

Again, this report confuses who investors are.  The people to whom they refer are not the investors.  The investors are all the mums and dads with pensions.  The people to whom they were referring are the fund managers, and they are not the investors.  How this Group can arrive at any pathway to move forward on their integrated and converged standards without getting even this correct is difficult to comprehend.

I am afraid things didn’t get much better.

It was suggested in the report that one of the problems was that there were three types of data being reported (by Vipul Arora of Solaran Sustainability Services; and I am going to call him the voice of reason), for regulators, for investors, and for management.  This comment was followed by Bob Eccles (Professor of Management Practice, Harvard Business School, and whom I am going to call the voice of unreason), who suggests that it is not the “job” of investors to pay enough attention to [corporate reporting reform.]

Uh, dah!!  Again, that confusion of who the investor is.  But the fund manager (about whom he is speaking) has a fiduciary obligation, not just a job, to do so in the USA and elsewhere.  They are using other people’s money. Indeed they should be both judicially and ethically active in seeking corporate reporting reform. This from an Harvard professor!

The problem I have with all this, is that this Group appear to be working in an ivory tower.  I don’t know how much they paid for the report but I could have done it in a week for nothing.  And as pleased as I am about this Group bringing together all the standard setters, and seeking convergence, time is running out. 

It took IASB eight years to develop and issue its non-mandatory MD&A.  The UN Environmental treaties still haven’t been finalised after more than 20 years.  What we need is clear action by regulators enforcing existing reporting regulation.  Not a reinvention of the whole lot again.  That’s just rent seeking.  By the time they have finished converging standards, we may well all be dead.