Monday, November 24, 2014

While the College Divestment Campaign Struggles, Cities and Pension Funds See Some Benefits

On November 17, the Boston City Council voted “yes!” urging the state of Massachusetts to divest from fossil fuel companies. (Credit: Click to Enlarge.
When it comes to the fallout from financial bubbles, the dot-com bubble of the late 1990s lost roughly half its value from 2000 to 2001 after it popped, and the aftershocks from the real estate bubble that helped precipitate the financial meltdown of 2007 and 2008 are still being absorbed worldwide.

Today, the possibility of a bursting "carbon bubble" has the underpinnings of perhaps even more financial turmoil than either of those predecessors.

Students, part of the still-nascent fossil fuel divestment movement, have argued that their schools' continued investment in fossil energy extraction companies is a dangerous and unethical decision.  Some financial analysts point to long-term risks.  Above all, investment advisers often cite the possibility of "stranded assets" as one reason for investors to be wary of fossil fuel-based investment.

In order to prevent a global temperature rise of more than 2 degrees Celsius above preindustrial levels, climate scientists say, the vast majority of known fossil fuel reserves must remain in the ground.  As international governments enact more policies to limit carbon emissions, energy companies could be stuck with untouchable pockets of oil, coal and natural gas.

"Financial analysts are increasingly warning investors of the risks that tighter regulations on carbon dioxide emissions and falling demand for fossil fuels could make fossil fuel reserves substantially less valuable, or even 'stranded' and ultimately rendered worthless," write the authors of a report by Impax Asset Management, a financial services firm.  "So the question becomes:  how should a fiduciary compare the risks to portfolios by stricter carbon regulations to the risks associated with reducing exposure to fossil fuel stocks?"

The Carbon Tracker Initiative, working with the Grantham Research Institute for Climate Change and the Environment at the London School of Economics and Political Science, published a watershed report on carbon risk and so-called bubbles in 2013.

The analysis places the remaining carbon budget between 900 gigatons of carbon dioxide (for an 80 percent chance to remain below the 2 C threshold) and 1,075 gigatons for a 50 percent change to hit that mark.

"The scale of this carbon budget deficit poses a major risk for investors," the authors write.  "They need to understand that 60-80 percent of coal, oil and gas reserves of listed firms are unburnable."

Though some investors have become increasingly concerned about fossil fuel bubbles and the ensuing carbon crash that some forecast, the most strident voices against fossil fuel investment are coming from college students, not activist investors.

Read More at While the College Divestment Campaign Struggles, Cities and Pension Funds See Some Benefits

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