The chair of the Grantham Research Institute on Climate Change and the Environment has warned fossil fuel companies against potential bankruptcy if they fail to properly ‘plan for decarbonisation’.
The claims are made in a paper co-authored by Lord Stern and Dimitri Zenghelis, another senior economist at the Grantham institute, which is due for submission to the Task Force on Climate-Related Financial Disclosures (TCFD).
The TCFD was set up by Mark Carney, is currently chaired by former New York mayor, Michael Bloomberg and has the aim of “develop[ing] voluntary, consistent climate-related financial risk disclosures for use by companies in providing information to investors, lenders, insurers, and other stakeholders.”
The task force’s first report was published earlier this year and concluded that the fragmented way in which climate risk was assessed and reported on made it incredibly hard for investors to make truly informed decisions.
Stern and Zenghelis’ paper argues on similar lines that there is currently a disparity in the valuation of fossil fuel companies and in the assessment of climate risk that must be addressed if the companies are to survive and receive the investment they require.
The paper states that there is a “gap between what politicians have signed up to in Paris and what markets and fossil fuel companies are assuming.”
“This gap,” it goes on, “should alarm policy-makers and central bankers: it suggest either asymmetric information or a lack of credibility in policies.”
Given the commitments made by countries signing the Paris Agreement, carbon emission levels will have to drop significantly in the coming years.
For fossil fuel companies, this means a significant restructuring of their business over time. Without a uniform way of reporting and assessing the future performance of these businesses, investors are left without much to go on and are likely to be deterred.
As such, Stern and Zenghelis argue, it is in these companies’ own interest to be transparent with regard to climate risk and to the effect that decarbonisation will have on their business models, if they are to survive financially in coming years.
For example, the paper says: “if an oil company does not believe global policy makers will adopt the measures necessary to attain the decarbonisation outlined in the Paris Agreement, then they need to be explicit about this. From an investor point of view, it is one thing for a business to assume that governments were not serious in Paris, but it is quite another to pin their entire strategy on this being so.”
It goes on: “If oil company X has no response to the “what do you do in a net zero emissions world”, then better to know that now so that their market capitalisation can fall in a gradual way.”
Companies reliant on fossil fuels need to start working on credible contingency plans if they want to retain investment.
“All companies will benefit from building resilience and planning for decarbonisation, though access to new technologies and market and compliance with new policies, but the degree to which they expect to benefit will depend on the costs of taking action and the distributing of risks.
“Some will be more exposed than others, but even in heavily carbon entangled sectors, competitive losses can be limited or avoided to proactive attempts to transform production processes and business models.”
