Fossil fuel firms are failing to address the low-carbon imperative

Chris Monks, lead researcher for environmental management at EIRIS, reflects on the latest Unburnable Carbon report by Carbon Tracker and the London School of Economics’ Grantham Research Institute.

The overvaluing of assets based on an underestimation of associated risk in the carbon bubble report clearly draws strong parallels with the recent US sub-prime mortgage crisis that precluded disastrous events in the banking sector, resulting in billions of pounds in value being wiped off the value of global investor assets.

EIRIS classifies the oil and gas sector of companies as being high-risk for the issue of climate change, which reflects the higher non-financial risk that investments in oil and gas companies represent to the investment community regarding this issue.

The carbon bubble report findings support the view that there is a linkage between the heightened environmental risks that climate change represents to company risk management, and potentially huge and hidden financial risks that exist to investors as the ‘real’ value of fossil fuels in any future climate regulatory framework becomes clearer.

EIRIS assessments show that the oil and gas sector is failing to demonstrate a strategic move towards sustainability; EIRIS believes that refusing to commit to a move away from a business model that is reliant on fossil fuels represents a heightened risk to the investment community.

EIRIS assessments relating to the environmental sustainability of oil and gas company strategies show that companies in this sector fail to address the need to transition their business strategies to a low-carbon economy.

Furthermore, whilst we observe major oil and gas companies investing in green/renewable energy sources on a relatively small scale, the same companies can often be seen to be investing in potentially harmful unconventional energy extraction practices such as tar sands, shale oil and natural gas fracturing on a much greater scale, which delays the necessary move away from a fossil fuel dependent economy.

Chris Monks is lead researcher for environmental management within the EIRIS research department.

Further reading:

Report says investing in fossil fuels is a ‘very risky decision’

Climate change will create investment winners and losers

Time to offload the high-risk, low-return carbon assets

Claims of oil prosperity fail to note the finite nature of fossil fuels

Do ethical funds and fossil fuels mix?

The Guide to Sustainable Investment 2013