The Carbon Tracker Initiative, a project from the NGO Investor Watch, has produced research that shows that if we stick to our global carbon budget, 80% of global declared fossil fuel reserves will be unburnable. Some investment funds, even environmental funds or green funds, may be exposed to the risks of companies being unable to use their reserves.
The research showed that worldwide proven reserves of fossil fuels represent 2795 Giga tonnes of CO2 (GtCO2), but the carbon budget needed to keep global warming below 2°C is only 886 GtCO2 for the period 2000-2050. The remaining reserves represent unburnable carbon, which may mean that the companies with these assets are currently overvalued. There is still investment into fossil fuel extraction, one example is the IPO of mining company Glencore in May. This may be investment into assets that they cannot use. The report suggests that a carbon bubble is forming, and it will eventually burst sending companies which extract fossil fuels plummeting.
Risks for Index-tracker funds
Index-tracker funds are exposed to the risks involved with unburnable carbon. Mining, oil and gas companies make up around 36% of the FTSE100, which many funds use as a benchmark, and as a result have similar holdings. This means that they are more susceptible to these risks.
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