The Carbon Tracker Initiative has warned fossil fuel companies to stress test their business model against low carbon, low price scenarios or risk shareholder value falling.
Working with the Energy Transition Advisors, the organisation has published a blueprint examining the impact of limiting global temperature rise to 2C on the fossil fuels industry, focusing on oil and gas. The report argues that stress testing business models can benefit businesses, and in turn shareholders.
Paul Spedding, advisor to Carbon Tracker and co-author of the blueprint, said, “Senior management is overly focused on demand and price scenarios that assume business as usual. As such, there may be a risk assessment ‘gap’ between a management’s view of the future and that resulting from action on climate change, technological advances and changing economic assumptions.
“Critically, the greatest impact will – initially – not be directly from reduced demand, but from the consequent pressure on commodity prices.”
While Carbon Tracker acknowledges that many fossil fuels companies recognisethe threat posed by climate change an the energy transition, their forecasts often do not aligned with other organisations’ projections.
The blueprint recommends that fossil fuel companies carry out a “through risk assessment on the implications of an energy transition including demands and price pathways that differ from the status quo”. In particular it highlights indications of cashflow and revenue from commodity price change, the flexibility built into the company’s five-year investment programme and the project portfolios such as internal rates of return and breakeven price curves as being key indicators.
Carbon Tracker research advisor Mark Fulton, who also co-authored the report, commented, “Focusing on higher Internal rates of return and lower-cost projects reduces risk for companies and shareholder. It might also create additional value by improving stock ratings should historic return-rating relationships persist.”
He continued that the blueprint advances the risk management process that tests for an ‘orderly energy transition’ and considers a ‘disorderly’ one where change is abrupt. This means that it tests business models to the limit, demonstrating how shareholder value could be destroyed.
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