Only 7% of oil and gas companies take account of climate change in corporate project and capital expenditure assessments despite 99% recognising that it is a business risk, according to financial experts.
The Carbon Tracker Initiative (CTI) analysed responses from oil and gas companies to the Carbon Disclosure Project’s 2014 climate change questionnaire; and to requests for information on asset risks by the CTI and US business and environment organisation Ceres.
All of the companies acknowledged that climate change is an issue, with 99% predicting it will bring regulatory risks in particular carbon taxes and cap and trade schemes. Physical risks to their business were highlighted by 86% of firms.
However, the CTI found that only 21% of companies displayed evidence of analysing the impact of different temperature increases. These scenarios are used to stress-test project portfolios and expenditure plans by just 7% of companies, the analysis revealed.
Only one company discloses the prices used to stress-test investments, and none disclose the outcomes of their stress-testing. This leaves investors without quantitative data to objectively benchmark and gauge exposure to climate-related risk across companies, the CTI warns in its report.
Oil and gas companies should disclose the carbon embedded in their reserves and details of their resilience in low-price or low-demand scenarios, the CTI recommends.
Securities regulators and financial reporting standard setting bodies should requite stress-testing of the potential impact of reduced prices or demand on a companies’ assets, as well as guidance on the interpretation of existing standards, such as IAS 36 on carbon asset stranding, it adds.
“This report highlights the vast gulf between what investors are looking for and what energy companies are not providing in regards to financial risks from high carbon, high cost fossil fuel projects,” said Mindy Lubber, president of the sustainability advocacy group Ceres and director of the Investor Network on Climate Risk.
Paul Simpson, chief executive officer at CDP, added that the risk presented by stranded assets is parallel to that which precipitated the financial crisis in 2008. “Institutional investors need better disclosure from fossil fuel companies on the potential of their reserves to be stranded and details of how they intend to respond to this risk.”
Institutional investors and financial market regulators must also take action to ensure the risk is assessed, disclosed and managed, since accounting rules do not currently require this, he added.
Last week, Bank of England governor Mark Carney warned delegates at a World Bank seminar on integrated reporting that fossil fuel companies cannot burn all of their reserves if the world is to avoid catastrophic climate change. He also called for investors to consider the long-term impacts of their decisions.
