High-carbon assets pose “major problem” for investors – report « Mining Blog

High-carbon assets pose “major problem” for investors – report

22. January 2012,

In an Open Letter to the governor of the Bank of England, a high-profile UK coalition of investors, policicians and scientists has warned Sir Mervyn King that “overexposure to high-carbon assets by London-listed companies risks creating a ‘carbon bubble'”

Mervyn King chairs the UK Financial Policy Committee (FPC), set up in 2011 to “identify and take action to remove or reduce systemic risks to protect and enhance the resilience of the UK financial system.”

The letter claims that: “The global drive to reduce carbon emissions could mean billions of pounds of fossil fuel reserves will rapidly lose value” and cause “a major problem” for institutional investors and pension funds.

Using terminology only too familiar to the financial chaos and collapse of 2008 onwards, the coalition says that the huge reserves of coal, oil and gas held by London-listed companies are “sub-prime” assets, posing a systemic risk to economic stability.

“These high-carbon assets pose significant strategic challenges for the future prosperity of Britain that just can’t be ignored,” said investment manager James Cameron, who is a member of the UK Prime Minister’s business advisory group.

“Investors continue to pour cash into unsustainable assets without understanding the risks associated with these investments, such as climate change, local pollution, fossil fuel price volatility, political risk and catastrophes such as Deepwater Horizon.”

The letter is also signed by the government’s former chief scientific adviser Sir David King, Zac Goldsmith MP, former environment minister John Gummer and 17 others. It urges action to investigate the risk of the “carbon bubble”.

The letter’s authors point out that “five of the top 10 FTSE 100 companies are almost exclusively high-carbon and alone account for 25% of the index’s entire market capitalisation” and that this risk will exist in other indices and in bank loan books.

“We need to prevent the deep and profound harm that could be wrought by an overexposure to high-carbon assets and a rapid shift in their values,” said Ben Caldecott, head of policy at investment company Climate Change Capital, who signed the letter along with Aviva Investors. “Unlike sub-prime mortgages before the financial crisis, this time regulators must act to prevent the build-up of systemic risk in our financial system.”

Another signatory, David Nussbaum, chief executive of WWF-UK, noted that other assets held by investors could be damaged by climate change: “It’s clear that we cannot burn all the fossil fuels currently listed on the world’s financial markets without seriously impacting the value of other listed assets – which would affect the future pensions on which we’ll all depend.”

In a separate report, published last week, the Carbon Tracker Initiative reveals that coal reserves held by 16 London-listed companies will release 45bn tonnes of CO2 when burned, equivalent to 86 years of annual UK emissions, which are the tenth highest in the world.

Concern over the long-term risk posed by high-carbon assets has also been raised in the US, where the Investor Network on Climate Risk, a group of 100 institutional investors with collective assets of $10 trillion, recently said:
“In order to fulfil our fiduciary duty to safeguard the long-term interests of our clients and beneficiaries, we believe that it is essential to take action now that will result in substantial reductions in global greenhouse gas emissions within a timeframe that minimises the risk of serious impact.”

[Source: Guardian, 18 January 2012].

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