Two new reports just released conclude over €1 trillion in European financial institutions at risk from a growing carbon bubble, while divestment from fossil fuels will not harm business returns.
The two new reports were released today in Brussels and Sydney and both help strengthen the case for fossil fuel divestment.
One report emphasises the growing risk of a carbon bubble resulting from overexposure to high carbon assets, and the other concludes that responsibly divesting from fossil fuels will not hurt a portfolio’s financial performance.
The first report, a Greens/European Free Alliance (EFA) Group of the European Commission study, investigates the carbon exposure of Europe’s top 43 banks and pension funds.
It assesses the risk a carbon shock posed to them.
The results of the study, entitled The Price of Doing Too Little Too Late: The impact of the carbon bubble on the EU financial system, were presented at a conference taking place in Brussels today.
It concludes that the most cost-effective pathway to limit the risk of the carbon bubble would be a quick and decisive transition to a low-carbon economy with ambitious energy and climate targets.
The study highlights a number of individual institutions that are at risk, and with them their associated countries.
This is particularly the case for France where two of the largest European banks, Société Général and BNP Paribas, have a “relatively high” exposure, and the United Kingdom and the Netherlands, where national pension funds have a “high” exposure.
According to the report, the exposure to the carbon bubble has been markedly higher for the pension fund sector than it has been for the banking sector.
Out of the 23 large EU pension funds researched in this study, the Universities Superannuation Scheme (USS), the principal pension scheme provided by universities, higher education and other associated institutions for their employees in the UK, has an overwhelmingly large amount of carbon risk in its portfolio.
The overall exposure of the European financial institutions into high carbon assets has been calculated to be over €1 trillion, although the report says it is important to note that this is still a conservative estimate.
Reinhard Butikofer, industrial policy spokesperson of the Greens/EFA in the European Parliament said: “A new study we commissioned clearly shows the potential losses of a carbon shock to Europe’s top 20 banks and top 23 pension funds.
The result is sobering. With over €1 trillion in high-carbon assets, we have identified that the carbon bubble is a significant risk particularly for a number of EU Member States and EU financial institutions.
“Investments in fossil fuel companies could therefore quickly turn into fool’s gold.
“The EU’s business-as-usual strategy entails greater risks and costs to our financial system. This should be a wake-up call.”
The study makes a number of additional recommendations which include greater transparency obligations regarding high-carbon assets, undertaking carbon stress tests, investigating the fiduciary duty of pension funds and how that could limit investments into high carbon assets, setting ambitious climate and energy targets, and many others.
Bill McKibben, co-founder of 350.org, speaking via video-link at today’s conference in Brussels, highlighted the importance of these findings.
“I hope the release of this study is an occasion for everyone to come as quickly as possible to the conclusion that we have got to change the business-as-usual scenario.”
“Business-as-usual is not just a threat to the planet around us but to the economy at large,” he added.
The second report released today in the New South Wales capital, Sydney, concludes that shares in coal, oil and gas companies increase financial risk without any additional benefit to returns.
Published by The Australia Institute and 350.org and released today Australia and Market Forces, Climate proofing your investments: Moving funds out of fossil fuels, claims that portfolios containing coal, oil and gas companies risk lower returns in the long run while portfolios avoiding these companies can provide competitive returns.
The report concludes that investors who divest from companies such as Whitehaven Coal, Woodside Petroleum and Origin Energy need not sacrifice their investment returns.
The report also looks at the financial risk of “unburnable carbon” to shareholders of coal, oil and gas companies.
According to the report, balance sheet valuations of reserves held by coal, oil and gas companies are based on the assumption they can extract over three times more carbon than is compatible with the internationally agreed two degree global warming limit.
The lobby group 350.org said these new reports served to add impetus to an already growing divestment movement.
Since 350.org launched the divestment campaign in the autumn of 2012 the movement has spread across the United States, Australia and Europe, with dozens of cities and institutions already committing to divest.
A recent study by the University of Oxford concluded that the fossil fuel divestment movement is growing faster than any previous divestment campaign.
It said, “The outcome of the stigmatisation process, which the fossil fuel divestment campaign has now triggered, poses the most far-reaching threat to fossil fuel companies and the vast energy value chain.”[5]
Most recently 70 global investors, managing over $3 trillion of assets, have demanded the oil, gas and coal companies asses the risks that climate change poses to their business plans.
Earlier this month during a summit of financial leaders held at the United Nations, Christiana Figueres, Executive Secretary of the United Nations Framework Convention on Climate Change (UNFCCC), joined the voices calling on investors to get out of high carbon assets.[6]