Carbon-Intensive Investors Risk $6 Trillion ‘Bubble,’ Study Says

Investors in carbon-intensive business could see $6 trillion wasted as policies limiting global warming stop them from exploiting their coal, oil and gas reserves, according to a report.

The top 200 oil, gas and mining companies spent $674 billion last year finding and developing fossil fuel resources, according to research by the Carbon Tracker Initiative and a climate-change research unit at the London School of Economics. If this rate continues for the next decade some $6 trillion risks being wasted on “unburnable” or stranded assets, according to the report, released today.

Banks, funds and institutional investors are seeking clarity from government and central banks about how greenhouse-gas emissions may affect the value of their investments. The Bank of England said last year it will evaluate whether the U.K.’s exposure to investments in polluting industries poses a risk to financial stability after a group of more than 20 investors called for a such a probe.

“If the markets carry on regardless, with the regulators looking the other away, they’re just asleep on their watch,” James Leaton, research director at Carbon Tracker, a project by non-profit Investor Watch, said in an interview in London. “The longer it goes on, the bigger the bubble will get.”

Bonds, Shares

Bonds of fossil fuel companies could be vulnerable to ratings downgrades, pushing up their financing costs while equity valuations could plummet as much as 60 percent if industries become less carbon-intensive, the study showed, citing HSBC Holdings Plc analysis.

The analysis shows that 60 to 80 percent of coal, oil and gas reserves of the 200 public companies studied could be unburnable if the world is to curb emissions to limit global warming to 2 degrees Celsius, a United Nations target.

Even without UN targets, the focus on air quality in nations including China and the U.S., and the falling costs of wind and solar technologies should drive investors to seek low-carbon opportunities, Leaton said.

The report calls on finance ministers to incorporate climate change into assessment of risk in the capital markets and urges financial regulators to require companies to report CO2 emissions embedded in their fossil fuel reserves. Ratings agencies should address climate change as part of efforts to tackle risk, it said.

“I hope this report will mean that regulators also take note, because much of the embedded risk from these potentially toxic carbon assets is not openly recognized through current reporting requirements,” Nicholas Stern, who chairs the LSE’s Grantham Research Institute on Climate Change and the Environment, said in the statement accompanying the report.