Oil Bonds May Face Sharp Repricing on Climate, BOE Analysts Blog

  • More than $600 billion of fossil fuel bonds may be at risk
  • About 60 percent of securities affected by green transition

Bondholders may face a “sharp repricing” on debt issued by oil and gas companies as demand for polluting fossil fuels falls and investment in clean energy grows, analysts from the Bank of England wrote in a blog post.

About 60 percent of publicly-held debt issued by oil and gas companies matures after 2020 and so could be impacted by the transition toward sustainable energy from hydrocarbons, according to post on Monday entitled “The tip of the iceberg: the implications of climate change on financial markets. Oil and gas companies owe more than $636 billion of debt maturing after 2021, according to data compiled by Bloomberg.

“Financial valuations can move sharply even if the transition to sustainable energy were smooth,” BOE researchers, including Yuliya Baranova and Carsten Jung, said in the post on Bank Underground, a staff blog that allows officials to share commentary and analysis. “exposures are sufficiently large to warrant attention from both investors and policymakers.”

BOE governor Mark Carney has taken the lead in warning how climate change could destabilize financial markets. Last month, in a report produced for the Financial Stability Board, Carney urged companies to tell investors about risks posed by tighter pollution rules and extreme weather events. Climate change is a “tragedy of horizon” because its full-impacts fall beyond the typical short-term timescales of bankers, creditors and insurers, he’s said.

Deterioration of Ratio

Source: BOE

Last month, in his role as head of the Financial Stability Board, Carney published a report for the Group of 20 nations that urged companies and investors to map how profits may be hit by tighter pollution rules and extreme weather events. He appointed Michael Bloomberg owner of Bloomberg LP, the parent company of Bloomberg News, to lead the panel of industry experts that drew up the report.

Improving climate risk disclosure could help “smooth price adjustments,” according to the BOE blog post. “The impact of transition risks would be substantially reduced were the transition to begin early.”

Nearly 200 countries agreed in Paris in 2015 to limit global warming to “well-below” 2 degrees Celsius (3.6 degrees Fahrenheit) compared to pre-industrial levels. Reaching that goal would require oil and gas demand to peak by 2020 and investment in fossil fuels will need to fall by at least $16 trillion dollars by 2040, according to the post. Conversely, spending on renewable energy and energy efficiency would need to rise by $24 trillion, it said.

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