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Managing the risks of exposure to fossil fuel companies Page 2 of 5
Managing the risks of exposure to fossil fuel
companies
Investors who are not yet sold on the idea that environmental, social and governance (ESG) factors
can affect corporate financial performance may be overlooking material risks. From individual
investors and asset managers to top officials at the United Nations, there are many stakeholders who
have been advocating for greater recognition of the risks associated with the fossil fuel industry's
business model. Looking beyond near-term risks, such as the cost of cleaning up environmental
disasters, there are fundamental questions about whether fossil fuel companies like ExxonMobil have
a long-term future in the marketplace.
One of the primary concerns for investors is that increased regulation of carbon emissions and related
market forces will effectively render a large portion of known fossil fuel reserves "unbumable." This
would place a significant amount of shareholder value at risk, as the valuations of major energy
companies are based in large part on the quantity of fossil fuel reserves in their possession.
Quantifying the risks of owning fossil fuel stocks
Fossil fuel companies' proven reserves of coal, oil and gas are valued at approximately $20 trillion.
However, multiple scientific studies have looked at the current climate situation and concluded that
the vast majority of these resources must not be burned for the international community to retain even
a reasonable chance of limiting climate change to 2 degrees Celsius — a goal recognized by virtually
every national government and many prominent international organizations.
According to the Carbon Tracker Initiative, the industry's current reserves contain almost 2,800
gigatons of carbon dioxide — roughly five times the amount that can be added to the atmosphere
without completely discarding the 2-degree target. If 80 percent of these reserves — approximately
$16 trillion in assets — become "stranded," what impact will it have on fossil fuel companies' share
price?
This question is driving a wide range of stakeholders to reconsider their investments in the fossil fuel
industry.
Material effects of regulatory intervention could come sooner than expected
The latest report from the Intergovernmental Panel on Climate Change (IPCC) suggested that the
planet is already on track to experience more severe consequences from global warming than
previously projected. This means regulatory interventions may need to be more dramatic and come
faster than expected, which increases the risk facing investors with exposure to fossil fuel companies.
In the United States, cap and trade markets are currently functioning in California and the Northeast,
where the Regional Greenhouse Gas Initiative (RGGI) includes nine participating states and several
observers. In 2013, following larger-than-expected declines in emissions driven by the economic
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