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Managing the risks of exposure to fossil fuel companies Page 3 of 5
recession and utilities' growing use of gas as a replacement for coal and oil, the emissions cap used by
the RGGI was cut almost in half, from 165 million tons to 91 million tons.
The European Union (EU) took several steps to strengthen its Emissions Trading System (ETS) last
year and additional reforms are expected to be forthcoming. Worldwide, more than 40 nations are in
the process of developing market-driven systems to help cut their output of GHGs by putting a price
on emissions. The EU and Australia have even taken preliminary steps toward integrating their carbon
markets.
Putting a specific price or limit on carbon emissions through direct taxation or regulation isn't the only
way that governments can affect the fortunes of fossil fuel companies. For example, if new
restrictions are placed on horizontal drilling and hydraulic fracturing, it may become prohibitively
costly for companies to develop some of their proven reserves.
Development of other types of unconventional reserves, including bituminous sands (also known as
"tar sands") and oilfields located in sensitive environments, is also highly controversial and these
activities could be more tightly regulated going forward, increasing the cost of production and
potentially forcing companies to abandon some assets.
The financial risk facing fossil fuel companies is constantly increasing as these firms pour
increasingly large sums into exploring for new reserves in more remote environments and developing
new extraction equipment and processes.
SEC: More disclosure may be necessary under existing rules
Shareholders are not the only ones calling for more transparency. The U.S. Securities and Exchange
Commission (SEC) has advised publicly traded corporations that, under existing disclosure
regulations, they may be required to publish information about how climate change could affect their
financial performance. In a 2010 guidance document, the SEC noted that factors which may need to
be disclosed to investors include the direct and indirect effects of legal and regulatory developments,
as well as potential operational impacts of climate change.
Investors are taking action to address the risk of climate change
Investors aren't sitting back as the risks of owning fossil fuel stocks become ever clearer.
Within the institutional investment community, funds operating under active ownership strategies are
estimated to be worth at least $4.7 trillion, according to the Global Sustainable Investment Alliance.
Various guidelines, including the UN-backed Principles for Responsible Investment (PRI), which has
more 1,000 signatories managing over $30 trillion in assets, encourage this movement.
High-profile activists have shown that there are many ways for investors to approach environmental
issues. For example, the California Public Employees' Retirement system (CalPERS) creates a "focus
list" each year and engages with certain companies that it believes are underperforming on ESG
metrics. The organization estimates that between 1992 and 2005, this activism has helped create more
than $3 billion in shareholder value.
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