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Listed companies have far larger reserves of coal, oil, and gas than we can allow ourselves to exploit if the global warming is not to go haywire.
Therefore pension funds and other investors with a long time horizon should consider very well in relation to investment in these companies. They plainly have the risk of becoming a bad deal. This is the message from the British think tank Carbon Tracker Initiative, which is founded by persons with broad experience in the finance sector.
Where environmental organizations argue that it is morally wrong to earn money from extracting fossil fuels, which lead to global warming, the arguments of CTI are financial. They base their work on the word of scientists that two-thirds of the known fossil fuel reserves must remain in the ground, if the global warming is to stay below 2 degrees, as almost all countries in the world have agreed to.
“Listed companies own twice the reserves that we can burn if we are to stay below 2 degrees. Thus it makes no economic sense to spend money on new projects for extraction, “says CTI executive Mark Campanale during a visit to Copenhagen. He founded Carbon Tracker Initiative in 2009 after having worked for 25 years with asset management. CTI has among other things published analyses of the risk for financial investors of coal mines, of the risk of a range of concrete oil projects, and of how exposed individual oil companies are. CTI does not argue that pension funds and other investors should sell their stock in oil and gas companies. Instead, they believe, that investors should exercise their influence to have the companies refrain from investing in expensive extraction projects, that require a very high oil price to break even. They have no prospect of ever becoming profitable if the world takes the two-degree scenario seriously.
“Because there is no lack of fossil fuels. And if the companies refrain from investing in new projects, they can afford to pay out higher dividends to their investors based on existing projects,” said Mark Campanale. It can thus be good business for the investors to have the oil companies drop their risky investments, he believes. Some companies have already postponed or canceled new expensive projects in oil extraction from tar sands, deep water or in the Arctic. This also goes for Danish Maersk Oil, but this is because of the dramatic fall in oil price the last year, and it is yet unclear, whether the price drop is temporary or structural.
When it comes to coal, however, CTI does not believe, that pension funds and other investors should hesitate to get rid of their stock. Recently the Financial Times wrote that the stocks of coal producers globally have lost two-thirds of their value since 2011. “As an asset manager, this is a good argument for dropping investment in the industry. It is a sunset industry, an industry in decline. And as an asset manager du have a duty to protect your capital,” says Mark Campanale.
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