As the policy response to climate change accelerates, new academic and civil society research has revealed the extent and financial ownership of fossil fuel reserves that must remain in the ground if the world is to meet the 1.5ºC global heating target of the Paris Agreement.
The exposure of investors, financial markets and governments to these stranded assets represents a systemic risk to financial stability, the studies show, with action needed to avoid a sudden and disorderly collapse in values.
Over 90% of known fossil fuel reserves must remain unburned, according to a Carbon Tracker Initiative report published on Thursday. Limiting global heating to 2ºC would require approximately 60% of these reserves to stay in the ground, the study shows, while global temperatures would rise by over 3ºC if they were all extracted and burned. Most of this unburnable carbon is held by companies listed in just a handful of global financial centres, with New York and London particularly exposed.
Over US$1tn of oil and gas assets are at risk of becoming stranded, the analysis shows, with these risks affecting not only producers but the entire value chain. Growing investor awareness, the rapid expansion of alternative energy sources, and expanding government and regulator policy action all act to increase the associated financial risk for listed companies, their investors and the wider financial system and economy.
Ownership of the transition risk associated with stranded fossil fuel assets is explored in a second study, published in the latest edition of Nature Climate Change. The analysis traces the equity risk ownership from 43,439 oil and gas production assets through a global equity network of 1.8mn companies to their ultimate owners, showing that most of the market risk falls on private investors in OECD countries.
There are 1,759 active oil and gas parent companies that own 93.4% of all potential losses, with these losses being passed on through 33,836 separate corporate ownership and fund management nodes – including most of the world’s large financial companies – to 16,171 ultimate corporate owners.
Both studies warn of the growing risk to financial stability as a result of fossil fuel asset devaluation. “The rapid collapse of fossil-fuel ‘sunset’ industries presents major transition risks,” say the authors of the Nature paper.
“Current financial market regulation is not fit for purpose overall,” concludes the Carbon Tracker report, as it is “failing to protect investors from the systemic risks posed by climate change”.
This page was last updated June 24, 2022
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