Risk & Responsibility: first report on fossil risks in Austrian capital markets
“Where capital goes over the next fifteen years is going to decide whether we’re actually able to address climate change and what kind of a century we are going to have. … What we truly need is to create a ‘surround sound’ where, no matter what sector you turn to, there is a signal saying, ‘Folks, we are moving toward a low carbon economy. It is irreversible; it is unstoppable. So get on the bandwagon.´”
This quote (from “The Weight of the World”, The New Yorker, August 24, 2015) by Christiana Figuera, Executive Secretary of the UN Framework Convention on Climate Change (UNFCCC), describes very well why fossil divestment matters. In preparation for the UN-Conference of the Parties on Climate Change (COP 21) in Paris the “Fossil Divestment” movement contributes to a new dynamic in the political climate and energy debate. The interaction between capital markets and climate protection appears increasingly higher on the agenda of stakeholders. Divestment has proven to be an effective and powerful instrument with a high potential and impact on global financial markets. Examples like the Norwegian Pension Fund, Stanford University, Rockefeller Brothers or warnings e.g. by the Bank of England show that divestment addresses key players on the market. According to a recently released study by Arabella Advisors a number of 436 institutional and thousands of private investors, representing overall assets under management of 2.6 trillion US dollars, committed to divest their money from fossil fuel investments. The value of their commitment has multiplied by a factor of 50 within one year (September 2014 to September 2015).
First report on Austrian capital markets
In a report for the Green Party Austria (responsible Member of Parliament Christiane Brunner) Wolfgang Rattay, a long time capital market expert and founder of Green Alpha, and I (covering the background on climate & energy) provide – for the very first time – an analysis on the exposure of fossil investments in key segments of the Austrian capital market. Based on a detailed investigation on 385 investment funds representing a high market share and on interviews with stakeholders the share of fossil energy investments was calculated and compared to international references. Here are some of the results and basics:
- While the awareness of public and private financial institutions such as pension funds, banks, insurance companies, universities, churches or governmental authorities holding assets based on coal, oil, natural gas reserves is rising internationally, there is a lack of transparency and awareness in the Austrian capital market. The climate-political dimension in terms of risk and responsibility is growing on a global scale. But there has been nearly no public debate in Austria so far. Nevertheless the flow of capital will be decisive for the future energy supply – and therefore for the climate.
- The value of fossil reserves is a dominant element for the value of companies in the oil, coal and gas sector. To limit global warming to a maximum of 2°C, keeping two thirds of all proven fossil reserves in the ground will be necessary. Consequently, more than 80 % of coal reserves (without the use of Carbon Dioxide Capture and Storage CCS amounting to 88 %), more than 50 % of natural gas reserves and one third of oil reserves need to remain unused. In this case companies in the oil and gas sector will experience massive losses on capital value. This depreciation can already be observed based on lower commodity prices. Between January 2014 and September 2015 fossil equities lost about 40 % of their value compared to the S&P500 Index (since January 2015 around 22 %). Despite these massive losses there is still a 6.4 % share of fossil energy companies within the Index and a similar number within the MSCI World Index.
- In 2013 a study commissioned by the European Green Party [“The price of doing too little too late”] investigates the carbon exposure of Europe’s top 43 banks and pension funds. The report assessed potential losses of capital based on different scenarios. Over 1 trillion EUR are invested in fossil fuel energy within the European Union. Estimates show an approximate number of 260-330 billion EUR for pension funds and around 460-480 billion EUR for banks as well as 300-400 billion EUR for insurance companies. Many global divestment initiatives aim to withdraw investment capital from fossil fuels and invest in climate friendly alternatives.
- According to calculations based on the three main banks, insurances and capital management companies (385 investment funds) and their market share currently 21.1 billion EUR are exposed to fossil risk in the Austrian capital markets. An extrapolation based on all market segments shows a fossil exposure of 28 to 30 billion EUR. This share corresponds with findings of the European study. Details can be found in the German language version.
- Compared to international developments on fossil divestment the awareness of stakeholders in the Austrian capital market seems to be relatively low. An explicit divestment strategy of Austria’s stakeholders is currently not in place. Therefore transparency for the individual investor is rather limited. Further steps to improve transparency are necessary to raise awareness and give consumers a choice. Concerning “sustainable” investing Austria is already well-positioned. A detailed examination based on financial sectors, instruments and target policies could lead to a perceptible divestment strategy aiming at protecting the environment and avoiding profits at the cost of future generations. Besides an appropriate divestment strategy it is crucial to support the growth of renewable energy sources. Instruments like tax breaks, but also cutting subsidies for fossil fuel consumption can play an important role. The public sector has to take a leading role in that process. The political arena needs to deliver clear statements regarding future policy plans.
“Divestment” event in Vienna with Carbon Tracker’s Mark Campanale
“Carbon Tracker” has played a very important role in putting the carbon bubble on the agenda and raise awareness of key stakeholders in the capital market for the interdependence of climate politics and capital market. The 2011 report “Carbon Bubble” provided a groundbreaking analysis of fossil reserves and the carbon intensitiy of the top 100 coal and top 100 oil and gas companies. In consequence of a turnaround in fossil fuel consumption based on the 2°C target they might become stranded assets. So it has been a real privilege to have Carbon Tracker founder Mark Campanale as a key note speaker of the first Neongreen Hubclub event on “divestment” (Oct 30). The recent Carbon Tracker report “Lost in Transition” shows that mainstream scenarios of fossil fuel consumption which are an essential fundament of investments are not in line with the necessary transformation of the energy sector (a transformation already on its way). The majority of the world’s fossil fuel suppliers appear to be betting on demand for their product continuing to grow as per business as usual (BAU). Many financial and industry energy projections suffer from the ‘straight-line’ syndrome, where historical trends or energy mixes are extrapolated into the future over long periods. The direction of travel we see from the worlds of policy and technology is for destruction of fossil fuel demand. Dramatic changes in policy or technology will cause non-linear change in trends. It is clear that the world will need to deviate from BAU if we are to prevent dangerous levels of climate change. Organisations such as the IEA are consistently behind the curve in their projections of renewables costs and deployment, for example (compare Guensblog on scenarios in the World Energy Outlook 2014).
Business as usual… Quo vadis OMV?
Austria’s governmental investment policy was not detailed subject of the Austrian report on divestment. Nevertheless the 31.5 % share of OMV Oil can obviously be seen as a risk. Like many other businesses in the oil and gas sector OMV suffered from the oil price fall. But despite believing in a price cycle and betting for higher consumption the question is what is the long term strategy? Under new CEO Rainer Seele OMV works on such a strategy. But last week’s big event at Hofburg (Nov 9) together with Germany’s former chancellor Gerhard Schröder allows scepticism if a need for new concepts has been really identified. Business-as-usual based on exploiting fossil reserves is seemingly presented as the only key option. Not that it can be expected to have a big player of the oil and gas sector at the forefront of climate protection but nevertheless it looks like the trend to decarbonisation of the world economy (G7 statement in June 2015) and the efforts before COP21 do not change anything of OMV’s scenarios. It took approx. 75 minutes at the event until the term “climate” became part of the panel discussion. And that leads to the question of the 31.5% owner “Republic of Austria”. Intensifiying and integrating the cooperation of OMV’s business sectors with Russia’s Gazprom does not only have short term effects on a political level but the asset exchange between OMV and Gazprom must be seen in the light of long term strategies of Austria’s and Europe’s energy security. And based on the assumption of a carbon bubble and the incompatibility of business-as-usual with climate protection the question can be raised what is Austria’s position in this strategy’s process. At least more public debate seems to be necessary.
Some impressions of the first Neongreen Hubclub event (left side pictures by Jan Fucik, right side pictures by Angie Rattay):