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ExxonMobil and the Carbon Bubble

Who wins and loses?



Recent reports suggested that ExxonMobil was prepared to address potential financial risks from climate change, in so far as which of its fossil fuel assets might be stranded.  However, their just released report instead suggests that they see no risk of what has become known as “stranded assets.”

This is on the back of the analysis of the Carbon Tracker Initiative as well as other groups such as the International Energy Agency who suggested in a 2013 report that a majority of the remaining coal, oil and gas may need to be considered “unburnable” in order for the world to avoid potentially devastating effects of climate change.  The University of Oxford also developed a research arm around this concept of potentially stranded fossil fuel assets.    

Massachusetts-based Investor Arjuna Capital, working with NGO As You Sow among others, agreed to not push forward with a shareholder resolution on this subject, with an understanding from ExxonMobil that they would publish a report explaining how they are dealing with this risk.  Among investor requests, through groups such as CERES, have recently included asking fossil fuel producing companies to report on an understanding of the exposure they may have to potential limitations on carbon emissions.  Capital expenditure, recently estimated to be another US$7 Trillion over the next few years, is used by companies to invest in fossil fuel extraction processing, which eventually becomes additional fuel for consumers among other products.  Shareholders have also asked for oil companies to return this capital to shareholders, instead of using it for such future investment purposes, given the need to keep most of such assets in the ground to prevent damaging climate change.

Instead, in their report today, ExxonMobil makes clear that they fully expect buyers for their oil & gas products, making the point that the developing world’s demands for energy ensure that their supply will meet with rising global demand.  This stance is backed by figures such as Boeing’s record projected airplanes on order, mostly from the developing world.  Boeing’s share price has risen dramatically since January 2013 from 72 to 125 (or a gain of over 73%), as investors realize that the desire to fly is only going to increase on the back of the developing world’s desire for lifestyles the West has long enjoyed, and this too is ExxonMobil’s point.  Oil will fuel those planes in the short term, as oil will continue to empower much of what it does today without dramatic action being taken. 

It has been argued that corporations are very good at selling people what they want, and that is what they are designed for.  Investors are good at figuring out how to make short term profits partly by anticipating ahead of other investors what consumer trends will likely be, and most investors, unlike those pushing ExxonMobil for climate risk disclosure, don’t consider such factors in their decision making.  We will write more soon on the state of socially responsible investing, its techniques, its pitfalls, its successes and failures, and especially what works and what is badly needed.

And so the onus is on policymakers in the fossil fuel conundrum, but it is also a question for global society.  We can see what path we are on.  The IPCC has just released a report showing clearly the inexorable march we are on to a world of warmer temperatures and rising seas, with likely further side effects of less and less biodiversity, and less ability to grow enough food for a world of increasing human population, with expected strife to follow.  And so this becomes an issue of national security, and economic wellbeing.   Companies cannot sell products without a vibrant economy supporting a working population that can buy them.  Environmental and social concerns are intertwined on this issue.

There is a need for innovation, and companies that can drive solutions become growingly attractive for investors.  That’s an urgent need for investors and corporates to also consider.

But global policymakers, short term political calculus aside, now need to be bold in Paris in 2015, and make clear what we need to do to avoid crisis from climate change.  Companies need to make long range plans, as do cities and countries, as do all investors, not just socially responsible ones.  There will be winners and losers no matter what.  What we need is to avoid a scenario where we all lose.

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