Carbon risk

CARBON RISK

Financial consequences of fossil fuel asset devaluations

Paris Agreement
COP21

The key elements of the international agreement from the COP21

RI & climate change

Financing the transition to a low-carbon economy

Companies
& climate change

Adapt business models and reduce emissions

CALCULATING CLIMATE RISK WITH CARBON RISK

Display Carbon Risk in full screen

Carbon Risk, a web application developed by Novethic, highlights the economic and financial issues raised by climate change. More than 58,000 pieces of data from 14 reference sources were compiled and analysed to create Carbon Risk. The app is regularly updated.

Carbon Risk has been launched to contribute to the global debate on climate change. We want it to be distributed as widely as possible, so share it with others and include it in your website for free.

The basics

A carbon budget to keep warming below 2°C

Carbon risk and the carbon budget concept

Scientists say that to limit climate warming to 2°C, global CO2 emissions must not exceed a certain amount. That, in turn, means that a large share of fossil fuel reserves (coal, gas, oil) must remain in the ground.

Today, the financial value of these reserves is put at $22 trillion, a colossal sum that could vanish if it were impossible to exploit them. In that case, investors with holdings in fossil fuel companies will lose a lot of money. This is called carbon risk, and it is being taken very seriously by long-term investors like pension funds and insurance companies.


Read the Novethic study on investor mobilisation

The Novethic research centre has monitored investor mobilisation on the climate throughout 2015.

Since autumn 2014, a coordinated movement has emerged in which investors are using a variety of initiatives to fight against climate change. This movement, which is rooted in their responsible investment practices, is rapidly gaining strength. Two main factors account for this mobilisation: the belief that a carbon risk exists for companies that are the largest GHG emitters and the mounting pressure from civil society.

Climate: Investors Take Action - November 2015 Update September 2015 Update February 2015 Update

QUESTIONS

1. Where does the carbon risk concept come from?

In 2011, the UK-based NGO Carbon Tracker Initiative published a study entitled "Unburnable Carbon". It explained in financial terms how climate change presented a powerful threat to the supremacy of fossil fuel companies, which play a big role in the financial sector. Concretely, the market value of carbon-intensive companies like those in the oil industry could plunge dramatically, in which case investors exposed to this carbon risk would take huge losses on their portfolios.

The Carbon Tracker Initiative's argument was picked up quickly, first in sceptical articles in the pages of the Financial Times and the Wall Street Journal. Next, Al Gore, a former US vice president and a leading voice on climate change, began talking about the carbon risk concept, boosting its recognition and credibility internationally. Then the financial community began taking it seriously.

2. What are stranded assets?

These are assets that fossil fuel companies may be forced to write down. Their current value is estimated at $22 trillion.

Large international investors hold huge amounts of these stranded assets, either because they have put money in funds benchmarked against the major market indices, which contain many carbon-intensive companies, or because they are direct shareholders in these companies.

3. Is carbon risk already a financial risk?

If all known fossil fuel reserves were burnt, climate warming would quickly reach 6°C, an insupportable level. That is why the COP21 negotiations in Paris at the end of 2015 are crucial to get countries to agree to take drastic measures. Meanwhile, coal has already lost much of its value, particularly in the United States, where the specific market index for that industry has lost 75% of its value in five years.

4. Isn't carbon risk also a reputation risk?

Movements organised by civil society and NGOs have seized on the concept of carbon risk for divestment campaigns like those conducted in the past against apartheid. The largest, "Go Fossil Free", urges investors to exclude from their portfolios either the 200 most-polluting companies or the sectors most harmful to the climate, like coal and shale oil. This campaign has prompted numerous universities in the US and UK to make climate protection commitments. It has also been picked up in the UK by The Guardian. This newspaper is leading a campaign called #keepitintheground, which is targeting in particular two major foundations, the Bill & Melinda Gates Foundation and the Wellcome Trust.

In some countries, parliament members are exerting pressure, too. For example, Norway's parliament voted unanimously to require the country's sovereign wealth fund to divest from the coal industry.