Red flags on Exxon, corporate climate pledges and a sustainable Finance plan for the EU:
Ahead of Friday’s news that 1) Exxon Mobil faces reserves cut, the IEEFA 36 page report 'Red Flags on Exxon: A Note to Institutional Investors’ summarises why Exxon might be on brink of irreversible decline, with annual revenue down 45% over five years and long-term debt quadrupling.
The new CDP global report 'Out of the starting blocks: Tracking progress on corporate climate action’ found while 2) 900 major companies have a plan to cut carbon, only 94 have a 2°C compatible strategy and their plans meet only a quarter of cuts required to get on track for 2°C.
The 3) sustainable finance plan for the European Union was launched on Friday by a broad coalition. The 38 page report from E3G is backed by Eurosif, Smith School, ShareAction and 2° Investing among others, and was published on same day Ségolène Royal gave out a new Investor award for best Climate Reporting. Winners listed below.
Details of these stories, plus 4) Renewable energy overtakes coal, but IEA still assuming renewables decline and my 5) round up of other interesting news, including Blackrock calling for higher carbon pricing and more. I’m aware these summaries can get a bit long, but hope it is useful food for thought and links for your commute or weekend reading. As ever any comments, suggestions on improvements, or news welcome!
1) EXXON MOBIL FACES RESERVES CUT AND WARNED ON BRINK OF IRREVERSIBLE DECLINE
Exxon Mobil faces reserves cut: Yesterday Exxon-Mobil 'warned it may be facing the biggest reserves revision in its history’ reported Bloomberg (Exxon Facing Historic Reserves Reduction as Slump Persists, 28 Oct). 3.6 billion barrels of reserves in Canadian oil sands and another 1 billion in other North American fields may be in jeopardy, a total ‘that would equate to 19 percent of Exxon’s reserves and would be the largest de-booking since the 1999 merger that created the company in its modern form’ Bloomberg reported. Matthew Philips also has an excellent short article on Exxon, writing that ‘slowly, in fits and starts, Exxon's investors are pushing it to take better account of climate-change risks’ (Exxon Enters No Man's Land, BloombergBusinessWeek, 28 Oct)
Exxon 'reported a 38% decline in quarterly profit, the company’s eighth straight quarter' of declines (Exxon Warns on Reserves as it Posts Lower Profit Wall Street Journal ($), 28 Oct). The WSJ said news came as 'Exxon are under investigation from the SEC and New York Attorney General over its accounting practices and how the value of its future oil and gas wells could be impacted by government action from climate change’ and quote Andrew Logan of Ceres: “For the oil sands, this is the tipping point. Why would any company invest billions of dollars in a new oil-sands project now, given the near certainty that the world will be transitioning away from fossil fuels during the decades it will take for that project to pay back?”. By contrast Chevron, which ‘recorded almost $4 billion in asset impairments’ in the last year saw its first profit in a year (Chevron Posts First Profit Since ’15 as Oil Inches Higher, Bloomberg, 28 Oct). On Reuters Breakingviews, Kevin Allison says Exxon may finally have to join rivals in writing down assets whacked by low oil prices and that ‘add in climate concerns and the industry may take a $33 trillion hit’ (Exxon reserves tap into Big Oil’s next crisis ($), 28 Oct).
Exxon might be on brink of irreversible decline: Investors should not assume ExxonMobile will rebound, CNN Money said on Wednesday. 'Tom Sanzillo, former deputy comptroller of New York State, doesn't think [they will]. Sanzillo says Exxon's finances suggest the company may be in the middle of an "irreversible decline.” (Warning: ExxonMobil may be in irreversible decline, CNN, 26 Oct). They quote him saying "I learned long ago that if you get caught up looking at the short term, instead of the long term, your pension fund isn't going to be worth much.”He highlighted three red flags on Exxon in a new report for IEEFA:
- Annual revenue down 45% over the past five years,
- Long-term debt has quadrupled to nearly $30 billion,
- It's had to borrow money to pay out dividends and buy back shares
Sanzillo, now the Director of Finance at IEEFA, told Huffington Post “Investors right now are getting less cash from Exxon than they have historically, and are likely to get less cash in the future. This is going to be a much smaller company in the future, and the oil industry is going to be much smaller in the future.” HuffPo note that 'In April, Exxon Mobil was stripped of Standard & Poor’s top credit rating for the first time since the 1930s’ and that 'Unlike some of its rivals, Exxon has been slow to invest in renewable energy.’ (Exxon Mobil Could Be On The Brink Of ‘Irreversible Decline’, Huffington Post, 26 Oct).
Exxon called the report inaccurate. But HuffPo said that this 'head-in-the-sand approach could spell doom for the company, much as it did for the financially ravaged coal industry. The value of the coal sector has decreased by two-thirds since 2010. In recent months, industry giants Peabody Energy, Arch Coal, Alpha Natural Resources and Patriot Coal have all filed for bankruptcy. “Exxon is too big of an investment and too important of a company for institutional investors to simply shrug like they did with coal,” Sanzillo said. “I get that [Exxon] wants to wipe it all away. That’s what everyone does, and that’s what the coal industry did. Look where they wound up.” Also in (Oil Crisis: Low Prices Mean Exxon Mobil, World's Largest Oil Company, May Be In A Death Spiral, International Business Times, 27 Oct)
The report “Red Flags on Exxon: A Note to Institutional Investors” is a 36 page PDF on Institute for Energy Economics and Financial Analysis (IEEFA) site, with commentary from author (IEEFA Exxon: Telltale Crossover in Late 2014 Marks Where a Major Oil Stock Began to Go South, 27 Oct).
2) CDP: 900 MAJOR COMPANIES HAVE PLAN TO CUT CARBON, BUT ONLY 94 HAVE A 2 DEGREES COMPATIBLE STRATEGY
A new CDP global report shows that while ‘more than 900 of the world’s largest companies have a plan to cut their carbon pollution’ only ’94 of these businesses have a strategy to deal with [the Paris Agreement’s] aim to stop global temperatures rising more than 2C’, reported The Financial Times (Big companies fail to meet carbon goals, 24 Oct).
Those companies with a strategy include Sony, which plans a 90 per cent cut in its carbon emissions by 2050, and Philips which will use renewable electricity for its operations globally by 2020 but the FT say: 'the response from oil majors and other big fossil fuel groups is “disappointing”, says a report by the Carbon Disclosure Project, a non-profit body that collects company data for more than 800 institutional investors with combined holdings of more than $100tn, including BlackRock, the world’s largest asset manager.’
Reuters say the study shows that 'Plans to cut greenhouse gas emissions by big companies represent only a quarter of the amounts needed to limit global warming under targets agreed last year by almost 200 nations.’ If achieved, the company targets would cut their collective emissions by 1 billion tonnes of carbon dioxide below current levels by 2030, or a quarter of the estimated 4 billion tonnes needed to get on track for 2C. The 3 billion tonne gap is ‘equal to nearly 50 percent of these companies’ current total emissions.' (Company climate change plans too weak to meet Paris goals – survey, Reuters, 25 Oct).
CDP say this is the 'first global report showing the current state of play for corporate action on climate change, how prepared companies are for the low carbon transition, and which companies are already starting to reap the benefits' (Out of the starting blocks: Tracking progress on corporate climate action, CDP, 25 Oct). Overall CDP secured responses from 1,089 companies that together account for 12 per cent of global greenhouse gas emissions. 85% of companies surveyed already boast at least one GHG emission reduction target, say Business Green(Electrolux sets 50 per cent renewable energy target for 2020, 25 Oct).
Writing in IR Magazine, CDP Chief Executive Paul Simpson highlights that ‘reducing emissions brings in more money’ as 62 companies have cut emissions by average of 26% while increasing revenue by average of 29%. The remaining companies have seen revenues fall by 6% and emissions increase by 6%. While most companies have emissions reduction targets, many ‘are short term or lack ambition’ and as Paris Agreement targets enter into force disclosure will enable smart investors to ‘identify which companies are best positioned for the low carbon transition’ and which are not well positioned and therefore ‘viewed as a risky investment’ (Companies need to do more on emission reductions, IR Magazine, 25 Oct). In a video for Bloomberg CDP Chair Paul Dickinson explains Why Companies Share Data About Climate Change (Bloomberg, 24 Oct). Story also in Business Green, Edie Clean Energy News and CleanTechnica.
Many national papers picked up implications for domestic companies: in Ireland Ryanair defended itself for being on the list of largest companies ignoring the survey (Ryanair denies snubbing influential climate change survey, Irish Times, 26 Oct), while Kingspan celebrated being the only Irish company on the ‘A List’ (Kingspan named on latest Climate 'A' List by CDP, RTE, 26 Oct). In India over 80% of the 69 Indian firms examined had plans to reduce emissions (Majority of Indian companies voluntarily reduce emissions : Report, Business Standard, 26 Oct) and are increasingly looking to set an internal price on carbon as part of risk mitigation (Indian firms set targets to reduce carbon footprint, India Climate Dialogue, 25 Oct)
3) A SUSTAINABLE FINANCE PLAN FOR THE EUROPEAN UNION LAUNCHED
Asustainable finance plan for the European Union has been launched by a broad consortium of green groups and asset managers. The consortium consists of 13 think thanks and NGOs including E3G, Eurosif, CTI, Smith School, ShareAction and 2° Investing and the launch was also backed by asset managers including Hermes, Impax, Mirova and WHEB. See Plan launched to tackle European investment crisis (E3G, 27 Oct), and the full 38 page pdf report here.
EU wide investor disclosure of 2°C progress: The report urges that 'The new French energy transition law that requires investors to disclose their contribution towards meeting climate goals should be replicated across the European Union’ according to Responsible Investor, explaining that 'Article 173 of the new law is a major comply-or-explain green finance mechanism that requires investors to report on how they integrate ESG into their investment processes, outline the greenhouse gas (GHG) emissions of their investments and contribute to the financing of a low carbon economy.’ (France’s Article 173 should be replicated at EU level, say campaign groups, Responsible Investor($),28 Oct). The report says that Article 173 shows “There is a precedent for such measures in national legislation. This regulation should be replicated at EU level, with EU financial institutions required to measure how their activities perform relative to a benchmark that is consistent with global climate objectives."
Plug €100bn annual investment gap: Recommended measures could help plug 'a €100bn annual investment gap in funding needed to meet the EU's climate and energy targets’ according to the authors. The EU is taking some steps, with 'plans to re-boot the Capital Markets Union (CMU) - the EU's strategy for mobilising capital - by setting up an expert group on sustainable finance’ and a plan to 'double the financial capacity of the European Fund for Strategic Investment (EFSI) to provide €500bn of strategic investments by 2020, of which 40 per cent will be dedicated to climate action’ report BusinessGreen. 'According to the consortium, however, more still needs to be done, and it is urging the European Commission to take on a number of recommendations as part of its proposed 'Sustainable Finance Plan 2030'. The recommendations focus on prioritising investment in low carbon infrastructure, enhancing responsible investment practices, and boosting disclosure of climate risk information. (EU urged to plug clean energy investment gap or miss climate targets, BusinessGreen, 28 Oct).
Sweden aims to ‘Deliver a Green Capital Markets Union’: Swedish Minister Per Bolund said at a seminar organised last week by Bruegel. RI report that Sweden is seeking to correct the current low carbon price in the EU ETS system with the highest carbon tax in the world, and finance more green infrastructure via wholesale changes to its economy. Sweden aims to be one of the first fossil fuel free nations in the world and rather than a feared negative impact from a carbon tax, Bolund said, Sweden had instead become an innovative supporter of the green economic transition as a result. The EU’s Capital Markets Union project could play a similar, vital role in the greening of capital markets more broadly. To get a transformation to a low carbon economy under way, Bolund said, the disclosure of carbon emissions and carbon stress tests were needed. (Delivering a Green Capital Markets Union, Responsible Investor ($), 24 Oct)
Brexit opportunities for sustainable finance innovation: ShareAction’s Camilla de Set Croix said UK faces choice post-Brexit: “Britain’s exit from the EU presents a real opportunity for the City of London to innovate and lead the way on sustainable investment. The next few years will be critical if the City wishes to consolidate its position as the green finance hub of Europe. A quiet revolution in sustainable finance is underway across the globe. With so many questions marks hanging over the future of the City, the UK should position itself boldly as a leader in the rapidly growing market for sustainable financial services. But if not properly considered, the UK risks being left behind.” (UK Urged To Seize Brexit Opportunities To Solve Investment Crisis, Blue&GreenTomorrow, 28 Oct).
Investor award for best Climate Reporting: in a ceremony in Paris on Friday, Ségolène Royal awarded AXA Group and TPT Retirement Solutions with the ‘Best Global Reporting Award’ organised by the Ministry of Environment and 2° Investing Initiative. Awards were also given for best reporting in three categories:
- Climate strategies: Actiam (Runner up for best engagement: Local Government Super)
- Assessment of the alignment with climate goals: Australian Ethical and Ircantec
- Assessment of climate risks: Environment Agency Pension Fund
AXA said after their win 'AXA has already taken strong initiatives such as divesting from coal-related assets and measuring the “carbon intensity” of its investments. However, article 173 takes the debate to a more complex space by requiring investors to initiate a deeper analysis of “carbon-related” risks. These include reporting on how we integrate sustainability and climate-related considerations into our investment analyses, how we may be exposed to “carbon” risks, whether we conduct “carbon stress tests” on our assets, or even if and how we measure our investments’ contribution to energy transition scenarios.' (AXA wins top award for its investment-related analysis of climate risks, 28 Oct)
Handbook to French Article 173-VI published: The Prize for Best Investor Reporting comes under the framework of the Law on Energy Transition for Green Growth (article 173-VI). By adopting this law, France set the example during the COP21 by becoming the first country in the world to make it mandatory for investors to publish information concerning their contribution to climate targets and to the financial risks involved in the energy and ecological transition. These obligations will apply to the 2016 management reports to be published in 2017. See prize website and 2° II website for more. This week French SIF published a handbook in English on the law 'Article 173-VI: Understanding the French regulation on investor climate reporting (pdf).
4) RENEWABLE ENERGY OVERTAKES COAL – BUT IEA STILL ASSUMING RENEWABLES DECLINE
Renewable Energy overtakes coals: 'The battle between clean energy and dirty coal has entered a new phase’ The Economist report. 'The International Energy Agency (IEA), an industry forecaster, this week reported that in 2015 for the first time renewable energy passed coal as the world’s biggest source of power-generating capacity. The IEA, whose projections for wind and solar energy have in the past been criticised as too low, accepted that renewables are transforming electricity markets. (Wind and solar advance in the power war against coal, The Economist, 29 Oct). IEA Executive Director Fatih Birol told the BBC "We are witnessing a transformation of global power markets led by renewables” (Renewable energy capacity overtakes coal, BBC, 25 Oct). About 500,000 solar panels were installed every day last year, and two wind turbines went up every hour according to the IEA. (IEA: strategy shift needed to keep up renewables growth, Climate Home, 25 Oct)
IEA raise renewable energy forecasts, but still assume declining annual market: The IEA now expect renewables share of power generation to rise to 28 per cent by 2021, 13 per cent more than its estimate made just last year. (Renewables overtake coal as world’s largest source of power capacity, FT, 25 Oct). However CarbonBrief show that 'as in previous forecasts, the IEA once again expects the rising trend in renewable additions to come to an end. After the record 153GW in 2015, it sees 148GW of new renewable capacity being added in 2016, 134GW in 2017 and 131GW in 2018.’ They quote Professor Christian Breyer of Energy Watch Group saying '“I would say, honestly, it’s very similar to what we saw in the past from the IEA. For the last 20 years, you always see the IEA only assumes the annual market will not grow. It was for all the last 20 years wrong. Assuming a declining annual market for solar and wind in the next five years, knowing it’s the least cost source of electricity. Sorry, even my grandmother would not believe this.” (Analysis: How have the IEA’s renewable forecasts changed?, CarbonBrief, 26 Oct).
5) ROUND-UP OF OTHER INTERESTING NEWS
Blackrock urges higher carbon price, calling on governments globally to make businesses pay a higher price for the pollution they generate, with the FT reporting the $4.9 trillion fund house 'is struggling to understand the climate change risks it faces when making investment decisions because the price companies have to pay for emitting carbon is inconsistent’ (BlackRock calls for higher carbon price to tackle climate change, Financial Times, 27 Oct)
Paul Fisher, former deputy head of BoE PRA, warns climate risk may trigger next financial crisis: The former deputy head of the UK Prudential Regulation Authority told Bloomberg that climate change “is potentially a systemic risk.” A sudden repricing of assets as a result of climate change “could be the trigger for the next financial crisis.” Speaking in Australia, he said "You don’t need to believe in climate change, you don’t need to believe that it is man-made. You just need to believe that governments are going to do stuff and that is going to affect your business. And then it is a material risk.” (Climate Change May Trigger Next Financial Crisis, Fisher Says, Bloomberg, 24 Oct). Also in Sydney Morning Herald, ABC’s NR Breakfast (audio), Think Progress and The Independent.
Wind and Solar power 40% cheaper than new coal a new report from South Africa’s leading research institute revealed. Renewable costs have fallen dramatically and dropped to $0.62 Rand/kWh in 2015, compared to R1.03/kWh for coal. (Wind, solar costs undercut new coal plants in South Africa, Climate Home, 21 Oct). The short 9 slide Council for Scientific and Industrial Research analysis paper (pdf) has compelling graphs.
UK falls to all time low in EY Renewable Index: 'The UK has fallen to 14th place, an all-time low, in EY’s latest Renewable Energy Country Attractiveness Index, on the back of Brexit, DECC’s dismantling and approval of the Hinkley Point C nuclear plant.' ('All time low' for UK renewables, ReNews, 25 Oct).
Dong ditching oil for renewables: Dong Energy no longer considered oil and gas to be “a long-term strategic commitment” and said that it was “reviewing strategic options” for the future of the division. (Dong heralds wind of change by ditching oil for renewables, The Times ($), 27 Oct)
Moody’s warn power companies of rating risks: 'warning that many utilities and power companies run the risk of having their credit ratings reassessed based on their ability to deal with climate policy and other changes to the viability of traditional business models.’ Moody's highlight four risk areas: climate policies, political interference and sentiment, the impact of low-cost renewable energy on power prices, and emergence of new technologies as threats to centralised energy generators. (Ratings agency Moody’s warns power companies of credit risks around climate, Responsible Investor ($), 20 Oct).
Beyond Bight for BP: Pension funds and other investors have an important stewardship duty to stand up to imprudent capital allocation, and the governance structures that support it, ShareAction and the Wilderness Society write in RI. Both BP and Shell face binding votes on their remuneration policies at their 2017 AGMs and 'shareholders must use their ‘say on pay’ votes to steward the companies towards commercial resilience in a low carbon world’. (BP’s Bight backdown is just one piece of the low carbon puzzle, Responsible Investor ($), 25 Oct).
China scraps part-built coal power plants: China will halt construction on 30 coal-fired power plants with a combined capacity of 17GW report the FT, according to a statement from the National Energy Administration. "Up to now, the Chinese government had avoided interfering in projects that had already been contracted and financed, and where construction had started,” says Lauri Myllyvirta, an energy analyst for Greenpeace in Beijing. “The cancellations will be painful, and entail major commercial losses and disputes. But spending money to complete these unneeded coal plants would have been even more wasteful: it would likely have cost well over $20bn. Now China avoids throwing good money after bad.” (China axes part-built coal power plants, Financial Times, 21 Oct).
Splits in oil and gas industry on future demand: The Oil and Money Conference in London saw sharply differing views on the future of the industry. Statoil Chief Eldar Saetre said 'Oil demand will peak in the 2020s and then the industry will start to shrink’ based on the logic that 'transport accounts for 55% of oil use, and the electric vehicle industry is starting to gather pace meaning a once-guaranteed market could start to fade – fast.' (Statoil chief: rise of electric cars will shrink oil industry, Climate Home, 19 Oct). Saudi Aramco Chairman Khalid al-Falih said ‘we are at the end of a considerable downturn. The fundamentals are improving and the market is rebalancing' (Oil producers optimistic that the slump is over, FT, 20 Oct). At the same event Exxon Chief Executive Rex Tillerson said prices would stay low: ‘It’s difficult for me to see a big price blowout’ (Saudi Arabia’s Energy Minister Warns of Oil Shortage, WSJ, 19 Oct).
Shipping industry agrees cap sulphur emissions by 2020…: 'The International Maritime Organisation (IMO) agreed on Thursday to set a cap on the sulphur content of marine fuels, in a move that campaigners predict will save millions of lives in the coming decades’ according to Business Green. (Shipping industry agrees to cap sulphur emissions by 2020, Guardian, 28 Oct).
…But IMO delays climate strategy until 2023: Unlike other sectors – where HFCs and Aviation this month agreed global deals to curb emissions – the IMO will only 'produce a strategy to curb greenhouse gases by 2023.’ The plan to delay a decision for 7 years was criticised by NGOs, with John Maggs, president of the Clean Shipping Coalition saying: "This can in no way be seen as an adequate response to Paris [climate agreement]… what is urgently needed is a clear sense of the scale of emission reductions to keep warming to safe levels” (UN to deliver climate plan for shipping in 2023, Climate Home, 28 Oct). This headline sums it up: Shipping industry: Climate change? What’s the big rush!, Grist, 29 Oct.
That’s all for now, next week is the final week before the COP22 climate talks in Marrakesh, Morocco from 7-18th November. Friday 4th November is the day to watch with the Entry into Force of the Paris Agreement, the Climate Finance Day in Casablanca, and rumours of an announcement from Oil and Gas majors too. If you have events or announcements planned during COP22 please let me know.
written by Joel Kenrick