Investor climate bodies suggest shareholders ask fossil fuel firms about internal carbon price

CalPERS weighs in on ‘stranded assets’ amid shifting policy and demand

Investors are being advised to ask oil and gas companies about whether a price for carbon is factored in to their long-term decision making, in new guidance from major investor climate groups.

The groups suggest the following question to the boards of such companies: “Is a price on carbon incorporated into decisions regarding long term projects and does the board’s approach differ depending on jurisdiction? Is this applied to products as well as operations?”

It comes in a new six-page guide called Investor Expectations: Oil and Gas Company Strategy. It has been issued by Europe’s Institutional Investors Group on Climate Change (IIGCC), its US counterpart Ceres’ Investor Network on Climate Risk (INCR), Australasia’s Investors Group on Climate Change (IGCC) and the Asia Investor Group on Climate Change (AIGCC). They work together as the Global Investor Coalition on Climate Change (GIC). The guidance is to be used in conjunction with 2012’s Institutional Investors’ Expectations of Climate Risk Management.
One of the investors involved, the largest US pension fund, the $297.1bn California Public Employee’s Retirement System (CalPERS), makes its position clear. “We need to know how fossil fuel companies – and particularly the boards which are accountable for overseeing these companies – see the future of demand, how that view aligns with the carbon reductions being agreed to by governments around the world, and to what extent there may be stranded assets due to either a commitment by governments or a shift in demand,” said its Director of Global Governance, Anne Simpson.The new document aims to “stimulate and facilitate” more meaningful discussions of climate risk by a larger number of investors and oil and gas companies. A five-point approach is advocated, breaking down broadly into 1) Governance 2) Strategy 3) Implementation 4) Transparency & Disclosure and 5) Public policy.

“We need to know how fossil fuel companies see the future of demand” – CalPERS’ Simpson

The investor groups say: “Capital allocation decisions being made now will determine the future profitability of the sector. We would like to see resilient business strategies that have been sufficiently stress tested to prepare for the next decade and beyond.”

Scenario testing, risk analysis and transparency by fossil fuel companies will help investors “avoid misplaced faith in both endless fossil fuels growth and universal divestment,” said IGCC Chief Executive Nathan Fabian.

The expectations document was developed by the IIGCC with support the other bodies. It builds on the Carbon Asset Risk (CAR) Initiative, through which 75 investors managing more than $3 trillion in assets engaged with 45 of the world’s largest fossil fuel companies.