Twenty six years ago, Mark Campanale sat in a reception room at a swanky London hotel with Jeremy Leggett (a campaigner at Greenpeace who went on to make his name as the Founder of renewables firm Solar Century), a posse of high-profile environmentalists and 150 copies of a report titled The long term financial risks to the carbon fuel industry from climate change, and waited…
“Loads and loads of people were invited to the launch of this report, and not a single person turned up,” he recalls, looking visibly dejected all over again. “That felt kinda weird.”
A former head of SRI Business Development at Henderson Global Investors, Campanale co-founded Carbon Tracker in 2009, with fellow Henderson alumnus Nick Robins, who was by that point Head of HSBC’s Climate Change Centre of Excellence. The think tank sought to develop the idea that climate change posed a risk to financial markets – in particular for investors in fossil fuel companies.
Robins experienced the same frustrations as Campanale when it came to engaging investors in the early days (and even, he says, environmentalists, who often insisted climate change had nothing to do with financial risk).
It was the 2007 financial crisis that woke people up – some of them, at least.
“Until then, there was this unquestioning faith in the markets – an assumption that the financial system could self-equilibrate, no matter what,” says Robins. “So it was truly impossible to conceive of climate change being a systemic issue. But then the market crashed, and people were more willing to consider other structural risks.”
Four years later, Carbon Tracker coined the terms ‘unburnable carbon’ and ‘carbon bubble’ to capture the idea that the need to rein in emissions would result in high-carbon assets becoming stranded and worthless.
“This obsession with engaging away the problem is really dangerous” – Mark Campanale
Robins says that unburnable carbon was an effective concept because of its simplicity and scientific robustness: “CIOs didn’t used to think about climate change much, but it didn’t prevent them from immediately understanding the argument, because it relies on three simple points: 1. Climate change means there is now a constraint on carbon emissions. 2. The carbon under the ground is greater than that constraint; and…” Robins stops for a moment and then says: “…the exciting thing is that they always come to the third point themselves, and it isn’t always the same. It could be ‘So we need to reallocate capital away from carbon’, or ‘So we need to push our companies to decarbonise’ – but it always involves change, somehow.”
And for those who weren’t convinced by Carbon Tracker’s logic (one sell side oil analyst famously told the FT in 2011 that it was “complete hot air”), 2020 has seen theory in action.
Repsol, which pledged last year to write down assets to reflect its support of the low-carbon transition, announced in February that the decision had cost it nearly €5bn so far. Shell, BP, Total, Chevron, Eni and Equinor also knocked billions off their valuations, with some slashing their celebrated dividend payments to shareholders, too. The trend has been driven by a number of factors, not just climate change, but it is clear that these business models are on shaky ground, as Robins and Campanale have been warning for decades. BP’s CEO, Bernard Looney, became the first oil boss to publicly acknowledge that “the world’s carbon budget is finite and running out fast” when he unveiled a Net Zero by 2050 ambition for the firm this year.
While Looney sees climate change as a threat to business-as-usual for oil majors, Campanale sees the oil majors as the threat. “We need to manage out the fossil fuel industry quickly, before it takes us over the edge in terms of climate,” he says, matter-of-factly; adding that, while there have been huge efforts by the investment community to address climate change, sometimes the sense of urgency is missing.
“Someone at a large insurance company told us once they wouldn’t divest from coal because they felt engagement was more appropriate. They spent three or four years taking that approach, during which time they probably lost 80% of their money. This obsession with engaging away the problem is really dangerous. How do you engage with a coal company? It’s like asking the luddites to go faster when we’ve already invented the spinning jenny.”
He says shareholder engagement group Climate Action 100+, of which Carbon Tracker is a research partner, must take lessons from this mystery investor by acknowledging that engagement is only credible when it results in companies making profound business transitions to clean energy and technology within realistic timeframes, while retiring dirty assets.
“Oh, and by the way, where was the CIO of this insurance firm this whole time?” he asks, throwing his arms up. “Apparently, assuming that everything was fine with coal, and that doing a bit of engagement meant they could say they were responsible shareholders, which is easier than re-calibrating whole business models and doing proper risk analysis. It beggars belief.”
Robins takes a more generous approach, saying that “there is a shape to the ‘stranded assets’ learning curve”.
“If you cut me, I bleed carbon bubbles…” – Nick Robins
“It’s not been a straight line, and the demise of coal has been one of the moments of real proof that fossil fuel assets do become stranded. We said from the start: the evidence is there, but when it happens, people will still be surprised. Even if investors had this perfect foresight that capitalism would have us all believe, they don’t have full liberty to respond – they’re bound by benchmarks and products. It’s not a matter of simply acting on what you’ve come to know.”
With 2020 providing a tidal wave of “I told you so” moments for the pair, what do they think the rest of the decade has in store?
“This is just the beginning,” says Campanale, who believes the next step will include tackling not just the oil giants, but the pipelines, ports, railways and other infrastructure tied to the fossil fuel industry and sitting in investment portfolios all over the globe. “We estimate that this carbon entangled infrastructure is valued at $30trn, and it’s going to have to be written down in the next 15 years, which means multiples of the losses we saw in the financial crisis.”
The 2020s won’t just be about how climate change impacts assets, though. Robins has spent the last couple of years working to create a financial agenda around the Just Transition – ensuring that investors, companies and policymakers limit the social fall-out of the shift to a low-carbon economy, including job losses stemming from shutting down conventional energy production.
It’s an agenda that’s quickly gaining traction, and one that US President-elect Joe Biden has put at the centre of his climate plan, which promises to support “the workers… who through dangerous and back-breaking labour, powered our industrial rise… and fuelled America’s prosperity through the 20th century”. In the UK, SSE became the first utility to publish a Just Transition Plan last month, on the back of pressure from shareholders.
“If the carbon bubble thesis was only able to get going because the financial crisis changed our thinking around systemic risk, the Just Transition is becoming important because of Covid-19, which has forced us to think about how we want to rebuild an economy at this moment in history,” says Robins.
Campanale is also widening his focus, having launched a sister think-tank to Carbon Tracker with Robins in 2018. Planet Tracker focuses on the investment risks tied to natural resources beyond fossil fuels, including fish (covered by its own Planet Tracker sub-group called… yes, you guessed it: Fish Tracker).
“Unburnable carbon has been about addressing the assumption investors have had that there are no physical boundaries preventing the use of fossil fuels,” he explains. “Likewise, they’re assuming that if you can catch 10 fish using one boat, you must be able to catch 1,000 using 100 boats. But once you finance all those boats, you realise there’s actually nothing left to catch, and the share price of your company falls off a cliff. This isn’t small fry, either: we found more than 200 listed fisheries in the world, with seafood turnover of more than $80bn.”
Given how successful Robins and Campanale were at forecasting doom for oil majors, many will be keeping a close eye on both these projects. I ask them whether they feel vindicated now that their predictions are playing out, after years of empty reception rooms and dismissive CIOs.
“You know, when I was a teenager I had these terrible nightmares that the world was on fire and me and a group of people were streaming away from this scene of mass devastation and disaster,” says Campanale (I must look shocked at this answer, because he quickly reassures me he’s “fine”). “The point is, I think everyone has a calling, or a purpose; and this has been one of mine.”
He bats the questions over to Robins, who hesitates, and then says: “What do you want me to say? If you cut me, I bleed carbon bubbles…” and the pair erupt in laughter.