carbon asset risk report

CARBON ASSET RISK: FROM RHETORIC TO ACTION

Initiativearbon Tracker

This paper, first presented at the 1st Global Stranded Assets Conference, hosted by the Smith School in Oxford September 2015, looks at developments over the past two years around the concepts of carbon asset risk, stranded assets and wasted capital in relation to the fossil fuel industry. We draw on NGO and market research, and corporate and investor activity. The focus is on establishing a framework for analysis and assessing how investors and corporations are responding in terms of risk management, disclosure, corporate capital expenditures and the implications for investors in terms of portfolio management, engagement and divestment. This is done in the context of share and commodity markets. We show that carbon asset risk (CAR) is in the process of moving from discussion and acknowledgement to action and impact.

EDITOR Mark Fulton Founder, Energy Transition Advisors, Research Advisor Carbon Tracker, Senior Fellow Ceres

LEAD AUTHORSShanna Cleveland, Senior Manager, Carbon Asset Risk Initiative, Ceres

Rob Schuwerk, Senior Counsel, Carbon Tracker

Chris Weber, Senior Analyst, 2 Degrees Investing

We would like to acknowledge review by : James Leaton, Carbon Tracker; Morgan LaManna Institutional Investors Group on Climate Change; Andrew Logan, Ceres.

CARBON ASSET RISK: FROM RHETORIC TO ACTION | 1

TABLE OF CONTENTSExecutive Summary ............................................................................................ 3

1. Carbon Asset Risk: Discussion Framework: WRI and UNEP-FI Port folio CarbonInitiative ............................................................................................ ............71.1 Introduction .............................................................................................................................. 7

1.2 Summary of WRI/UNEP FI Framework ..................................................................................... 8

1.2.1 Purpose of the Framework ............................................................................................................ 81.2.2 Summary of the framework .......................................................................................................... 8

1.3 Organization of this report ...................................................................................................... 11

2. Commodity Markets – Evidence of the Energy Transition or Cyclical? Coalleads the way. .............................................................................................. 122.1 The US Coal Crash ...................................................................................................................12

2.2 Chinese Demand ....................................................................................................................14

2.3 European Utility Death Spiral .................................................................................................14

2.4 Oil Markets ..............................................................................................................................16

2.4.1 Wood Mackenzie: Pre-FID project deferrals: 20 billion boe and counting ............................... 172.4.2 Oil and Gas companies support Carbon price. .......................................................................... 18

2.5 Selection of Market Analyst Research papers. .......................................................................20

3. Engagement, Disclosure and Shareholder Proposals .................................... 223.1 Background .............................................................................................................................22

3.2 Investor Engagement: Ceres and IIGCC Review of Investor Engagement ...........................24

3.3 Carbon Tracker’s engagement with oil and gas company assessment of climate risk .........30

3.4 Summarizing: quantifying the disclosure results as at June 2014: .......................................35

4. Divestment .................................................................................................. 414.1. Background .............................................................................................................................42

4.2 Sizing the movement ..............................................................................................................43

4.2.1 The Go Fossil Free Movement ..................................................................................................... 434.2.2 The Norwegian Example ............................................................................................................. 444.2.3 Index Providers. ........................................................................................................................... 444.2.4 Making an impact on corporations ............................................................................................ 46

5. Investor Port folios and Service Providers ..................................................... 475.1 AODP Overview .......................................................................................................................47

5.2 Service Providers ...................................................................................................................48

5.2.1 Portfolio Carbon Footprinting ..................................................................................................... 495.2.2 Portfolio Stress Testing ................................................................................................................ 50

Appendix 1: Companies That Received the Investor Carbon Asset Risk Letter . 52

Appendix 2: Summary of CAR shareholder proposals ....................................... 53

Appendix 3: Institutions divesting ................................................................... 56

Disclaimer ........................................................................................................ 58

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L IST OF F IGURE SFigure 1: Summary of Framework Structure .................................................................. 8

Figure 2: Risk Management Options by Investment Stage for Dif ferent Financial Sector Actors ............................................................................................... 10

Figure 3: Layout of this report in UNEP FI/WRI framework ......................................... 11

Figure 4: The US Coal Crash ........................................................................................ 13

Figure 5: Chinese Coal Imports ................................................................................... 14

Figure 6: European util ity share price per formance versus DAX from 2008 to 2013 (2008 = 100) .................................................................................................. 15

Figure 7: The util ity ‘death spiral ’ explained .............................................................. 15

Figure 8: Wood Mackenzie Deferred Oil Projects ......................................................... 17

Figure 9: Deferred Resources ...................................................................................... 18

Figure 10: Analyst Reports .......................................................................................... 20

Figure 11: CAR Initiative Responses ........................................................................... 24

Figure 12: Proxy Resolutions ....................................................................................... 27

Figure 13: 20-year Average Business EBITDA Contribution .......................................... 29

Figure 14`: Carbon Tracker Website Access Data ......................................................... 30

Figure 15: ExxonMobil ’s scenario exceeds the NPS CO2 emissions trajectory ............ 33

Figure 16: Carbon Tracker Analysis of corporate responses - regulatory risk .............. 38

Figure 17: Carbon Tracker analysis of corporate responses - substitution risk ........... 38

Figure 18: Carbon Tracker analysis of corporate responses – assessing climate risks . 39

Figure 19: Carbon Tracker analysis of companies – risk signif icance ........................... 39

Figure 20: CDP Climate Change Questionnaire ............................................................ 40

Figure 21: CDP Investor Expectations Governance ...................................................... 40

Figure 22: CDP Strategy Considerations ...................................................................... 41

Figure 23: Smith School analysis of divestment stigmatization .................................. 43

Figure 24: Divestment by Type of Institution .............................................................. 44

Figure 25: MSCI Fossil Fuel Free Index ........................................................................ 45

Figure 26: Asset Owners Disclosure Project – AODP Global Climate Index 2015 .......... 47

Figure 27: Types of quantitative CAR models ............................................................. 48

Figure 28: Impact of climate change scenario on the Median Annual Return Impact over 10 years. ............................................................................................ 51


E XECUT IVE SUMMARYThe Energy Transition is underway - more haste is needed!

In the past few years, carbon asset risk (CAR) has gone from a fringe topic discussed primarily by NGOs to a serious consideration of some of the largest companies in the world. Recent market action, LQYHVWRU�SOHGJHV��QHZ�PRGHOV�DQG�UHVXOWV��DQG�VLJQL¿FDQW�VKDUHKROGHU�UHVROXWLRQV�DUH�DOO�FRQWULEXWLQJ�to pushing CAR into the public attention.1 This report discusses some of the most important recent GHYHORSPHQWV�DQG�SURYLGHV�WKH�¿UVW�DWWHPSW�DW�TXDQWLI\LQJ�WKH�XSWDNH�RI�&$5�DVVHVVPHQW�DQG�management.

The report follows the basic structure of the recently released UNEP FI/WRI CAR Framework, a multi-stakeholder and multiyear process to develop a common terminology and language VXUURXQGLQJ�&$5�DVVHVVPHQW�DQG�PDQDJHPHQW��,W�¿UVW�VXPPDUL]HV�WKH�IUDPHZRUN��ZKLFK�LGHQWL¿HV�FDUERQ�ULVN�IDFWRUV�DQG�H[SODLQV�KRZ�FRPSDQLHV�DQG�¿QDQFLDO�LQVWLWXWLRQV�FDQ�DVVHVV�WKHLU�H[SRVXUH��HYDOXDWH�¿QDQFLDO�LPSDFWV��DQG�PDQDJH�ULVN��,PSRUWDQWO\��WKH�IUDPHZRUN�VHSDUDWHV�WKH�ULVN�WKDW�carbon-intensive companies are exposed to (“operator carbon risk”) from the risk that is passed on to lenders and investors with a stake in these companies (“carbon asset risk”). Exposure and risk evaluation have to be done at the asset level by companies (operators of those assets) and at the SRUWIROLR�OHYHO�E\�RZQHUV�RI�RU�¿QDQFLDO�LQWHUPHGLDULHV�WR�WKRVH�RSHUDWRUV��5LVN�LV�WKHQ�PDQDJHG�XVLQJ�VHYHUDO�RSWLRQV��GLVFORVXUH��GLYHUVL¿FDWLRQ��GLYHVWPHQW��DYRLGDQFH��DQG�HQJDJHPHQW��81(3�),�:5,�had over 200 participants in the webinar launch of its Framework.

This report now looks at the evidence for action by operators (disclosure) and investors (divestment DQG�HQJDJHPHQW��LQ�SDUWLFXODU��WKHUH�LV�OLPLWHG�HYLGHQFH�RI�DFWLRQ�E\�¿QDQFLDO�LQWHUPHGLDULHV�DW�WKLV�VWDJH��LQ�UHODWLRQ�WR�WKHVH�LVVXHV�LQ�WKH�IRVVLO�IXHOV�DQG�XWLOLW\�VHFWRUV��,W�DOVR�DQDO\]HV�KRZ�UHFHQW�market volatility, a primary risk factor in the CAR framework, may be contributing to such action. It focuses on evidence of action in four spheres: market action, corporate disclosure and engagement, and direct investor action (divestment and portfolio exposure and stress testing). We conclude that these developments are beginning to show progress in terms of action in an energy transition that now seems well underway. There is still a long way to go.

• Market Action: the past year has essentially applied a “stress test” through energy commodity prices of a magnitude no one could have foreseen a year ago – spot oil prices around $40bbl and seaborne coal prices of $50t. While these are only spot and not the expectations for the next 20 years they show the dynamics at work in CAR evaluation. The key issue is what drove these price declines. Short-term cyclical forces and geopolitics are two obvious drivers. However, we also point to the following key themes that are part of the long-term CAR thesis in terms of:

- Regulatory and technology forces in coal markets: a number of increasing UHJXODWRU\�DQG�SROLF\�WUHQGV�LQ�WKH�86�DQG�&KLQD�LQ�SDUWLFXODU�KDYH�DHFWHG�FRDO�demand.2 Combined with technology changes in gas and renewable energy markets, these trends have led to a fall in US coal demand (impacting share markets) and signs of a peaking in Chinese coal demand.3

1 Indeed, one recent survey quoted the corporate secretary of an energy company as opining that the engagement process “had ‘transformed the corporate secretary’s UROH�¶�DQG�KDG�DOVR�µWUDQVIRUPHG�WKH�ERDUGURRP�¶´�0DUF�*ROGVWHLQ��³'H¿QLQJ�(QJDJHPHQW��$Q�8SGDWH�RQ�WKH�(YROYLQJ�5HODWLRQVKLS�%HWZHHQ�6KDUHKROGHUV��'LUHFWRUV�DQG�([HFXWLYHV�´�,66��$SULO�� 0RRG\¶V��'HFOLQLQJ�&KLQHVH�FRDO�GHPDQG�H[DFHUEDWHV�SUHVVXUH�RQ�$XVWUDOLDQ�PLQHUV��$XJ��DYDLODEOH�DW�KWWSV��ZZZ�PRRG\V�FRP�UHVHDUFK�0RRG\V�'HFOLQLQJ�&KLQHVH�FRDO�GHPDQG�H[DFHUEDWHV�SUHVVXUH�RQ�$XVWUDOLDQ�PLQHUV��35B��8�6��(QHUJ\�,QIRUPDWLRQ�$GPLQLVWUDWLRQ��³&RDO�XVH�LQ�&KLQD�LV�VORZLQJ�´��6HSW��DYDLODEOH�DW�KWWS��ZZZ�HLD�JRY�WRGD\LQHQHUJ\�GHWDLO�FIP"LG �� 7RP�5DQGDOO��³6RODU�DQG�ZLQG�MXVW�SDVVHG�DQRWKHU�ELJ�WXUQLQJ�SRLQW�´�%ORRPEHUJ%XVLQHVV��2FW��DYDLODEOH�DW�KWWS��ZZZ�EORRPEHUJ�FRP�QHZV�

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- Acknowledgement of carbon constraints and a rush of cheap supply in oil markets: the Saudi Oil Minister has acknowledged that by 2050 the need for fossil IXHOV�ZLOO�EH�JUHDWO\�UHGXFHG�DQG�WKLV�KDV�FRLQFLGHG�ZLWK�D�VLJQL¿FDQW�SXVK�RI�QHZ�supply from low cost producers to markets, crashing the oil price.4

- In Europe and the U.S. utilities have been highly disrupted. Analysts have been concerned with the “utility death spiral” for companies in both regulated and restructured markets because the companies generally have not anticipated or adapted their business models to several factors: a combination of policies that support GLVWULEXWHG�JHQHUDWLRQ��UHQHZDEOHV�DQG�LQFUHDVHG�HQHUJ\�HFLHQF\�PDQGDWHV��FKDQJLQJ�PDUNHW�G\QDPLFV�GXH�WR�ORZ�QDWXUDO�JDV�SULFHV��DQG�QHZO\�GHVLJQHG�FDSDFLW\�DQG�energy markets. Investors should be concerned that companies failed to predict or PLWLJDWH�WKH�HHFWV�RI�WKHVH�IDFWRUV�WR�DYRLG�ORVV�RI�YDOXH�

- At least $200bn in capital expenditures, primarily oil & gas projects, has been deferred or cancelled over the past year. Most recently, Shell announced that its $7-9 billion in capital expenditures chasing Arctic oil was unsuccessful, highlighting the danger of wasted capital for projects with high break-evens and long time frames for development.5

- Major Oil companies including BP, Shell, BG, Eni, Statoil, and Total have called for a global carbon price.

- Market Analysts Views Are Evolving: The number of comments and papers focusing on CAR related issues has rapidly increased in the last year. We catalogue these papers by sell side, buy side, and ratings agencies.

• Engaging with Operator/Corporate Risk Management: much of the focus by investors and NGOs has been on how the operators of carbon assets are managing risk. Engagement FDQ�WDNH�WKH�IRUP�RI�UHTXHVWV�IRU�GLVFORVXUH�ERWK�LQ�UHJXODWRU\�WHUPV�DQG�LQ�OHVV�IRUPDO�ZD\V�VXFK�DV�VXUYH\V�DQG�GLVFXVVLRQ�SDSHUV��7KH�UHVSRQVHV�WR�WKHVH�UHTXHVWV�IRUP�WKH�EDVLV�IRU�DQ\�HYDOXDWLRQ��,W�LV�QRW�VLPSO\�D�TXHVWLRQ�RI�PHDVXULQJ�WKH�FRPSDQ\¶V�FDUERQ�IRRWSULQW�±�ZKLFK�is generally obvious in the fossil fuel and utilities sector – but a deeper consideration of how the operator stress tests the various possibilities in an Energy transition (e.g. a 2°C policy outcome).

- Proxy voting has been a key area for investors to press for more information from operators.6 Our data shows that a majority of investors supported proxy access resolutions at 23 out of 33 fossil fuel companies despite company opposition.7 There is ample evidence to support that under investor pressure, operators are addressing CAR in formal disclosure and informal HYDOXDWLRQV��EXW�QRW�LQ�VXFLHQW�GHWDLO��2XU�GDWD�VKRZ�WKDW�FRPSDQLHV�have begun to consider the potential of a 2D scenario internally but that

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only a handful such as Conoco, Statoil, and BHP Billiton have publicly VXSSRUWHG�WKH�XVH�RI�D��'�DQDO\VLV�ZKLFK�DJDLQ�ZRXOG�EHQH¿W�IURP�PRUH�details, especially on capital expenditures.8 There is a general tendency to dismiss strong policy action and expect an extended energy transition beyond a 2D climate pathway.

- It is notable that the Governor of the Bank Of England has also pointed to climate and carbon risks and the need for disclosure to assess the potential IRU�V\VWHPLF�¿QDQFLDO�ULVNV.9

�� )XUWKHU��LW�LV�GLFXOW�WR�GHWHUPLQH�WKH�H[DFW�EXVLQHVV�DVVXPSWLRQV�DURXQG�GHPDQG�SUR¿OHV�DQG�WR�VRPH�H[WHQW�H[SHFWHG�VXSSO\�FRVWV�WKDW�PDNH�RU�EUHDN�UHWXUQV��7KLV�VWLOO�lacks completeness in a risk management framework.

- Engagement can also take the form of direct dialogue with operators and business planning and models. This is frequently private in nature.

- One regulatory initiative of particular note is article 173 of the French Energy Transition law, which requires both companies and investors to disclose on CAR issues.

• Direct Investor Portfolio action: investors can also manage CAR directly at their own portfolio level, integrating some of the results of engagement. Most actions are mandate-dependent. That is, asset owners and asset managers have to follow the set out mandates ranging from ethical to passive to active.

- Divestment is the most extreme form of portfolio action and can have GLHUHQW�WKUHVKROGV�RI�DFWLRQ�WULJJHUV. The divestment by the Norwegian sovereign wealth fund of coal companies deriving above 30% of revenue potentially leaves 122 companies to be sold. There are nearly 400 investing institutions claiming some degree of disinvestment, led by foundations and NGOs, faith-based investors, SHQVLRQ�IXQGV�DQG�JRYHUQPHQWDO�RUJDQL]DWLRQV��DQG�FROOHJHV�XQLYHUVLWLHV�

- This has produced vocal responses from the fossil fuel industry. While there is an economic case that disinvestment does not ultimately starve companies of capital, Peabody has pointed to the possibility of adverse business impacts in its disclosures. 7KH�LQGXVWU\�KDV�FHUWDLQO\�IRFXVHG�RQ�WKH�SRWHQWLDO�IRU�³VWLJPDWL]DWLRQ�´

- Investors can use quantitative methods for testing exposure (carbon footprinting and stress testing portfolios for substantial carbon constraints) and evidence suggests this currently rare practice is growing. A small percentage of the large asset owner industry currently do this—around 60 LQVWLWXWLRQDO�LQYHVWRUV�KDYH�SOHGJHG�WR�IRRWSULQW�WKHLU�SRUWIROLR�WKURXJK�35,¶V�0RQWUHDO�Pledge, for instance—and there is substantial disagreement on whether current market RHULQJV�DUH�DGHTXDWH�

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- 5HJDUGOHVV��D�VLJQL¿FDQW�QXPEHU�RI�SURYLGHUV�KDYH�HPHUJHG�WR�RHU�services in this area, mostly with respect to screening using carbon footprinting approaches. A growing number of tools are going beyond cross-sectional analysis to include explicit scenario-based stress testing. However, currently “bottom-up” security-level tools are likely too complex for most investors to use directly, and “top-down” portfolio tools lack the security-level detail needed for stock-picking.

- At an integrated Portfolio level Mercer have launched a top down model ORRNLQJ�DW�FOLPDWH�ULVNV�LQFOXGLQJ�WKH�HHFWV�RI�SK\VLFDO�LPSDFWV. Mercer has seen more than 3000 downloads of their document setting out the high level results ZKLFK�VKRZ�GLYHUVH�VHFWRU�UHVXOWV��VRPHZKDW�OHVV�VR�DW�WKH�DVVHW�OHYHO�DQG�OLWWOH�HHFW�DW�the overall portfolio level when the trends are addressed proactively.

By the Numbers 2014-15Proxy Access

• Shareholder Control: Proxy access in U.S. for right to nominate directors focused on climate. 23 of 33 resolutions at fossil fuel companies and utilities gain majority vote.

Proxies Votes US

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Proxies Votes Europe

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Divestment

• 397 Institutions divested in some form

Financial research

�� $W�OHDVW��UHVHDUFK�SDSHUV�SXEOLVKHG�E\�PDLQVWUHDP�¿QDQFLDO�DQDO\VWV��EX\�VLGH��VHOO�VLGH��DQG�ratings agencies).

Company Action

• 3 fossil fuel majors support 2D scenario analysis (ConocoPhillips, Statoil, and BHP Billiton).

• 6 oil majors call for global carbon pricing (Eni, Statoil, Shell, BP, Total, BG Group).

• 2 oil majors leave ALEC (BP, Shell)

• 4 oil majors defer Arctic drilling (Chevron, BP, Statoil, Shell)

• 2 oil majors invest in renewable energy (Total and Statoil)

• 8 oil majors announce plan to engage in climate policy.


Future Key Action metrics – much more is neededEngagement

• Changing capital planning processes by successfully persuading companies to conduct transparent review of reserves and resources portfolio under 2C scenarios.

• Aligning executive compensation with creating value over volume at any cost by de-linking reserve replacement metrics and executive incentives.

• Highlighting public policy stances and actions of companies as compared to their statements about support for climate change action.

• Investor engagement with policymakers and regulators including continued public calls for strong climate action such as 357 investor signatories to UN calling for price on carbon, 62 investor signatories to SEC calling for implementation of climate disclosure, and investor calls for strong greenhouse gas emissions standards for power plants and methane regulations.

1. CARBON ASSE T R ISK : D ISCUSSION FRAME WORK : WRI AND UNEP-F I PORTFOL IO CARBON IN IT IAT IVE10

1.1 INTRODUCTION&OLPDWH�FKDQJH�SUHVHQWV�HQRUPRXV�HFRQRPLF��VRFLDO��DQG�¿QDQFLDO�LPSOLFDWLRQV�IRU�HFRQRPLHV�around the world. In response, many governments have enacted, or are considering enacting, policies to reduce greenhouse gas (GHG) emissions and increase deployment of low-carbon technologies.11 Such policy actions are in turn occurring in the context of changing regional and global energy markets, as evidenced by recent volatility in global energy commodity prices. This has led a number RI�LQYHVWRUV�DQG�RWKHU�VWDNHKROGHUV�WR�TXHVWLRQ�ZKHWKHU�ORDQV�RU�LQYHVWPHQWV�LQ�FDUERQ�LQWHQVLYH�physical assets or companies could be at risk due to policy and market dynamics, separate from the SK\VLFDO�ULVNV�WKDW�FOLPDWH�FKDQJH�SUHVHQWV��IRU�H[DPSOH��VHYHUH�VWRUPV��ÀRRGV��HWF��12.

This discussion on “carbon risk”13�KDV�EHHQ�LQÀXHQFHG�E\�UHVHDUFK�XQGHUWDNHQ�E\�WKH�,QWHUQDWLRQDO�Energy Agency (IEA), Oxford University, and the Carbon Tracker Initiative, among others, which VXJJHVWV�WKDW��DEVHQW�FDUERQ�FDSWXUH�DQG�VHTXHVWUDWLRQ�RU�RWKHU�WHFKQRORJLFDO�VROXWLRQV�WR�PDQDJH�*+*�HPLVVLRQV��D�VLJQL¿FDQW�TXDQWLW\�RI�WKH�ZRUOG¶V�IRVVLO�IXHO�UHVRXUFHV��HVSHFLDOO\�FRDO��ZLOO�need to remain in the ground (that is, unexploited) under climate mitigation scenarios. To take WKH�FOHDUHVW�H[DPSOH��LI�D�ODUJH�TXDQWLW\�RI�IRVVLO�IXHO�UHVRXUFHV�FDQQRW�EH�H[WUDFWHG�DQG�SURGXFHG�(whether because of policy, market or other carbon-related constraints), companies whose business is principally focused on such activities could be negatively impacted, both operationally and ¿QDQFLDOO\��7KLV�LQ�WXUQ�FRXOG�UHSUHVHQW�¿QDQFLDO�ULVN�WR�LQYHVWRUV�DQG�OHQGHUV�ZKR�KROG�D�¿QDQFLDO�stake in such companies, sometimes referred to as “carbon asset risk.”

7KLV�UHSRUW�ZLOO�VXPPDUL]H�UHFHQW�DFWLYLWLHV�LQ�WKH�&$5�VSDFH�DQG�LPSRUWDQWO\�TXDQWLWDWLYH�GDWD�RQ�uptake across three relevant stakeholder groups: markets, companies, and investors. The recently

�� 3RUWLRQV�RI�WKLV�VHFWLRQ�ZHUH�SUHYLRXVO\�SXEOLVKHG�LQ�&DUERQ�$VVHW�5LVN��'LVFXVVLRQ�)UDPHZRUN��:5,�81(3),��DYDLODEOH�DW�KWWS��ZZZ�ZUL�RUJ�VLWHV�GHIDXOW�¿OHV�FDUERQ�DVVHW�ULVN�GLVFXVVLRQ�IUDPHZRUN�JKJSB��SGI�11� $W�WKH�WLPH�RI�SXEOLFDWLRQ�RI�WKLV�UHSRUW��³LQWHQGHG�QDWLRQDOO\�GHWHUPLQHG�FRQWULEXWLRQV´��,1'&��KDG�EHHQ�VXEPLWWHG�WR�WKH�81)&&�FRYHULQJ�DOPRVW��RI�JOREDO�HPLVVLRQV��6HH�&OLPDWH�$FWLRQ�7UDFNHU�DYDLODEOH�DW�KWWS��FOLPDWHDFWLRQWUDFNHU�RUJ�LQGFV�KWPO�� 81(3�),�:5,��DQG��G,,�&'&�&OLPDWH�81(4�,QTXLU\��SURYLGH�JRRG�RYHUYLHZV�RI�UHFHQW�ZRUN�� $OO�UHIHUHQFHV�WR�³FDUERQ´�LQ�WKLV�GRFXPHQW�UHIHU�WR�DOO�JUHHQKRXVH�JDV�HPLVVLRQV�UDWKHU�WKDQ�MXVW�FDUERQ�GLR[LGH�

8 | WWW.CERES.ORG CARBON ASSET RISK: A REVIEW OF PROGRESS AND OPPORTUNITIES | 8

UHOHDVHG�81(3�),�DQG�:5,�&DUERQ�$VVHW�5LVN�IUDPHZRUN��ZKLFK�UHSUHVHQWV�WKH�ZRUN�RI�GR]HQV�RI�VWDNHKROGHUV�RYHU�VHYHUDO�\HDUV�WR�OD\�RXW�WKH�UROHV�RI�GLHUHQW�SDUWLHV�LQ�DVVHVVLQJ�DQG�PDQDJLQJ�&$5��VHUYHV�DV�WKH�EDVLV�IRU�WKLV�UHSRUW��7KH�¿UVW�VHFWLRQ�ZLOO�EULHÀ\�VXPPDUL]H�WKH�IUDPHZRUN�and connect it to the remaining sections. Following this, sections discussing market, corporate, DQG�LQYHVWRU�UROHV�ZLOO�EH�SUHVHQWHG�IROORZHG�¿QDOO\�E\�D�VXPPDU\�RI�WKH�FXUUHQW�VWDWH�DQG�IXWXUH�developments.

1.2 SUMMARY OF WRI/UNEP FI FRAMEWORK1.2.1 Purpose of the FrameworkThe dialogue around carbon asset risk has grown over time, but it has occurred in the absence of a comprehensive, generally accepted framework to guide institutions and other stakeholders in WKHLU�HRUWV�WR�WKLQN�FRQVLVWHQWO\�DQG�V\VWHPDWLFDOO\�DERXW�WKH�LVVXH��7R�PHHW�WKLV�LPSRUWDQW�QHHG��the World Resources Institute (WRI) and UNEP Finance Initiative (UNEP-FI) launched a process LQ�HDUO\��WR�GHYHORS�D�IUDPHZRUN�WR�KHOS�¿QDQFLDO�LQWHUPHGLDULHV�DQG�LQYHVWRUV��DV�ZHOO�DV�stakeholders with an interest in this topic, more systematically to identify, assess, and manage carbon asset risk. It represents an open, multi-stakeholder framework for discussing current events in the CAR space.

1.2.2 Summary of the framework The framework covers the key elements of addressing carbon asset risk during the process of making QHZ�¿QDQFLQJ�RU�LQYHVWPHQW�GHFLVLRQV�DQG�ZKHQ�PDQDJLQJ�H[LVWLQJ�LQYHVWPHQW�SRUWIROLRV��$V�VKRZQ�LQ�)LJXUH��EHORZ��WRS�DUURZV��WKH�IUDPHZRUN�FDQ�EH�RUJDQL]HG�DURXQG�WKUHH�FHQWUDO�DFWLRQV�investors and intermediaries can take in assessing CAR: assessing exposure, evaluating the impacts RI�WKLV�H[SRVXUH��L�H��¿QDQFLDO�ULVN��DQG�PDQDJLQJ�PDWHULDO�ULVNV��

Figure 1: Summary of Framework Structure


7KH�IUDPHZRUN�¿UVW�H[SORUHV�W\SHV�RI�ULVN�IDFWRUV�UHODWHG�WR�FDUERQ�ULVN��7KH�IUDPHZRUN�GLVFXVVHV�four core carbon risk factors that exist today—policy and legal, technology, market and economic, and reputational factors—that are closely intertwined and not always easy to isolate (picked up in Section 2: Markets).

The framework then draws an important distinction between how exposure to carbon risks PDWHULDOL]HV�DQG�WR�ZKLFK�SDUWLHV��,Q�SDUWLFXODU��ULVN�IDFWRUV�RWKHU�WKDQ�UHSXWDWLRQDO14�SULPDULO\�DHFW�carbon-intensive companies/operators (“operator carbon risk.”) Depending upon the nature DQG�VHYHULW\�RI�ULVN�DV�ZHOO�DV�WKH�RSHUDWRU¶V�ULVN�PDQDJHPHQW��WKLV�ULVN�FRXOG�WKHQ�DHFW�¿QDQFLDO�LQWHUPHGLDULHV�DQG�LQYHVWRUV�WKDW�KDYH�D�¿QDQFLDO�UHODWLRQVKLS�ZLWK�WKHVH�RSHUDWRUV��³carbon asset risk”).

Of course, certain industry sectors and types of companies are more or less exposed to carbon risk. To date, public dialogue has focused principally on physical assets and operations heavily UHOLDQW�RQ�IRVVLO�IXHOV��VXFK�DV�XSVWUHDP�IRVVLO�IXHO�H[SORUDWLRQ�DQG�SURGXFWLRQ�DQG�IRVVLO�IXHO�¿UHG�power generation. This is a logical focus, given that these activities contribute the largest share of GHG emissions to the global economy and are most likely to be impacted directly by carbon (and other air-pollution-control) policy regimes, such as cap-and-trade programs or carbon taxes. Nevertheless, other sectors, such as fossil-fuel-dependent infrastructure and fossil-fuel-intensive industries that face competition from low-carbon competitors, may also be exposed to operator FDUERQ�ULVN�GHSHQGLQJ�RQ�WKH�SUR¿OH�RI�WKH�XQGHUO\LQJ�SK\VLFDO�DVVHWV��W\SH��IXHO�PL[��ORFDWLRQ��RSHUDWLRQDO�OLIHWLPH��*+*�HPLVVLRQV��HWF��WKH�RSHUDWRU¶V�HDUQLQJV�PDUJLQ��DQG�WKH�ZD\�LQ�ZKLFK�LW�manages the risk (termed “operator carbon strategy”). Such strategies can include factors such DV�IXWXUH�GHYHORSPHQW�FDSLWDO�H[SHQGLWXUH��FDSH[��SODQV��DVVHW�GLYHUVL¿FDWLRQ��DQG�RSHUDWLRQDO�ULVN�PDQDJHPHQW�HRUWV��IRU�H[DPSOH��PHWKDQH�PLWLJDWLRQ��

Even for investments in sectors or companies that face high levels of operator carbon risk, though, carbon asset risk�WR�LQYHVWRUV�RU�OHQGHUV�LV�ODUJHO\�D�IXQFWLRQ�RI�WKH�W\SH�RI�¿QDQFLDO�UHODWLRQVKLS�ZLWK�WKH�RSHUDWRU��IRU�H[DPSOH��FRUSRUDWH�ORDQ��SURMHFW�¿QDQFH��HTXLW\�RU�ERQG��DQG�WKH�OLNHO\�GXUDWLRQ�RU�³WHQRU´�RI�WKH�UHODWLRQVKLS��³¿QDQFLDO�DVVHWV´�LQ�WKH�¿JXUH�DERYH��6SHFL¿F�DVSHFWV�RI�¿QDQFLQJ��LQFOXGLQJ�WKH�W\SH�RI�FDSLWDO�SURYLGHG��WKH�WHQRU��WKH�VHQLRULW\�RI�FDSLWDO��DQG�ZKHWKHU�LW�LV�VHFXUHG�E\�FROODWHUDO��DOO�DHFW�WKH�ULVN�DQG�UHWXUQ�SUR¿OHV�RI�D�¿QDQFLDO�LQYHVWPHQW�DQG�DUH�important considerations in determining whether operator carbon risk may translate to carbon asset risk for an intermediary or investor. Collectively, the characteristics of investee companies (and their underlying physical assets) in a ¿QDQFLDO�SRUWIROLR�GHWHUPLQH�WKH�SRWHQWLDO�exposure to CAR. Such characteristics can thus be used WR�VFUHHQ�SRUWIROLRV²WKH�¿UVW�VWHS�LQ�HYDOXDWLQJ�¿QDQFLDO�LPSDFW²EXW�DORQH�FDQQRW�GHWHUPLQH�WKH�¿QDQFLDO�LPSDFW�RI�WKH�ULVN��7ZR�PDLQ�DQDO\WLFDO�DSSURDFKHV�FDQ�LQIRUP�WKLV�DVVHVVPHQW��D�“bottom-up” operator-level approach starting from physical assets and rolling up to a portfolio, and, 2) a “top-down” portfolio approach that evaluates the impacts of risk factors on an entire portfolio of investments.

Given the complexity associated with operator-level stress testing (collecting plausible scenario GDWD��VXFK�DV�WKDW�H[SORUHG�LQ�WKH�,QWHUQDWLRQDO�(QHUJ\�$JHQF\¶V�:RUOG�(QHUJ\�2XWORRN�DV�ZHOO�DV�company-level risk factor data to plus into the scenario), this type of analysis is most likely to be done by carbon-intensive companies themselves.

7KH�WRS�GRZQ�SRUWIROLR�DSSURDFK�LQVWHDG�HYDOXDWHV�WKH�LQÀXHQFH�RI�ULVN�IDFWRUV�DW�WKH�SRUWIROLR�OHYHO��

�� 5HSXWDWLRQDO�ULVNV�DVVRFLDWHG�ZLWK�FDUERQ�LQWHQVLYH�DVVHWV�FDQ�DIIHFW�ERWK�WKH�FDUERQ�LQWHQVLYH�RSHUDWRUV�WKHPVHOYHV�DV�ZHOO�DV�LQYHVWRUV�DQG�OHQGHUV�WR�WKHVH�RSHUDWRUV��DV�HYLGHQFHG�E\�³QDPH�DQG�VKDPH´�FDPSDLJQV�DJDLQVW�EDQNV�OHQGLQJ�WR�FRDO�FRPSDQLHV�DQG�WKH�GLYHVWPHQW�PRYHPHQW�DPRQJVW�LQVWLWXWLRQDO�LQYHVWRUV�

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taking into account both high- and low-carbon investments and the expected risk correlation between them given an assumed scenario. While such an analysis is highly technical, tools to perform such evaluation are emerging, though only through commercial providers. Thus, it is feasible for large investors to perform such modeling and some are beginning to do so (discussed in Section 4).

)LQDOO\��ZKHUH�D�VLJQL¿FDQW�ULVN�H[LVWV��WKH�IUDPHZRUN�VXJJHVWV�VWUDWHJLHV�WKDW�¿QDQFLDO�LQWHUPHGLDULHV�and investors can pursue to manage carbon asset risk. The options for managing carbon asset risk will vary depending on the role of the intermediary or investor (for example, underwriter, ERQGKROGHU��OHQGHU�RU�VKDUHKROGHU��DQG�ZKHWKHU�¿QDQFLQJ�RU�LQYHVWPHQW�LV�XQGHU�FRQVLGHUDWLRQ�or has already been made. In general, though shown in Figure 2, intermediaries and investors have two main options—avoiding risk altogether or managing it. The options—which are of course LQVWLWXWLRQ²DQG�PDQGDWH�VSHFL¿F��FDQ�EH�VXPPDUL]HG�DV�³'LVFORVXUH��'LYHUVL¿FDWLRQ��(QJDJHPHQW��and Divestment.”

Figure 2: Risk Management Options by Investment Stage for Different Financial Sector Actors

While not discussed in detail in this report, the framework also notes that some amount of CAR is a byproduct of the current uncertainty about future global and regional climate policy regimes. The ¿QDQFLDO�VHFWRU�FDQ�SOD\�D�UROH�LQ�ZRUNLQJ�WR�UHGXFH�WKLV�XQFHUWDLQW\�WKURXJK�HQJDJHPHQW�LQ�SXEOLF�policy arenas, asking for stable and predictable medium-term policy frameworks to deliver long-term emissions reductions goals.15 Having greater clarity on issues such as the potential nature and timing RI�*+*�UHJXODWLRQ�DQG�UHSRUWLQJ�DQG�GLVFORVXUH�UHTXLUHPHQWV�ZRXOG�JUHDWO\�HQKDQFH�WKH�DELOLW\�WR�assess and manage carbon asset risk.

�� /HWWHU�IURP��LQYHVWRU�&(2¶V�WR�*��)LQDQFH�0LQLVWHUV�DYDLODEOH�DW�KWWS��ZZZ�LLJFF�RUJ�¿OHV�SXEOLFDWLRQ�¿OHV�,QYHVWRU&(2BOHWWHU�SGI�


1.3 ORGANIZATION OF THIS REPORTThis report digs deeper into several of the areas of the CAR ecosystem as laid out in the UNEP ),�:5,�IUDPHZRUN�WR�GLVFXVV�UHFHQW�HYHQWV�DQG�DWWHPSW�WR�TXDQWLI\�WKH�DFWXDO�XSWDNH�RI�&$5�DVVHVVPHQW�DQG�PDQDJHPHQW��)LJXUH�EHORZ��:H�¿UVW�GLVFXVV�WKH�UROH�RI�PDUNHWV�LQ�WKH�FRQWH[W�RI�UHFHQW�FRPPRGLW\�PDUNHW�YRODWLOLW\��RQH�RI�WKH�IUDPHZRUN¶V�ULVN�IDFWRUV��6HFWLRQ��:KLOH�SROLF\�and technology risk factors often receive the most attention in CAR debates, the role of markets has proven paramount recently.

Section 3 of the report then discusses the state of corporate carbon risk disclosure and investor engagement. Corporate disclosures often serve as both important CAR exposure screening information for investors as well as the raw data driving operator level stress tests (which, in many FDVHV��DUH�SUHFLVHO\�WKH�GDWD�UHTXHVWHG�E\�LQYHVWRUV��,QYHVWRU�HQJDJHPHQW��RQH�RI�WKH�SULPDU\�ULVN�PDQDJHPHQW�WHFKQLTXHV��LV�DQ�LPSRUWDQW�GULYHU�RI�VXFK�LQIRUPDWLRQ�DQG�LV�GLVFXVVHG�LQ�WKH�VDPH�section. Section 4 then analyses investor actions other than engagement, notably the divestment PRYHPHQW��6HFWLRQ��DQG�TXDQWLWDWLYH�WHFKQLTXHV�WKDW�DUH�EHLQJ�DSSOLHG�WR�DVVHVV�H[SRVXUH�RU�stress test CAR impacts (4.2).

Figure 3: Layout of this report in UNEP FI/WRI framework

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2. COMMODIT Y MARK E TS – E V IDENCE OF THE ENERGY TRANSIT ION OR CYCL ICAL? COAL LE ADS THE WAY.In many ways in the last year markets themselves have seen the biggest action for much of the CAR thesis – battles in supply energy markets, falling energy commodity prices, turmoil in energy UHODWHG�VWRFN�SULFHV��7KH�TXHVWLRQ�LV�GRHV�WKLV�DW�DOO�UHODWH�WR�IXQGDPHQWDO�VKLIWV�GXH�WR�DQ�HQHUJ\�transition/climate constraint or is it all just cyclical. We believe that there is a fundamental peaking in coal demand and market dynamics, which is a function of regulation, natural gas and renewable energy. The Energy Transition is under full swing in this sector. Oil is more complex and there are undoubtedly cyclical forces at play. However even the Saudi Oil Minister can see long term carbon constraints and the move to dominate supply by OPEC is exactly what a climate constraint would be expected to produce.16

2.1 THE US COAL CRASH:H�¿UVW�ORRN�DW�WKH�FRDO�LQGXVWU\�LQ�WKH�86�17 Between 2011 and 2014 the Dow Jones index of coal stocks declined 76% compared to the overall market rising by 68%. Evidence of structural change based on regulation and new technology in the shape of fracked gas and renewables is strong.18

The EPA was active in relation both to clean air and climate pollution particularly advancing rules around Mercury but also directly in relation to GHGs. The new standards of performance IRU�JUHHQKRXVH�JDV�HPLVVLRQV�IRU�QHZ��PRGL¿HG�DQG�UHFRQVWUXFWHG�VWDWLRQDU\�VRXUFHV�HVVHQWLDOO\�established natural gas as the benchmark for emissions.19 The proposed Clean Power Plan is set to expand on that by setting greenhouse gas limits for existing facilities.20 Investors and businesses have played a key role in shoring up political support for these regulations.21

Underpinning this all has been the fracked or tight gas developments resulting from decades of research and development. The drilling technology breakthroughs in the mid-2000s produced high volumes of cheap natural gas that began to change electric power market dynamics as early as 2009 and resulted in shifting load from existing coal plants and replacing plans for new coal builds.22

Renewable energy sources have meanwhile been getting cheaper and more readily available. As a UHVXOW�WKH�VZLWFK�RXW�RI�FRDO�KDV�EHHQ�PHW�IURP�D�FRPELQDWLRQ�RI�JDV��UHQHZDEOHV��DQG�HFLHQF\�

These forces represent clear examples of an energy transition from a longer-term perspective that has been driven primarily by market forces.

�� 3HWHU�:DOGPDQ��³6DXGL�$UDELD¶V�3ODQ�WR�([WHQG�WKH�$JH�RI�2LO��%ORRPEHUJ0DUNHWV��$SULO��DYDLODEOH�DW�KWWS��ZZZ�EORRPEHUJ�FRP�QHZV�DUWLFOHV��VDXGL�DUDELD�V�SODQ�WR�H[WHQG�WKH�DJH�RI�RLO��17� /XNH�6XVVDPV�DQG�$QGUHZ�*UDQW��&DUERQ�7UDFNHU��³7KH�86�&RDO�&UDVK��(YLGHQFH�IRU�6WUXFWXUDO�&KDQJH�´��DYDLODEOH�DW�KWWS��ZZZ�FDUERQWUDFNHU�RUJ�UHSRUW�WKH�XV�FRDO�FUDVK�� 5DQGDOO��VXSUD�QRWH�� &�)�5��3W��6XESDUWV�'D�DQG�....�� )HG��5HJ��$XJXVW�� 0LQG\�/XEEHU��³:K\�&RUSRUDWH�$PHULFD�LV�6XSSRUWLQJ�(3$¶V�&OHDQ�3RZHU�3ODQ�´�)RUEHV��$XJXVW��DYDLODEOH�DW�KWWS��ZZZ�IRUEHV�FRP�VLWHV�PLQG\OXEEHU��ZK\�FRUSRUDWH�DPHULFD�LV�VXSSRUWLQJ�HSDV�FOHDQ�SRZHU�SODQ�� 0DUN�)XOWRQ��³1DWXUDO�*DV�DQG�5HQHZDEOHV��7KH�&RDO�WR�*DV�DQG�5HQHZDEOHV�6ZLWFK�LV�2Q�´�'HXWVFKH�%DQN�&OLPDWH�&KDQJH�$GYLVRUV��2FW��DYDLODEOH�DW�KWWSV��ZZZ�GE�FRP�FU�HQ�GRFV�1DWXUDO*DV$QG5HQHZDEOHV�2FWB��B8SGDWH�SGI��*RUGRQ�3LFNHULQJ��³7KH�SKHQRPHQRQ�RI�&RDO�WR�*DV�6ZLWFKLQJ�´�1DYLJDQW��)DOO��DYDLODEOH�DW�KWWS��ZZZ�QDYLJDQW�FRP�a�PHGLD�:::�6LWH�,QVLJKWV�(QHUJ\�7KH��3KHQRPHQRQ��RI��&RDOWR*DV��6ZLWFKLQJ��E\��*3LFNHULQJ:(,��DUWLFOHSGI�DVK[��'�&��'HQLVRQ��³6RPHUVHW�SRZHU�SODQW�SXW�XS�IRU�VDOH�´�%RVWRQ�*OREH��6HSWHPEHU��DYDLODEOH�DW�KWWSV��ZZZ�ERVWRQJOREH�FRP�EXVLQHVV��GRPLQLRQ�UHVRXUFHV�VHOOLQJ�LWV�EUD\WRQ�SRLQW�SRZHU�VWDWLRQ�VRPHUVHW�T��V]6�2VME�;$D2;Q<2[/�VWRU\�KWPO��


Figure 4: The US Coal Crash

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2.2 CHINESE DEMAND Meanwhile at the fundamental demand level for coal, Chinese demand seems to be peaking due to environmental and health constraints as well as a slow down in growth – a key element we expected in terms of the market overestimating continued demand growth. Recent data shows total imports IRU�WKH�¿UVW�HLJKW�PRQWKV�RI��ZHUH��PLOOLRQ�WRQQHV��GRZQ��SHUFHQW�IURP�WKH�VDPH�SHULRG�last year:

Figure 5: Chinese Coal Imports

2.3 EUROPEAN UTILITY DEATH SPIRALIn European terms, the coal story has played out more in relation to utilities.23 Many have performed poorly again from the fundamental energy transition standpoint of renewable energy being the dispatch of choice. The failure of utilities to adapt to this transition has led to the “Utility Death Spiral” syndrome.

�� 6HH��H�J��0DWWKHZ�*UD\�³&RDO��&DXJKW�LQ�WKH�(8�8WLOLW\�'HDWK�6SLUDO�´�KWWS��ZZZ�FDUERQWUDFNHU�RUJ�UHSRUW�HXBXWLOLWLHV��


Figure 6: European utility share price performance versus DAX from 2008 to 2013 (2008 = 100)

Figure 7: The utility ‘death spiral’ explained

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2.4 OIL MARKETSThe oil markets have experienced a recent return to volatility that few expected.24 Notably, one of the premises of the carbon asset risk initiative was that the rapid rise in capital costs as compared to a low rate of production growth had put the industry in a fragile position where any faltering in RLO�GHPDQG�DQG�RU�SULFH�ZRXOG�SURGXFH�VLJQL¿FDQW�ZDVWHG�FDSLWDO�25 The commentary of Sheikh 1DLPL��WKH�6DXGL�2LO�0LQLVWHU��KDV�HPSKDVL]HG�WKH�HOHPHQWV�RI�FKHDS�VXSSO\��KLJK�FRVW�SURMHFWV�XQGHU�pressure and recognition of long term carbon constraints at play.

In May 2015 Sheikh Naimi against the background of increased supply into weakening prices stated: “In Saudi Arabia, we recognise that eventually, one of these days, we are not going to need fossil IXHOV��,�GRQ¶W�NQRZ�ZKHQ��LQ��RU�WKHUHDIWHU�¶�6DXGL�$UDELD�SODQQHG�WR�EHFRPH�D�µJOREDO�SRZHU�LQ�VRODU�DQG�ZLQG�HQHUJ\�¶´26

5HODWLQJ�WKLV�WR�&DUERQ�7UDFNHU¶V�&DUERQ�6XSSO\�&XUYHV�2LO�&DSLWDO�([SHQGLWXUHV27 yields the following observations:

�� 23(&�DQG�6DXGL�$UDELD�ZHUH�LGHQWL¿HG�DV�KDYLQJ�WKH�ORZHVW�FRVW�VXSSO\�DQG�VR�WKH�PRVW�“climate secure” oil if demand falls more than expected due to climate and other economic factors. Put another way, any battle for market share would see Saudi Arabia in particular as a winner in the long term.

�� 7KH�TXHVWLRQ�LV��GRHV�WKLV�YHU\�ORQJ�UXQ�FDUERQ�FRQVWUDLQW�SOD\�D�UROH�LQ�WKHLU�GHVLUH�WR�VXSSO\�low cost oil, even now? Perhaps at the margin that is true.

Regardless, the return to volatility, and in particular, the return to $40-50/barrel has presented, to some degree, the type of stress-testing that the Carbon Asset Risk Initiative called for from the beginning. As a result, some of the highest cost projects have begun to fall by the wayside as companies scramble to identify which projects could be put on hold, whether costs could be renegotiated with vendors, and how much of their planned capital expenditures would need to be slashed in order to preserve their balance sheets and reassure analysts and investors.28 The &DUERQ�$VVHW�5LVN�,QLWLDWLYH�SRVLWHG�WKDW�XQFRQYHQWLRQDO�UHVHUYHV��VSHFL¿FDOO\�RLO�VDQG��GHHSZDWHU��ultradeepwater, and Arctic drilling would be particularly vulnerable to stranding.29�2I�FRXUVH�6KHOO¶V�recent announcement that it is suspending its Arctic drilling plans after investing $7-9 billion in exploration costs is the most notable example of the risk of wasted capital.30 Shell knew as early as )HEUXDU\��WKDW�LWV�HRUWV�ZRXOG�QRW�EH�SUR¿WDEOH�XQOHVV�WKH�IRUPDWLRQ�LW�ZDV�H[SORULQJ�WXUQHG�out to be completely full of oil, but it took the gamble and invested an additional $4-5 billion that will never show a return.31�7KH�LQLWLDO�DQDO\VLV�E\�:RRG�0DFNHQ]LH�EHORZ�VHHPV�WR�FRQ¿UP�WKDW�deepwater/ultradeepwater (which includes some Arctic projects) and oil sands have borne the brunt of the cancellations.

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2.4.1 Wood Mackenzie: Pre-FID project deferrals: 200 billion boe and counting32

Finally we can show the impact of all this on expected capital expenditures – a $200bn pull back in the short term at least. Below we extract directly from their recent report.

Executive summary33

By year-end we may be able to count the number of major upstream projects that

made FID during 2015 on one hand. The dramatic fall in oil prices in 2014 and

subsequent deconstruction of 2015 company capital budgets has by mid-year

already resulted in over 45 major project FID deferrals. Together, these create a

substantial hole in the industry’s investment pipeline.

We estimate 20 billion boe of reserves has been pushed back from a diverse range

of onshore, shallow-water and deepwater developments. Combined, they represent

over US$200 billion in potential capital spend. Projects that are technically

FKDOOHQJLQJ��KDYH�VLJQL¿FDQW�XSIURQW�FRVWV��DQG�RU�ORZ�UHWXUQV�KDYH�SURYHG�YXOQHUDEOH�±�RYHU��RI�WKH��ELOOLRQ�ERH�LV�ORFDWHG�LQ�GHHSZDWHU�¿HOGV��DQG�QHDUO\�30% in the Canadian oil sands….

The upstream industry is winding back its investment in big pre-FID developments

as fast as it can. This is partly because it is one of the quickest ways to free up capital

in response to low oil prices, although this process was already underway in the

VKLIW�WR�YDOXH�YHUVXV�YROXPH��&RVW�LQÀDWLRQDU\�SUHVVXUHV�KDYH�SXVKHG�PDQ\�SURMHFWV�into economically marginal territory and operators are now reworking costs and

development solutions to achieve their hurdle rates.

Figure 8: Wood Mackenzie Deferred Oil Projects

32 June 2015.33� ,WDOLFL]HG�WH[W�DQG�¿JXUHV�DUH�XVHG�ZLWK�SHUPLVVLRQ�IURP�:RRG�0DFNHQ]LH�

18 | WWW.CERES.ORG

Figure 9: Deferred Resources

2.4.2 Oil and Gas companies support Carbon price.$V�PDUNHW�IRUFHV�KDYH�FUHDWHG�VLJQL¿FDQW�¿QDQFLDO�KHDGZLQGV�IRU�IRVVLO�IXHO�FRPSDQLHV�DQG�momentum towards the Global Conference of Parties in Paris has grown, six major European integrated oil and gas companies have joined together to issue a call for carbon pricing.34 The following letter was sent by the CEOs of six major European oil companies to the United Nations indicating their support for a global price on carbon. Many commentators believe this move should EH�VHHQ�LQ�D�PDUNHW�FRQWH[W�ZKHUH�JDV�LQ�SDUWLFXODU�LV�¿JKWLQJ�IRU�PDUNHW�VKDUH�LQ�SRZHU�PDUNHWV�LQ�relation to coal. Aside from embracing a policy that will be especially detrimental to coal, the letter also seems to indicate a continuing divide among European and North American integrated majors as to what role they should play in global climate discussions. Chevron and Exxon were approached by investors about joining the letter and each company publicly refused.35

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Dear Excellencies,

Climate change is a critical challenge for our world. As major companies from the oil & gas sector, we recognize both the importance of the climate challenge and the importance of energy to human life and well-being. We acknowledge that the current trend of greenhouse gas emissions is in excess of what the Intergovernmental Panel on Climate Change (IPCC) says is needed to limit the temperature rise to no more than 2 degrees above pre-industrial levels. The challenge is how to meet greater energy demand with less CO2. We stand ready to play our part.

Our companies are already taking a number of actions to help limit emissions, such as growing WKH�VKDUH�RI�JDV�LQ�RXU�SURGXFWLRQ��PDNLQJ�HQHUJ\�HFLHQF\�LPSURYHPHQWV�LQ�RXU�RSHUDWLRQV�DQG�products, providing renewable energy, investing in carbon capture and storage, and exploring new low-carbon technologies and business models. These actions are a key part of our mission to provide the greatest number of people with access to sustainable and secure energy.

For us to do more, we need governments across the world to provide us with clear, stable, long-term, ambitious policy frameworks. This would reduce uncertainty and help stimulate investments in the right low carbon technologies and the right resources at the right pace.

We believe that a price on carbon should be a key element of these frameworks. If governments DFW�WR�SULFH�FDUERQ��WKLV�GLVFRXUDJHV�KLJK�FDUERQ�RSWLRQV�DQG�HQFRXUDJHV�WKH�PRVW�HFLHQW�ZD\V�of reducing emissions widely, including reduced demand for the most carbon intensive fossil fuels, JUHDWHU�HQHUJ\�HFLHQF\��WKH�XVH�RI�QDWXUDO�JDV�LQ�SODFH�RI�FRDO��LQFUHDVHG�LQYHVWPHQW�LQ�FDUERQ�FDSWXUH�DQG�VWRUDJH��UHQHZDEOH�HQHUJ\��VPDUW�EXLOGLQJV�DQG�JULGV��R�JULG�DFFHVV�WR�HQHUJ\��cleaner cars and new mobility business models and behaviors.

Our companies are already exposed to a price on carbon emissions by participating in existing carbon markets and applying ‘shadow’ carbon prices in our own businesses to test whether investments will be viable in a world where carbon has a higher price.

<HW��ZKDWHYHU�ZH�GR�WR�LPSOHPHQW�FDUERQ�SULFLQJ�RXUVHOYHV�ZLOO�QRW�EH�VXFLHQW�RU�FRPPHUFLDOO\�sustainable unless national governments introduce carbon pricing even-handedly and eventually enable global linkage between national systems. Some economies have not yet taken this step, and this could create uncertainty about investment and disparities in the impact of policy on businesses.

20 | WWW.CERES.ORG

Christiana Figueres, the Executive Secretary of the UN Framework Convention on Climate Change UHVSRQGHG�E\�DVNLQJ�WKH�FRPSDQLHV�WR��SDUWLFLSDWH�LQ�GHWDLOHG��RSHQ�FDUERQ�SULFLQJ�GLDORJXHV��FRPPLW�WR�FRQVLVWHQW�JRYHUQPHQW�HQJDJHPHQW�IRFXVHG�RQ�VXSSRUWLQJ�D�ORQJ�WHUP�SROLF\�IUDPHZRUN��and (3) plan for long term scenarios consistent with an orderly transition to low carbon forms of energy.36 It remains to be seen whether the companies will follow through on all aspects. Investors have also been active in calling on companies to engage positively in climate dialogues.37

2.5 SELECTION OF MARKET ANALYST RESEARCH PAPERS.CAR and Climate Change: Sell-Buy side analysts, Rating agencies, Consulting Actuaries and Investors 2013- to date.

Figure 10: Analyst Reports

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Bernstein – Asia Strategy: Shouldn’t we all be dead by now? May 2015

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22 | WWW.CERES.ORG

3. ENGAGEMENT, D ISCLOSURE AND SHAREHOLDER PROPOSALSEngagement with asset operators/companies can take many forms but the most important in relation to Carbon Asset Risk (CAR) are simply:

• Asking a company to disclose more information – this could be in regulatory form but IUHTXHQWO\�LQ�PRUH�LQIRUPDO�LQIRUPDWLRQDO�GLVFXVVLRQ�SLHFHV��DQG

• Asking a company to change its practices.

The key initiators of engagement have been:

• Investors themselves, and

• NGOs either on their own behalf or on behalf of investors as members.

These actions can proceed through two primary channels:

• Engaging directly with the company, via mechanisms such as the shareholder proposal SURFHVV��DQG�

• Engaging directly with policymakers and regulators to, for example, seek improved disclosure or establish and implement relevant policy changes.

Because information obtained in direct one on one engagement with corporations may not be in the public domain, we focus on the more public aspects of engagement surrounding CAR, especially through NGOs. A critical focus of shareholder engagement has been to have companies disclose FDUERQ�DVVHW�ULVNV�DVVRFLDWHG�ZLWK�D��GHJUHH�VFHQDULR��,Q�UHVSRQVH�WR�WKRVH�HRUWV��&RQRFR3KLOOLSV�and Statoil have endorsed the use of 2 degree scenario analysis, but have not released the PHWKRGRORJ\�RU�PRGHOLQJ�DVVXPSWLRQV�EHKLQG�WKRVH�DVVHVVPHQWV��%+3�%LOOLWRQ�EHFDPH�WKH�¿UVW�major fossil fuel company to disclose some of the details behind its analysis of multiple 2 degree scenarios on September 29, 2015.38��:KLOH�%+3�%LOOLWRQ¶V�DQDO\VLV�UHSUHVHQWV�UHDO�IRUZDUG�SURJUHVV��LW�ZRXOG�EHQH¿W�IURP�DGGLWLRQDO�GHWDLO�UHJDUGLQJ�KRZ�WKH�FRPSDQ\�ZLOO�LQFRUSRUDWH�WKH�DQDO\VLV�LQWR�its capital planning processes and which types of resources and projects are most vulnerable to these low demand scenarios. None of the other oil, gas, coal, or utility majors has disclosed the results of such an analysis on the viability of their reserve and resource portfolios, though some have begun to consider it internally. This is a tremendous departure from earlier responses to the CAR Initiative that simply dismissed the feasibility of achieving the 2 degree goal. Now, Statoil has not only stated that “the 2 degree target is possible,” but it has laid out a potential pathway to achieving it.39

3.1 BACKGROUND(QJDJHPHQW�RQ�&$5�VWDQGV�RQ�WKH�VKRXOGHUV�RI�ERWK�IRUPDO�DQG�LQIRUPDO�GLVFORVXUH�HRUWV��&'3�has developed the largest collection globally of self reported climate change disclosures and has UHFHQWO\�H[SDQGHG�LWV�FOLPDWH�VXUYH\�WR�LQFOXGH�VXSSOHPHQWDU\�TXHVWLRQV�UHODWHG�WR�FDUERQ�DVVHW�ULVN�DQG�PRUH�VSHFL¿FDOO\��WKH�ULVNV�WR�WKH�RLO�DQG�JDV�VHFWRU�40 For embedded emissions reporting,

�� %+3�%LOOLWRQ�SUHVV�UHOHDVH�DYDLODEOH�DW�KWWS��ZZZ�EKSELOOLWRQ�FRP�LQYHVWRUV�QHZV�GLYHUVL¿FDWLRQ�DQG�FRPSHWLWLYHQHVV�SURYLGH�UHVLOLHQFH�WR�FOLPDWH�ULVN�� 6WDWRLO��(QHUJ\�3HUVSHFWLYHV��DYDLODEOH�DW�KWWS��ZZZ�VWDWRLO�FRP�HQ�1HZV$QG0HGLD�1HZV��3DJHV��-XQB(QHUJ\BSHUVSHFWLYHV�DVS[�� )RU�PRUH�LQIRUPDWLRQ�DERXW�&'3¶V�FROOHFWLRQ�YLVLW�KWWSV��ZZZ�FGS�QHW�HQ�86�3DJHV�$ERXW�8V�DVS[��


the World Resources Institute and World Business Council on Sustainable Development created the Greenhouse Gas Protocol (GHG Protocol) that has set the standard globally for measuring, managing and reporting greenhouse gas emissions.41

Past regulatory developments have also fed the CAR initiative. In the United States, Ceres has worked with its Investor Network on Climate Risk to persuade the Securities and Exchange &RPPLVVLRQ��6(&��WR�LPSURYH�GLVFORVXUH�RI�FOLPDWH�FKDQJH�ULVNV�LQ�FRPSDQLHV¶�DQQXDO�PDQGDWRU\�¿QDQFLDO�¿OLQJV��$�SHWLWLRQ�¿OHG�ZLWK�WKH�6(&�LQ��E\�LQYHVWRUV�UHSUHVHQWLQJ��WULOOLRQ�LQ�DVVHWV�UHVXOWHG�LQ�WKH�6(&¶V��JXLGDQFH�WKDW�VDLG�WKDW�FOLPDWH�FKDQJH�DQG�UHODWHG�UHJXODWLRQV�OHDG�WR�risks and opportunities for companies in a variety of sectors, and those issues, when material, must EH�GLVFORVHG�LQ�6(&�¿OLQJV�42

Building upon these steps, member-based NGOs have sought additional detail from the fossil fuel sector. For example, in December 2014, the Global Investor Coalition on Climate Change, led by IIGCC and Ceres, developed a document outlining the key disclosures sought during company engagements, known as “Investor Expectations: Oil and Gas Company Strategy.” CDP has since PDSSHG�WKH�,QYHVWRU�([SHFWDWLRQV�WR�LWV��FOLPDWH�FKDQJH�TXHVWLRQQDLUH�43

1*2V�DQG�LQYHVWRUV�KDYH�DOVR�H[DPLQHG�WKH�GLVFUHSDQFLHV�EHWZHHQ�D�FRPSDQ\¶V�GLVFORVXUHV�WR�&'3��WKH�6(&��DQG�RWKHU�UHSRUWLQJ�RUJDQL]DWLRQV��SURYLGLQJ�D�PXFK�FOHDUHU�SLFWXUH�RI�KRZ�FRPSDQLHV�have downplayed or given short shrift to such risks in government-mandated reporting while elaborating on them in voluntary reporting forms in order to increase their score or ranking.44 These discrepancies were highlighted in recent correspondence to the SEC by Ceres and CTI as an LQGLFDWLRQ�WKDW�IRVVLO�IXHO�FRPSDQLHV�DUH�QRW�PHHWLQJ�WKH�FXUUHQW�UHSRUWLQJ�UHTXLUHPHQWV�45 Although more work is needed, it appears that regulators are at least listening to the concerns.

Here, we focus on several critical NGO and investor-led engagements, starting with CAR letters VHQW�WR��RLO��JDV��FRDO�DQG�XWLOLW\�FRPSDQLHV�LQ��IROORZHG�E\�VKDUHKROGHU�SURSRVDOV�¿OHG�LQ�VXEVHTXHQW�\HDUV��:H�WKHQ�GLVFXVV�&DUERQ�7UDFNHU¶V�LQ�GHSWK�HQJDJHPHQW�ZLWK�UHVSRQVHV�IURP�Shell and ExxonMobil that the INCR/IIGCC/CAR process generated. Finally, we take a step back IURP�WKH�GHWDLO�DQG�VXPPDUL]H�WKH�EUHDGWK�RI�IRVVLO�IXHO�FRPSDQ\�UHVSRQVHV�WR�&'3¶V�TXHVWLRQQDLUH��&7,�DQDO\]HG�WKRVH�UHVSRQVHV�LQ�DQ�2FWREHU��UHSRUW�HQWLWOHG�³5HFRJQL]LQJ�5LVN��3HUSHWXDWLQJ�Uncertainty.”46

�� )RU�PRUH�LQIRUPDWLRQ�DERXW�WKH�*+*�3URWRFRO�YLVLW�KWWS��ZZZ�JKJSURWRFRO�RUJ�� &HUHV��&RRO�5HVSRQVH��7KH�6(&��&RUSRUDWH�&OLPDWH�&KDQJH�5HSRUWLQJ��DYDLODEOH�DW�KWWSV��ZZZ�FHUHV�RUJ�UHVRXUFHV�UHSRUWV�FRRO�UHVSRQVH�WKH�VHF�FRUSRUDWH�FOLPDWH�FKDQJH�UHSRUWLQJ�YLHZ�� &'3��/LQNLQJ�&'3�DQG�*,&¶V�,QYHVWRU�([SHFWDWLRQV��2LO�DQG�*DV�&RPSDQ\�6WUDWHJ\��DYDLODEOH�DW�KWWSV��ZZZ�FGS�QHW�'RFXPHQWV�WHFKQLFDO��/LQNLQJ�&'3�,QYHVWRU�([SHFWDWLRQV�2LO�*DV�&RPSDQ\�6WUDWHJ\�SGI�� 6HH��H�J��&HUHV��³6XVWDLQDEOH�([WUDFWLRQ"�$Q�$QDO\VLV�RI�6(&�'LVFORVXUH�E\�0DMRU�2LO��*DV�&RPSDQLHV�RQ�&OLPDWH�5LVN�DQG�'HHSZDWHU�'ULOOLQJ�5LVN´�DYDLODEOH�DW�KWWS��ZZZ�FHUHV�RUJ�UHVRXUFHV�UHSRUWV�VXVWDLQDEOH�H[WUDFWLRQ�DQ�DQDO\VLV�RI�VHF�GLVFORVXUH�E\�PDMRU�RLO�JDV�FRPSDQLHV�RQ�FOLPDWH�ULVN�DQG�GHHSZDWHU�GULOOLQJ�ULVN�YLHZ�� &HUHV�OHWWHU�DYDLODEOH�DW�KWWS��ZZZ�FHUHV�RUJ�¿OHV�FRQ¿GHQWLDO�LQYHVWRU�VHF�OHWWHU�LQDGHTXDWH�FDUERQ�DVVHW�ULVN�GLVFORVXUH�E\�RLO�DQG�JDV�FRPSDQLHV�DWBGRZQORDG�¿OH��&7,�OHWWHU�DYDLODEOH�DW�KWWS��ZZZ�FDUERQWUDFNHU�RUJ�UHSRUW�OHWWHU�WR�WKH�X�V�VHFXULWLHV�DQG�H[FKDQJH�FRPPLVVLRQ�� &DUERQ�7UDFNHU�,QLWLDWLYH��³$�EDVHOLQH�VXUYH\�RI�FOLPDWH�GLVFORVXUHV�E\�IRVVLO�IXHO�FRPSDQLHV��5HFRJQLVLQJ�5LVN��3HUSHWXDWLQJ�8QFHUWDLQW\�DYDLODEOH�DW�KWWS��ZZZ�FDUERQWUDFNHU�RUJ�UHSRUW�FOLPDWHULVNGLVFORVXUHV��

24 | WWW.CERES.ORG

3.2 INVESTOR ENGAGEMENT: CERES AND IIGCC REVIEW OF INVESTOR ENGAGEMENT47 While investors have for years been engaging with companies on the risks from climate change, 2013 was a watershed year when over 75 investors representing more than $3.5 trillion in assets issued letters to 45 RI�WKH�ZRUOG¶V�ODUJHVW�RLO��JDV��FRDO�DQG�HOHFWULF�XWLOLW\�FRPSDQLHV48 calling on them to assess and disclose the potential exposure they faced to carbon asset risk.49�7KLV�LQYHVWRU�OHWWHU�ZDV�WKH�¿UVW�VWHS�RI�WKH�&DUERQ�$VVHW�5LVN�,QLWLDWLYH�DQG�KDV�OHG�WR�D�VXVWDLQHG�HQJDJHPHQW�FDPSDLJQ�RUJDQL]HG�E\�&HUHV�DQG�,,*&&�DQG�VXSSRUWHG�through collaboration with Carbon Tracker.

The goals of the CAR Initiative were ambitious but straightforward:

1. To prevent shareholder capital from being wasted on developing high-carbon and high-cost fossil fuel reserves that are “unburnable” if the world is to avoid catastrophic climate change or may prove XQHFRQRPLF�LI�SULFHV�GHFOLQH��DQG�

2. To drive fossil fuel companies to acknowledge and plan for the escalating physical impacts of climate change such as higher temperatures, rising seas and stronger storms.

7KH�UDQJH�DQG�TXDOLW\�RI�UHVSRQVHV�YDULHG�JUHDWO\��VRPH�FRPSDQLHV�ZHUH�VSXUUHG�WR�WDNH�SRVLWLYH�actions and stake out meaningful positions in response to the initial letters:

Figure 11: CAR Initiative Responses

�� 7KLV�VHFWLRQ�IRFXVHV�SULPDULO\�RQ�UHVROXWLRQV�WKDW�UHTXLUH�UHSRUWLQJ��KRZHYHU��LW�LV�LPSRUWDQW�WR�QRWH�WKDW�LQYHVWRUV�KDYH�¿OHG�UHVROXWLRQV�FDOOLQJ�IRU�DFWLRQV�UDQJLQJ�IURP�HVWDEOLVKLQJ�VFLHQFH�EDVHG�JUHHQKRXVH�JDV�WDUJHWV�WR�PHWKDQH�UHGXFWLRQV�WR�H[SOLFLWO\�UHGXFLQJ�FDSLWDO�H[SHQGLWXUHV��)RU�PRUH�LQIRUPDWLRQ�RQ�WKRVH�UHVROXWLRQV��VHH�³&DUERQ�$VVHW�5LVN��$�5HYLHZ�RI�3URJUHVV�DQG�2SSRUWXQLWLHV´��-XQH��DYDLODEOH�DW�KWWS��ZZZ�FHUHV�RUJ�UHVRXUFHV�UHSRUWV�FDUERQ�DVVHW�ULVN�D�UHYLHZ�RI�SURJUHVV�DQG�RSSRUWXQLWLHV�YLHZ�� 6HH�$SSHQGL[��IRU�D�OLVW�RI�WKH�FRPSDQLHV�WKDW�UHFHLYHG�OHWWHUV�� &RSLHV�RI�LQGLYLGXDO�LQLWLDO�OHWWHUV�WR�RLO��JDV��FRDO��DQG�HOHFWULF�XWLOLWLHV�DYDLODEOH�DW�ZZZ�FHUHV�RUJ�FDUERQDVVHWULVN�� /HWWHU�IURP�$QGUHZ�*RXOG��&KDLUPDQ�WR�5\DQ�6DOPRQ�DW��$XJ�� ,G��DW�� /HWWHU�IURP�0DR�=HIHQJ��-RLQW�&RPSDQ\�6HFUHWDU\�WR�1DULQD�0QDWVDNDQLDQ��$SU�� /HWWHU�IURP�+LOGH�0HUHWH�1DIVWDG��6HQLRU�9LFH�3UHVLGHQW�WR�5\DQ�6DOPRQ�DW��2FW�� /HWWHU�IURP�0DUWLQ�'HIIRQWDLQHV��9LFH�3UHVLGHQW�WR�5\DQ�6DOPRQ�DW��$SU�� /HWWHU�IURP�)UDQFHVFR�*DWWHL��6HQLRU�9LFH�3UHVLGHQW�WR�5\DQ�6DOPRQ�DW��-XQ��

BG Group • Explained that it has a ‘group-wide GHG target which applies to our equity-share emissions from all assets LQ�RXU�SRUWIROLR�ZKLFK�ZH�VHW�WR�DOLJQ�ZLWK�UHFRPPHQGDWLRQV�IURP�,3&&�DQG�,($��SSP�VFHQDULRV�50

�� 5HFRJQL]HG�WKDW�IRU�QDWXUDO�JDV�WR�FRQWULEXWH�PHDQLQJIXOO\�WR�FOLPDWH�JRDOV��PHWKDQH�KDV�WR�EH�FRQWUROOHG��%*�*URXS�H[SOLFLWO\�SRLQWHG�WR�WKH�UHFRPPHQGDWLRQ�RI�,*&&��,1&5��DQG�,,*&&�DV�LWV�UDWLRQDOH�IRU�MRLQLQJ�WKH�81¶V�&&$&�LQLWLDWLYH�WR�UHGXFH�PHWKDQH�HPLVVLRQV�51

�� 3RLQWHG�WR�LWV�GHFLVLRQ�QRW�WR�SXUVXH�$UFWLF��RLO�VDQGV��KHDY\�RLO��RU�FRDO�DV�D�VLJQDO�RI�LWV�FOLPDWH�FRPPLWPHQW�

PetroChina �� ,QGLFDWHG�VXSSRUW�IRU�D�JOREDO�FOLPDWH�DJUHHPHQW�� 5HFRJQL]HG�WKDW�&KLQD�KDV�HPEUDFHG�D�WDUJHW�RI�OLPLWLQJ�ZDUPLQJ�WR��&�DQG��SSP��DQG�SRLQWHG�WR�D�

ELQGLQJ�HPLVVLRQV�UHGXFWLRQ�WDUJHW�RI��52

Statoil �� 9RLFHG�VXSSRUW�IRU�D��&�JRDO�HYHQ�WKRXJK�LW�XOWLPDWHO\�FRQFOXGHG�LW�LV�³QRW�D�UHDOLVWLF�RXWFRPH�´53

Total �� 9RLFHG�VXSSRUW�IRU�³LQWHUQDWLRQDO�DQG�SURJUHVVLYH�DJUHHPHQWV�RQ�FOLPDWH�´54

Eni �� 6XSSRUWHG�D�SRVW��FOLPDWH�DJUHHPHQW�DQG�GLVFXVVHG�D�VWUDWHJ\�WR�UHGXFH�³FDUERQ�LQWHQVLW\´�WKDW�KDV�EHHQ�LQ�SODFH�VLQFH��55

Suncor �� 5HFRJQL]HG�WKH�³LPSRUWDQFH´�RI�ZRUNLQJ�WR�NHHS�&2��EHORZ��SSP��DQG�FRPPLWWHG�WR�HVWDEOLVKLQJ�*+*�UHGXFWLRQ�WDUJHWV�IRU��\HW�WR�EH�VHW��56


6WHSSLQJ�EDFN�IURP�WKH�GHWDLOV�RI�HDFK�FRPSDQ\¶V�UHFRJQLWLRQ�RI�FDUERQ�DVVHW�ULVNV��WKH�OHWWHUV�HYLQFHG�DQ�HPHUJLQJ�WUHQG�LQ�IRVVLO�IXHO�FRPSDQLHV�IURP�GLHUHQW�VHFWRUV�GHYHORSLQJ�GLVWLQFW�SRVLWLRQV�RQ�addressing climate change, which suggests the potential for the political process to become more HHFWLYH��7KH�¿UVW�VLJQV�RI�WKLV�VSOLW�EHJDQ�WR�HPHUJH�DV�FKHDS�QDWXUDO�JDV�VWDUWHG�WR�GLVORGJH�FRDO¶V�JULS�RQ�SRZHU�JHQHUDWLRQ�LQ�WKH�8�6��WKH�¿UVW�UHVSRQVHV�WR�WKH�&DUERQ�$VVHW�5LVN�,QLWLDWLYH�OHWWHU�FRQ¿UPHG�WKDW�FKDQJH��DV�RQH�DIWHU�DQRWKHU�RLO�DQG�JDV�FRPSDQ\�SRLQWHG�WR�FRDO�DV�WKH�RYHUZKHOPLQJ�

source of carbon dioxide emissions and the most likely fossil fuel to be stranded. At the same time, these companies pointed to their ability to shift towards natural gas to reduce their “carbon intensity” DQG�WDNH�XS�FRDO¶V�PDUNHW�VKDUH�LQ�WKH�SRZHU�JHQHUDWLRQ�VHFWRU�DV�WKH�SULPDU\�UHDVRQ�WKDW�WKH\�ZRXOG�not see major stranding.59

Shareholders followed up on the more than 20 responses investors received to their carbon asset risk letters with formal shareholder proposals to the companies, to be voted upon at their annual general meetings. In the U.S., shareholders conducted a three-pronged approach.

First, they added the “Carbon Asset Risk” resolution to the several climate change-related resolutions DOUHDG\�EHLQJ�RHUHG�DW�IRVVLO�IXHO�FRPSDQLHV�60 While there is some variation amongst these UHVROXWLRQV��WKH\�W\SLFDOO\�IRFXV�RQ�WKH�¿QDQFLDO�ULVNV�IDFHG�E\�WKH�FRPSDQ\�LQ�DQ\�VFHQDULR�LQ�ZKLFK�WKH�LQWHUQDWLRQDOO\�UHFRJQL]HG�JRDO�RI�OLPLWLQJ�ZDUPLQJ�WR��&�LV�DSSUR[LPDWHG��7KH�YDVW�PDMRULW\�of these resolutions have been allowed by the SEC, suggesting that resolutions pertaining to risks ÀRZLQJ�IURP�WKH�LPSRUWDQW�SROLF\�WDUJHW�RI�OLPLWLQJ�ZDUPLQJ�WR�QR�PRUH�WKDQ��&�DUH�SHUIHFWO\�acceptable. The carbon asset risk resolution has now been placed on the proxy ballot at over 20 FRPSDQLHV��LQ�PDQ\�FDVHV�UHFHLYLQJ�PRUH�WKDQ��VKDUHKROGHU�DSSURYDO²D�YHU\�VLJQL¿FDQW�QXPEHU�IRU�VKDUHKROGHU�DSSURYDOV�WKDW�KDYH�EHHQ�XQDQLPRXVO\�RSSRVHG�E\�WKH�FRPSDQ\¶V�ERDUG��

The most notable response to these resolutions came from ExxonMobil. At the end of 2013, Arjuna Capital, As You Sow, The Christopher Reynolds Foundation and the Tri-State Coalition began a series RI�HQJDJHPHQWV�UHJDUGLQJ�FDUERQ�DVVHW�ULVN�ZLWK�([[RQ0RELO��,Q�UHVSRQVH�WR�UHVROXWLRQV�¿OHG�E\�

�� /HWWHU�IURP�$UOHQH�6WURP��9LFH�3UHVLGHQW�WR�5\DQ�6DOPRQ�DW��1RY�� 6HH�3HDERG\�(QHUJ\�&RUSRUDWH�5HVSRQVLELOLW\�5HSRUW�DYDLODEOH�DW�KWWS��ZZZ�SHDERG\HQHUJ\�FRP�FRQWHQW��SXEOLFDWLRQV�FVU�UHSRUWV�� /HWWHU�IURP�6$�1LNRVL��&(2�WR�5\DQ�6DOPRQ��-DQ�� 7KH�SRWHQWLDO�SLWIDOOV�RI�UHO\LQJ�WRR�KHDYLO\�RQ�QDWXUDO�JDV�DV�D�KHGJLQJ�VWUDWHJ\�DUH�GHWDLOHG�LQ�&DUERQ�7UDFNHU�,QLWLDWLYH¶V�UHFHQW�UHSRUW��&DUERQ�6XSSO\�&RVW�&XUYHV��(YDOXDWLQJ�WKH�5LVN�WR�1DWXUDO�*DV��DYDLODEOH�DW�KWWS��ZZZ�FDUERQWUDFNHU�RUJ�UHSRUW�JDVFRVWFXUYH�� 9DOHULH�9ROFRYLFL��³,QYHVWRU�JURXS�GHPDQGV�IRVVLO�IXHO�FRPSDQLHV�GLVFORVH�FDUERQ�DVVHW�ULVN�´�5HXWHUV��)HEUXDU\��DYDLODEOH�DW�KWWS��ZZZ�UHXWHUV�FRP�DUWLFOH��XVD�FOLPDWH�GLVFORVXUH�LG86/�1�/+�3%��

BHP Billiton • Recognized that the world must pursue:57

- Limiting climate change to the lower end of the IPCC emission scenarios in line with current international agreements;

- Providing access to the affordable energy required to continue economic growth;- Implementing a price on carbon in a way that addresses competitiveness concerns and achieves lowest

FRVW�HPLVVLRQV�UHGXFWLRQV�

Exxaro • Accepted the IPCC assessment of climate change and asserted its goal of becoming carbon through a range of initiatives including:58

- Carbon Capture and Storage (CCS) for coal plants�� (QHUJ\�HI¿FLHQF\�WKURXJKRXW�LWV�RSHUDWLRQV- Co-generation power plants- Wind energy projects- Management of climate impacts through increased resilience

26 | WWW.CERES.ORG

these groups, ExxonMobil agreed to conduct and issue a report assessing its vulnerability to carbon asset risk. Exxon released the report on March 31, 2014.61 Though the conclusions Exxon reached were at odds with the premises of the CAR Initiative, largely due to its refusal to consider a 2C VFHQDULR�DV�D�SRVVLELOLW\��WKLV�UHSUHVHQWHG�D�VLJQL¿FDQW�GHSDUWXUH�IRU�([[RQ�IURP�LWV�XVXDO�VWUDWHJ\�RI�setting its own terms for the debate.62�)RU�WKH�¿UVW�WLPH��D�PDMRU²LQ�PDQ\�SHRSOH¶V�PLQG��WKH�PDMRU²LQWHJUDWHG�RLO�DQG�JDV�FRPSDQ\�ZDV�HQWHULQJ�LQWR�WKH�FRQYHUVDWLRQ�RQ�LQYHVWRUV¶�WHUPV�DQG�SURYLGLQJ�new insight into the assumptions that drive its business decisions.

Second, investors have begun to highlight the need to change the executive compensation structures at fossil fuel companies focusing on compensation schemes which reward reserve replacements of HYHQ�WKH�KLJKHVW�FRVW�FDSLWDO�SURMHFWV��,Q�UHVSRQVH�WR�LQYHVWRU�HRUWV�E\�,,*&&�PHPEHU��0DWWKHZ�Crossman of Rathbone Greenbank, Shell made some adjustment to its executive compensation structure. In its 2014 executive remuneration report, Shell announced that the long-term incentive program performance measures would be altered and that “[f]or awards from 2014 onwards, the relative hydrocarbon production growth performance measure has been replaced by relative return RQ�DYHUDJH�FDSLWDO�HPSOR\HG��52$&(��JURZWK��JLYLQJ�JUHDWHU�IRFXV�RQ�FDSLWDO�HFLHQF\�´63

,Q��WKH�8QLWDULDQ�8QLYHUVDOLVW�$VVRFLDWLRQ�DQG�WKH�3UHVE\WHULDQ�&KXUFK��86$��¿OHG�D�UHVROXWLRQ�DW�&RQRFR3KLOOLSV�SXUVXLQJ�WKLV�DQJOH��7KH�UHVROXWLRQ�VRXJKW�WR�µGH�OLQN¶�H[HFXWLYH�FRPSHQVDWLRQ�IURP�UHVHUYHV�UHSODFHPHQW�E\�UHTXHVWLQJ�WKDW�&RQRFR3KLOOLSV

‘adopt a policy that it will not use ‘reserve additions,’ ‘reserve

replacement ratio’ (‘RRR’) or any other metric based on reserves

to determine the amount of any senior executive’s incentive

compensation without adjusting reserves to exclude barrels of oil

equivalent that are not economically producible under a Demand

Reduction Scenario in which the price of a barrel of Brent crude oil

decreases to $65….’

3UR[\�DGYLVRU\�¿UP�,66�UHFRPPHQGHG�DJDLQVW�WKH�UHVROXWLRQ�EHFDXVH�LW�YLHZHG�WKH��EEO�¿JXUH�WR�EH�WRR�SUHVFULSWLYH��KRZHYHU��ZLWK�RLO�QRZ�KDYLQJ�VWD\HG�LQ�WKH��EEO�UDQJH�IRU�PRQWKV��VKDUHKROGHUV�DQG�SUR[\�DGYLVRU\�¿UPV�PD\�YLHZ�VXFK�UHVROXWLRQV�GLHUHQWO\��7KHUHIRUH��ZKLOH�WKH�resolution received only 5.8% of shareholder votes in 2015, it remains to be seen whether, in light of the persistent low oil price environment, investors are not more concerned about the practice of rewarding executives for replacing reserves with barrels of oil that are more costly than prevailing market prices.

7KLUG��LQ�DQ�HRUW�OHG�E\�WKH�1HZ�<RUN�&LW\�&RPSWUROOHU¶V�2FH�DQG�FRRUGLQDWHG�ZLWK�&HUHV�,1&5��shareholders in U.S. companies have sought the ability to nominate their own candidates for the ERDUG�DQG�KDYH�WKRVH�FDQGLGDWHV�DGGHG�WR�WKH�FRPSDQ\¶V�SUR[\�IRU�YRWLQJ�SXUSRVHV��7KLV�³SUR[\�DFFHVV´�FDPSDLJQ�ZDV�WDUJHWHG�DW�FRPSDQLHV�WKDW�ZHUH�GH¿FLHQW�LQ�RQH�RU�PRUH�RI�WKUHH�DUHDV²RQH�RI�those areas was climate change and therefore swept in many fossil fuel companies.64

�� ([[RQ�0RELO��(QHUJ\�DQG�&DUERQ��0DQDJLQJ�WKH�5LVNV��0DUFK��DYDLODEOH�DW�KWWS��FGQ�H[[RQPRELO�FRP�a�PHGLD�JOREDO�¿OHV�RWKHU��FRYHU�OHWWHU�WR�DUMXQD�capital.pdf.�� $QGUHZ�/RJDQ��,QYHVWRUV�TXHVWLRQ�IRUHFDVWV�IURP�([[RQ0RELO�DQG�RWKHU�RLO�FRPSDQLHV��7KH�*XDUGLDQ��'HF��DYDLODEOH�DW�KWWS��ZZZ�WKHJXDUGLDQ�FRP�VXVWDLQDEOH�EXVLQHVV��GHF��LQYHVWRUV�H[[RQPRELO�ELJ�RLO�IRUHFDVWV�FOLPDWH�FKDQJH�HQYLURQPHQW�� 5R\DO�'XWFK�6KHOO��6(&�)RUP��)��S��DYDLODEOH�DW�KWWS��ZZZ�VHF�JRY�$UFKLYHV�HGJDU�GDWD��G��G��I�KWP�� )RU�PRUH�GHWDLOHG�LQIRUPDWLRQ�RQ�WKH�1HZ�<RUN�&LW\�&RPSWUROOHU¶V�%RDUG�$FFRXQWDELOLW\�3URMHFW�YLVLW��KWWS��FRPSWUROOHU�Q\F�JRY�ERDUGURRP�DFFRXQWDELOLW\��


The campaign was immensely successful this past year. 23 of 33 resolutions that went to a vote at fossil fuel companies received more than 50% support—an unprecedented level of support FRQVLGHULQJ�WKDW�LQ�YLUWXDOO\�DOO�RI�WKRVH�LQVWDQFHV��WKH�FRPSDQLHV¶�ERDUGV�UHFRPPHQGHG�DJDLQVW�the resolutions.65 Notably, Apache Energy Corporation, one of the energy companies that has been most engaged with investors over a sustained period of time, supported the proxy access resolution demonstrating just how important long-term engagement can be in moving companies.66

$�OLVW�RI�WKH�FDUERQ�DVVHW�ULVN��SUR[\�DFFHVV�DQG�FDUERQ�DVVHW�ULVN�UHODWHG�UHVROXWLRQV�¿OHG�WKH�SDVW�WZR�\HDUV��VHH�$SSHQGL[��VXJJHVWV�ERWK�LQFUHDVLQJ�FRQFHUQ�IURP�LQYHVWRUV�DV�WR�WKH�¿QDQFLDO�implications of climate change and a willingness to call for fundamental changes to company strategy for thriving in a carbon-constrained world.

Engagement of investors with fossil fuel companies on climate and carbon asset risk in the U.S. has increased over the past two years as shown by the following table, which includes the total number UHVROXWLRQV�¿OHG�67

Figure 12: Proxy Resolutions

Increased entrenchment from some of the North American fossil fuel companies this past proxy season show a need for even more coordinated action during the 2016 proxy season.

Similar resolutions have met with even greater success in Europe. European investors, supported by IIGCC, have been actively engaged with European oil and gas companies and in January 2015 XVKHUHG�LQ�WKH�¿UVW�H[DPSOHV�RI�IRVVLO�IXHO�FRPSDQLHV�HQGRUVLQJ�FOLPDWH�UHVROXWLRQV�DV�6KHOO��%3��DQG�6WDWRLO�DQQRXQFHG�VXSSRUW�IRU�FDUERQ�DVVHW�ULVN�UHVROXWLRQV�GHYHORSHG�DQG�¿OHG�E\�WKH�³$LPLQJ�IRU�$�Coalition.”68�7KHVH�UHVROXWLRQV�WLWOHG�³6WUDWHJLF�5HVLOLHQFH�IRU��DQG�EH\RQG�´�ZHUH�¿OHG�DW�6KHOO��BP, and Statoil and received more than 98% approval from shareholders.69 Although the “Aiming for A” resolutions were endorsed by company management, this endorsement may be suggestive of the growing recognition within some corners of the fossil fuel sector that a broad range of shareholders are genuinely concerned about carbon asset risks. The “Aiming for A” resolutions asked the companies to report, on an ongoing and annual basis, on the following issues:

�� &RULQQH�5DPH\��³&RPSWUROOHU�6FRWW�6WULQJHU�LV�/DXGHG�IRU�:RUN�RQ�6KDUHKROGHUV�´�:DOO�6WUHHW�-RXUQDO��6HSWHPEHU��DYDLODEOH�DW�KWWS��ZZZ�ZVM�FRP�DUWLFOHV�FRPSWUROOHU�VFRWW�VWULQJHU�LV�ODXGHG�IRU�ZRUN�RQ�VKDUHKROGHUV�� 7HUU\�:DGH��³$SDFKH�VKDUHKROGHUV�DSSURYH�SUR[\�DFFHVV�SURSRVDO�´�5HXWHUV��0D\��DYDLODEOH�DW�KWWS��ZZZ�UHXWHUV�FRP�DUWLFOH��XV�DSDFKH�DJP�LG86.%1�1=�(=�� 1RWH��VRPH�UHVROXWLRQV�PD\�QRW�KDYH�JRQH�WR�YRWH�GXH�WR�DJUHHPHQWV�IRU�ZLWKGUDZDOV��)RU�PRUH�GHWDLO�RQ�WKH�UHVXOWV�RI�WKH��DQG��SUR[\�VHDVRQV�VHH��VKDUHKROGHU�UHVROXWLRQV�UHODWHG�WR�FOLPDWH�FKDQJH�DQG�IRVVLO�IXHO�XVH�\LHOG�VWURQJ�UHVXOWV�GXULQJ��SUR[\�VHDVRQ�DYDLODEOH�DW�KWWS��ZZZ�FHUHV�RUJ�SUHVV�SUHVV�UHOHDVHV��VKDUHKROGHU�UHVROXWLRQV�UHODWHG�WR�FOLPDWH�FKDQJH�DQG�IRVVLO�IXHO�XVH�\LHOG�VWURQJ�UHVXOWV�GXULQJ��SUR[\�VHDVRQ"VHDUFKWHUP SUR[\��,QYHVWRUV�VHFXUH�JURXQGEUHDNLQJ�FRUSRUDWH�FRPPLWPHQWV�WR�SURWHFW�IRUHVWV��UHGXFH�FDUERQ�HPLVVLRQV�DYDLODEOH�DW��KWWS��ZZZ�FHUHV�RUJ�SUHVV�SUHVV�UHOHDVHV�LQYHVWRUV�VHFXUH�JURXQGEUHDNLQJ�FRUSRUDWH�FRPPLWPHQWV�WR�SURWHFW�IRUHVWV�UHGXFH�FDUERQ�HPLVVLRQV"VHDUFKWHUP ��SUR[\�� +HOHQ�:LOGVPLWK�RI�&&/$�OHG�WKH�HQJDJHPHQW�ZLWK�%3�DQG�0DWW�&URVVPDQ�OHG�WKH�HQJDJHPHQW�ZLWK�6KHOO�ZKLOH�$3��DQG�$3��HQJDJHG�ZLWK�6WDWRLO��6HH�KWWS��ZZZ�ODSIIRUXP�RUJ�/1HZV�)XOO/LVWLQJV�,QVWLWXWLRQDO�6XSSRUWHUV�5HVROXWLRQ��%3$*0�$V�DW��WK$SULO��SGI��KWWS��ZZZ�DS��VH�HQ�)LQDQFLDO�LQIRUPDWLRQ�3UHVV�UHOHDVHV��DS��VXEPLWV�VKDUHKROGHU�SURSRVDOV�IRU�LQFUHDVLQJ�FOLPDWH�UHSRUWLQJ�RI�VWDWRLO�� 0RUH�GHWDLOV�RQ�WKH�YRWHV�FDQ�EH�IRXQG�DW�KWWSV��ZZZ�FKXUFKRIHQJODQG�RUJ�PHGLD�FHQWUH�QHZV��YRWH�IRU�FOLPDWH�FKDQJH�UHVROXWLRQ�DW�ES�DJP�DVS[�DQG�DW�KWWS��ZZZ�ODSIIRUXP�RUJ�QHZV�¿OHV�0HGLD5HOHDVH$LPLQJIRU$,QYHVWRU&RDOLWLRQ:HOFRPHV'HFLVLYH6KHOO$*0&OLPDWH9RWH��WK0D\��SGI�

Resolutions 2013 2014 2015

Climate resolutions 110 150 167

GHG Targets 4 20 28

Proxy Access/Governance

0 3 41

CAR resolutions 5 13 15

28 | WWW.CERES.ORG

�� 7HVWLQJ�DVVHW�SRUWIROLR�UHVLOLHQFH�WR�WKH�,($�VFHQDULRV��LQFOXGLQJ�WKH��&�VFHQDULR�

�� .H\�SHUIRUPDQFH�LQGLFDWRUV�DQG�H[HFXWLYH�LQFHQWLYHV�

�� /RZ�&DUERQ�5'�VWUDWHJLHV�

• Public Policy engagements on climate issues.

It is no coincidence that these three companies were also among the six European majors who joined together to send a letter to the UN voicing their support for global carbon pricing mechanisms and among the eight oil companies who will be meeting in Paris this month to discuss their plans to HQJDJH�RQ�FOLPDWH��0DQ\�KDYH�FULWLFL]HG�HQJDJHPHQW�VWUDWHJLHV�IRU�IRFXVLQJ�RQ�GLVFORVXUHV��KRZHYHU��LW�is clear that engagement has resulted in real, substantive actions on the ground including cancellation of risky, costly projects. Three prime examples of actions that go beyond disclosure are included below:

Statoil provided one of the most detailed responses to the initial CAR letter and has a history of engaging with shareholders on sustainability issues at the highest levels of the company. In September 2014 after extensive engagement with Mercy Investment Services and Boston Common Asset Management, Statoil deferred the Corner oil sands project in Alberta for at least three years and DQQRXQFHG�WKDW�LW�ZRXOG�EH�UHYLHZLQJ�DOO�RI�LWV�SURMHFWV�DQG�SULRULWL]LQJ�RQO\�WKH�PRVW�FRPSHWLWLYH�70 ,Q��6WDWRLO�FKRVH�D�QHZ�&(2��(OGDU�6DHWUH��ZKR�SUHYLRXVO\�VHUYHG�DV�WKH�KHDG�RI�WKH�FRPSDQ\¶V�renewable energy group.71 Statoil also announced that it would defer plans for Arctic drilling.72 In addition, as described above, Statoil is one of the only oil majors to conduct an analysis of the impacts RI�D��GHJUHH�VFHQDULR�RQ�LWV�DVVHWV��6WDWRLO¶V�DQDO\VLV�FRQFOXGHG�WKDW�WKH��GHJUHH�WDUJHW�FRXOG�EH�DFKLHYHG��FRQWUDU\�WR�WKH�FODLPV�RI�VRPH�RI�LWV�FRPSHWLWRUV��DQG�6WDWRLO�DOVR�UHFRJQL]HG�WKDW�D�IDLOXUH�WR�PHHW�WKH��GHJUHH�WDUJHW�ZRXOG�UHVXOW�LQ�VHULRXV�HFRQRPLF�FRQVHTXHQFHV�WKDW�FRXOG�KDYH�QHJDWLYH�FRQVHTXHQFHV�RQ�GHPDQG�73

1HZ¿HOG�([SORUDWLRQ�FKDQJHG�LWV�6(&�GLVFORVXUHV�LQ�GLUHFW�UHVSRQVH�WR�VKDUHKROGHU�HQJDJHPHQW��1HZ¿HOG�LV�QRZ�RQH�RI�WKH�RQO\�RLO�DQG�JDV�FRPSDQLHV�WR�XVH�WKH�³5HVHUYH�6HQVLWLYLW\�7DEOH´�LQ�WKHLU�10-K reports.74�7KLV�WRRO�ZDV�GHYHORSHG�E\�WKH�6(&�LQ��DV�SDUW�RI�LWV�HRUWV�WR�DPHQG�LWV�UHVHUYH�reporting rules. The sensitivity table provides investors with important data on the risk to reserve value for a broader range of oil prices.

Of the North American majors, only ConocoPhillips has publicly endorsed the use of scenario planning that includes an analysis of three scenarios that would result in a 50% chance of limiting global average temperature rise to 2C. According to ConocoPhillips: “We have integrated carbon-restricted scenarios into the strategic portfolio planning process to test our portfolio, and have developed annual GHG price forecasts for companywide use in long-range planning and project evaluation.”75 However, ConocoPhillips has not disclosed how it uses these scenarios to inform capital planning decisions and has not publicly disclosed information about the methodologies and assumptions used to develop the scenarios or the range of impacts that each scenario would have on its portfolio of assets.

�� 6HH�6WDWRLO�DQQRXQFHPHQW�DYDLODEOH�DW�KWWS��ZZZ�VWDWRLO�FRP�HQ�1HZV$QG0HGLD�1HZV��3DJHV��6HSWB&RUQHU3RVWSRQHPHQW�DVS[��0HUF\�,QYHVWPHQW�DQQRXQFHPHQW�DYDLODEOH�DW�KWWS��ZZZ�PHUF\LQYHVWPHQWVHUYLFHV�RUJ�FRPPXQLW\�LQYHVWLQJ�QHZV��71� 0LNDHO�+ROWHU��³6WDWRLO�3LFNV�$FWLQJ�&(2�DV�3HUPDQHQW�%RVV�DIWHU�/XQG�´�%ORRPEHUJ�%XVLQHVV��)HE��DYDLODEOH�DW�KWWS��ZZZ�EORRPEHUJ�FRP�QHZV�DUWLFOHV��VWDWRLO�DSSRLQWV�HOGDU�VDHWUH�DV�QHZ�FHR�WR�VXFFHHG�KHOJH�OXQG�� 0LNDHO�+ROWHU��³6WDWRLO�3XWV�$UFWLF�([SORUDWLRQ�RQ�+ROG�DIWHU�2LO�3ULFH�3OXQJH�´�%ORRPEHUJ�%XVLQHVV��-DQ��DYDLODEOH�DW�KWWS��ZZZ�EORRPEHUJ�FRP�QHZV�DUWLFOHV��VWDWRLO�SXWV�DUFWLF�H[SORUDWLRQ�RQ�KROG�DIWHU�RLO�SULFH�SOXQJH�� 6WDWRLO��(QHUJ\�3HUVSHFWLYHV��-XQH��DYDLODEOH�DW�KWWS��ZZZ�VWDWRLO�FRP�HQ�1HZV$QG0HGLD�1HZV��'RZQORDGV�(QHUJ\��3HUVSHFWLYHV��SGI�� 1HZ¿HOG�([SORUDWLRQ��.�� 6HH�&RQRFR3KLOOLSV�ZHEVLWH�DYDLODEOH�DW�KWWS��ZZZ�FRQRFRSKLOOLSV�FRP�VXVWDLQDEOH�GHYHORSPHQW�HQYLURQPHQW�FOLPDWH�FKDQJH�PDQDJLQJ�ULVNV�DQG�RSSRUWXQLWLHV�3DJHV�FDUERQ�DVVHW�ULVN�DVS[��


BHP Billiton has issued one of the most detailed analyses to date on the potential impacts that PXOWLSOH��GHJUHH�VFHQDULRV�FRXOG�KDYH�RQ�LWV�SRUWIROLR��%+3�%LOOLWRQ¶V�UHSRUW�UHSUHVHQWV�D�VLJQL¿FDQW�VWHS�IRUZDUG��$OWKRXJK�%+3�%LOOLWRQ�FRQFOXGHV�WKDW�LW�ZLOO�QRW�VHH�VLJQL¿FDQW�DVVHW�VWUDQGLQJ��WKH�reasoning behind that conclusion represents a sea change from the premise relied upon by Exxon and Shell in earlier responses. Instead of dismissing any possibility of achieving the globally agreed XSRQ��GHJUHH�WDUJHW��%+3�%LOOLWRQ�UHFRJQL]HV�WKDW�ZDVWHG�FDSLWDO�LV�D�WKUHDW��DQG�HVVHQWLDOO\�FRPPLWV�to adjust its allocation of capital expenditures to address the kinds of triggers and events that create carbon asset risk to mitigate any damage to its portfolio of reserves and resources.76

Figure 13: 20-year Average Business EBITDA Contribution

�� %+3�%LOOLWRQ��³&OLPDWH�&KDQJH��3RUWIROLR�$QDO\VLV�´��³'HSHQGLQJ�RQ�WKH�VSHHG�RI�WUDQVLWLRQ��DQG�WKH�HQHUJ\�FKRLFHV�PDGH�GXULQJ�WKH�WUDQVLWLRQ��ZH�H[SHFW�WKHUH�ZLOO�EH�RSSRUWXQLWLHV�WR�PLWLJDWH�WKH�LPSDFW�RQ�SRUWIROLR�YDOXH�WKURXJK�VHOHFWLYHO\�LQYHVWLQJ�LQ�WKRVH�FRPPRGLWLHV�WKDW�DUH�SUHIHUUHG�RU�DGYDQWDJHG�GXH�WR�SROLF\�RU�WHFKQRORJLFDO�EUHDNWKURXJKV�WKDW�HYHQWXDWH�RU�GXH�WR�WKHLU�ORZHU�HPLVVLRQV�LQWHQVLW\�´��

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(RUWV�OLNH�WKRVH�SXW�IRUZDUG�E\�&RQRFR3KLOOLSV��6WDWRLO��DQG�%+3�%LOOLWRQ�SURYLGH�YDOXDEOH��information, but they would be strengthened by providing more insight into the methodologies used to develop the 2 degree scenarios. Revealing the details behind the development of these scenarios would advance understanding of additional pathways for reaching the 2 degree target as well as provide an opportunity to check the inputs against current trends and forecasts. Without information about key assumptions such as: (1) the primary drivers of change (e.g. technological, regulatory, or PDUNHW�EDVHG��IRUHFDVW�FKDQJHV�LQ�WKH�SURSRUWLRQ�RI�GHPDQG�EHLQJ�PHW�E\�SDUWLFXODU�HQHUJ\��UHVRXUFHV�LQFOXGLQJ�HFLHQF\��HQHUJ\�VWRUDJH��DQG�UHQHZDEOH�HQHUJ\��WKH�OHYHO�RI�DGRSWLRQ�RI��YDULRXV�W\SHV�RI�ORZ�FDUERQ�WHFKQRORJLHV�RU�FDUERQ�PLWLJDWLRQ�WHFKQRORJLHV��DQG��WKH�IRUHFDVWV��IRU�SULFHV��FRVWV��DQG�FDSDFLW\�LW�LV�GLFXOW�WR�DVVHVV�WKH�OHYHO�RI�FRQ¿GHQFH�WKDW�FDQ�EH�DWWULEXWHG�WR��WKH�DQDO\VLV��7KLV�DGGLWLRQDO�OHYHO�RI�GHWDLO�ZRXOG�SURYLGH�LQYHVWRUV�ZLWK�JUHDWHU�FRQ¿GHQFH�DERXW��D�FRPSDQ\¶V�FRPSHWLWLYH�SRVLWLRQLQJ�DPRQJ�LWV�SHHUV�ZKLOH�DOVR�FRQWULEXWLQJ�SRVLWLYHO\�WR�WKH��conversation about pathways to achieving the 2 degree target.

3.3 CARBON TRACKER’S ENGAGEMENT WITH OIL AND GAS COMPANY ASSESSMENT OF CLIMATE RISK The increase in engagement by investors has also led to additional analysis from informational intermediaries like Carbon Tracker. As one of the leading public voices in the debate, it is interesting WR�FRQVLGHU�WKH�JURZWK�DQG�RYHUDOO�UHDGHUVKLS�LQ�&DUERQ�7UDFNHU¶V�ZRUN��7KH�¿JXUH�EHORZ�VKRZV�WKH�breakdown of nearly 350,000 website views over a 15 month period of May 2014-August 2015.

Figure 14`: Carbon Tracker Website Access Data

In addition to public education, Carbon Tracker has been heavily involved in engaging fossil fuel companies on disclosures as well. As noted above, in March 2014, ExxonMobil published two GRFXPHQWV�UHVSRQGLQJ�WR�VKDUHKROGHU�UHTXHVWV�IURP�$UMXQD�&DSLWDO��$V�<RX�6RZ�DQG�WKH�&KULVWRSKHU�Reynolds Foundation for how it was addressing CAR. On May 16th, 2014 Royal Dutch Shell issued a SXEOLF�OHWWHU�µLQ�UHVSRQVH�WR�HQTXLULHV�IURP�VKDUHKROGHUV�UHJDUGLQJ�WKH�µFDUERQ�EXEEOH¶�RU�µVWUDQGHG�DVVHWV¶�LVVXH�¶�


7KH�HQJDJHPHQW�LWVHOI�ZDV�D�SRVLWLYH�GHYHORSPHQW��WKRXJK�&DUERQ�7UDFNHU�LGHQWL¿HG�VHYHUDO�shortcomings in the analysis that limited the usefulness of the disclosures for investors and published responses. The issues discussed below highlight the points that cause analysts to raise a risk premium ÀDJ�RYHU�WKH�IXQGDPHQWDO�SRVLWLRQV�WKH�FRPSDQ\�LV�WDNLQJ��7KHVH�GH¿FLHQFLHV�ZHLJK�LQ�IDYRU�RI�IXUWKHU�GLVFORVXUHV�WR�FODULI\�WKH�FRPSDQ\¶V�YLHZV��

Below, are some of the key issues Carbon Tracker focused on in responding to Royal Dutch Shell and ExxonMobil.77��&DUERQ�7UDFNHU¶V�DQDO\VLV�RI�WKHVH�GLVFORVXUHV�FOHDUO\�GHPRQVWUDWHV�WKH�LPSRUWDQFH�of having a dialogue in which assumptions and methodologies can be examined and corrected or supplemented.

A. Shell and Exxon address the risk of asset stranding, but dismiss it by largely focusing on the proven reserve base.

Shell does not believe that any of its proven reserves will become

‘stranded’ as a result of current or reasonably foreseeable future

legislation concerning carbon.

—Royal Dutch Shell

«�>:@H�DUH�FRQ¿GHQW�WKDW�QRQH�RI�RXU�K\GURFDUERQ�UHVHUYHV�DUH�QRZ�or will become “stranded”.

—ExxonMobil

It is promising that both Shell and Exxon focused on the risk of stranded assets, but they focused largely on proven reserves, depriving the market of an analysis of how a low-demand scenario would impact their resource base.

,Q�WKHLU��UHVSRQVHV��ERWK�6KHOO�DQG�([[RQ�GH¿QH�FDUERQ�DVVHW�ULVN�DV�LI�LW�UHIHUUHG�WR�SURYHQ�reserves only. This approach looks at a static snapshot of a given company which disguises the risk, since an ongoing “business as usual” re-investment program merely transfers value from “low carbon risk” proven reserves to future resources. Value will only be preserved – and stranded assets avoided ±�LI�WKH�FDVK�ÀRZ�IURP�WRGD\¶V�SURYHQ�UHVHUYHV�LV�QRW�UHGHSOR\HG�WR�QHZ�UHVRXUFHV��%XW�WKDW�LV�QRW�the way that oil companies are run. They are dynamic entities that continuously reinvest a material SURSRUWLRQ�RI�FDVK�ÀRZ�EDFN�LQWR�WKH�JURXQG��

B. Shell and Exxon suggest that even low-carbon scenarios require future investments, but provide little analysis of the delta between their planning scenarios and low-carbon scenarios.

The world will continue to need oil and gas for many decades to come,

supporting both demand, and oil & gas prices. As such, we do not

believe that any of our proven reserves will become “stranded”.78


77� &DUERQ�7UDFNHU�LVVXHG�RSHQ�UHVSRQVHV�WR�WKH�6KHOO�DQG�([[RQ�SXEOLFDWLRQV�DQG�WKHVH�FRPPHQWV�DUH�DGDSWHG�IURP�WKRVH�UHVSRQVHV�� /HWWHU�IURP�5R\DO�'XWFK�6KHOO�WR�,QYHVWRUV��0D\��DYDLODEOH�DW�KWWS��V��VWDWLF�VKHOO�FRP�FRQWHQW�GDP�VKHOO�QHZ�ORFDO�FRUSRUDWH�FRUSRUDWH�GRZQORDGV�SGI�LQYHVWRU�SUHVHQWDWLRQV��VUL�ZHE�UHVSRQVH�FOLPDWH�FKDQJH�PD\��SGI�

32 | WWW.CERES.ORG

The IEA in its World Energy Outlook 2013 examined production of

OLTXLGV�IURP�FXUUHQWO\�SURGXFLQJ�¿HOGV��LQ�WKH�DEVHQFH�RI�DGGLWLRQDO�investment, versus liquids demand, for both their lead “New Policies

Scenario” and for a “450 Scenario.” As shown in the chart above, in

ERWK�VFHQDULRV��WKHUH�UHPDLQV�VLJQL¿FDQW�OLTXLGV�GHPDQG�WKURXJK�2035, and there is a need for ongoing development and investment.

Without ongoing investment, liquids demand will not be met, leaving

the world short of oil.

—ExxonMobil

Carbon Tracker agrees with much of this analysis as most energy demand forecasts show that some OHYHO�RI�IRVVLO�IXHO�SURGXFWLRQ�ZLOO�EH�UHTXLUHG�LQ�WKH�IXWXUH�HYHQ�LQ�D�ORZ�FDUERQ�VFHQDULR��JLYHQ�natural decline rates. However, the level of investment will clearly be lower in (say) a 450 scenario ZKHQ�FRPSDUHG�WR�([[RQ¶V�³EXVLQHVV�DV�XVXDO´�VFHQDULR��&DSLWDO�H[SHQGLWXUH�UHTXLUHPHQWV�ZLOO�EH�similarly lower. Companies that continue to invest at the levels needed for “business-as-usual” run the risk of seeing their returns fall as prices react to weaker demand. Here, the risk that companies QHHG�WR�FRQVLGHU�LV�ZKDW�KDSSHQV�WR�SULFLQJ�LQ�D�PDUNHW�WKDW�WXUQV�WR�VHFXODU�GHFOLQH�DV�FKDUDFWHUL]HG�by a low-carbon scenario.

The box below looks at an analysis carried out by Carbon Tracker in Blueprint: Managing corporate risk from an energy transition: an oil and gas focus 2015.79

�� &DUERQ�7UDFNHU�,QLWLDWLYH��³7KH�)RVVLO�)XHO�7UDQVLWLRQ�%OXHSULQW�´�$SULO��DYDLODEOH�DW�KWWS��ZZZ�FDUERQWUDFNHU�RUJ�UHSRUW�FRPSDQ\EOXHSULQW��


Figure 15: ExxonMobil’s scenario exceeds the NPS CO2 emissions trajectory

Source: IEA World Energy Outlook 2014; ExxonMobil, 2015, Outlook for Energy; Shell, 2013, New Lens Scenarios80

C. Shell and Exxon contend that their risk assessment programs consider the relevant issues, but their disclosures raise additional questions. Each of the foregoing arguments from Shell and Exxon suggested potential gaps in their approach to carbon risk. However, both Shell and Exxon do disclose some steps they have taken, including establishing price bands for project screening and associating a carbon cost with the production of WKHLU�SURGXFWV��:KLOH�WKHVH�GLVFORVXUHV�SURYLGH�VRPH�YDOXH�WR�LQYHVWRUV�WKH\�DOVR�UDLVH�TXHVWLRQV�about the basics of how these risk assessment tools are actually employed. Additionally, the screens RHUHG�VXJJHVW�WKDW�WKH�FRPSDQLHV�PD\�QRW�EH�VWUHWFKLQJ�WR�WHVW�WKHLU�DVVHWV�DJDLQVW�WKH�ULVN�RI�D�ORZ�carbon energy transition.

+HUH��WKH�GLVFORVXUHV�E\�6KHOO�DQG�([[RQ�GLHU�VOLJKWO\�VR�ZH�GLVFXVV�WKHP�VHSDUDWHO\�

The energy industry has for decades been exposed to the sorts of

fundamental business risks outlined in your letter. These range

from, but are not limited to, regulatory risks, price risks to project

performance and competitiveness. Shell has a framework in place

when making new investment decisions that is designed to evaluate

the extent to which all of our projects are exposed to these various

risks.... For price risks we use a project screening value of $70 to $110

USD for our base Brent benchmark.81


�� 5R\DO�'XWFK�6KHOO��6FHQDULRV�DYDLODEOH�DW�KWWS��V��VWDWLF�VKHOO�FRP�FRQWHQW�GDP�VKHOO�QHZ�ORFDO�FRUSRUDWH�6FHQDULRV�'RZQORDGV�6FHQDULRVBQHZGRF�SGI�� 6KHOO��VXSUD�QRWH��DW��

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6KHOO¶V�GLVFORVXUH�RI�LWV�VFUHHQLQJ�UDQJH�ZDV�KHOSIXO�WR�LQYHVWRUV�E\�SURYLGLQJ�WKH�UDQJH�RI�SRWHQWLDO�SULFHV�FRQVLGHUHG��%XW�LW�DOVR�UHYHDOHG�WKDW��GHVSLWH�6KHOO¶V�GHFDGHV�RI�H[SHULHQFH�ZLWK�FRPPRGLW\�market risks, it was not using prices below $70 to screen projects. That the oil price fell below the screening range within twelve months is worrying. It may be that Shell did look at a $45-60 scenario as well but without knowing the probability that Shell assigned to this range, it is not of much help to investors. As Carbon Tracker noted in the Blueprint, the range of variables needs to EH�UHDOLVWLF��6KHOO¶V��UDQJH�KDV�DOUHDG\�SURYHQ�LQVXFLHQW�WR�FRYHU�FXUUHQW�SULFHV�WKDW�KDYH�ÀXFWXDWHG��LQ�RXU�YLHZ��EDVHG�XSRQ�WKH�VDPH�W\SHV�RI�ULVNV�WKDW�6KHOO�KDV�FRQVLGHUHG�RYHU�WLPH��This should be of concern to investors since it is not on account of the new demand risks posed by technologies such as electric vehicle penetration, or the synergies between EVs and solar/battery VWRUDJH�KDYH�QRW�\HW�FDSWXUHG�VLJQL¿FDQW�PDUNHW�VKDUH�82

0RUHRYHU��WKH�VFUHHQLQJ�SULFH�UHYHDOV�OLWWOH�LQIRUPDWLRQ�DERXW�WKH�SURMHFWHG�DQG�DFWXDO�FRVWV�RI�6KHOO¶V�development projects. Without such information, investors are hard-pressed to gauge risks to the SUR¿WDELOLW\�RI�6KHOO¶V�IXWXUH�SURGXFWLRQ��

We also set a project screening value for CO2 to evaluate the potential

economic impact of stricter CO2 related regulatory changes. This

VFUHHQLQJ�YDOXH�LV�FXUUHQWO\��WRQQH�RI�&2��HPLWWHG��7KLV�LV�applied as the economic base case across all of our projects. For short

OLIH�DVVHWV�RU�DVVHWV�ZLWKRXW�VLJQL¿FDQW�&2��HPLVVLRQV��WKH�H[WHQW�RI�the analysis is limited to the screening value. For longer life assets,

RU�WKRVH�ZLWK�KLJKHU�FDUERQ�ULVN�SUR¿OHV��NQRZQ�DV�³FDUERQ�FULWLFDO�projects,”, more extensive work is done.83


We interpret84�6KHOO¶V�&2��SULFH�DV�DSSO\LQJ�WR�XSVWUHDP�HPLVVLRQV�DVVRFLDWHG�ZLWK�H[WUDFWLRQ�ZKLOH�ignoring the potential downward pressure on prices that would likely be associated with carbon SULFLQJ�IRU�HQG�XVHUV��7KLV�XQGHUVWDWHV�WKH�SRWHQWLDO�WKUHDW�WR�UHWXUQV�IURP�6KHOO¶V��DQG�RWKHU�PDMRUV¶��projects from action on carbon.

6KHOO¶V�XVH�RI�D�&2��SULFH�VHHPV�WR�UHÀHFW�D�FRQVHQVXV�RI�WKH�VWURQJ�OLNHOLKRRG�RI�LQFUHDVLQJ�PHDVXUHV�to reduce carbon pollution, suggesting the “direction of travel” for future climate policy – that HPLVVLRQV�UHJXODWLRQ�ZLOO�LQFUHDVLQJO\�VTXHH]H�WKH�PDUJLQV�RI�IRVVLO�IXHO�SURMHFWV��+RZHYHU�DW�$40/tonne CO2, the economic impact on “upstream” activities amounts to only $1-2/bbl for most FRQYHQWLRQDO�RLO�SURMHFWV²D�OHYHO�GZDUIHG�E\�UHFHQW�PDUNHW�ÀXFWXDWLRQV�85 This suggests that, despite SHUFHLYLQJ�WKDW�FOLPDWH�FKDQJH�LV�D�VLJQL¿FDQW�SUREOHP�DQG�WKDW�DFWLRQ�PD\�EH�WDNHQ��6KHOO�EHOLHYHV�that action will have no meaningful impact on their business, and suggests that the carbon price HPSOR\HG�GRHV�QRW�VHUYH�DV�DQ�DGHTXDWH�WHVW�RI�WKH�EXVLQHVV�GHFLVLRQV�

7R�DVVHVV�WKH�IXOO�µSRWHQWLDO�HFRQRPLF�LPSDFW�RI�VWULFWHU�&2��UHODWHG�UHJXODWRU\�FKDQJHV�¶�6KHOO�QHHGV�WR�FRQVLGHU�KRZ�VXFK�FKDQJHV�PLJKW�DHFW�IXWXUH�GHPDQG�IRU�DQG�SULFH�RI�WKHLU�SURGXFWV��0RUH�rigorous analysis of project risks would thoroughly evaluate direct impacts on project costs and indirect impacts on project revenues (i.e. due to lower oil prices). Shell hints at performing this kind

�� 0LFKDHO�:��3DUNHU��%HUQVWHLQ��HW�DO��³$VLD�6WUDWHJ\��6KRXOGQ¶W�:H�$OO�%H�'HDG�%\�1RZ"´��0D\�� 6KHOO��VXSUD�QRWH�� &DUERQ�7UDFNHU�ZHOFRPHG�IXUWKHU�FODUL¿FDWLRQ�IURP�6KHOO�RQ�KRZ�LW�XVHV�&2��SULFHV�LQ�SURMHFW�HYDOXDWLRQ��WR�RXU�NQRZOHGJH��QR�VXFK�FODUL¿FDWLRQ�ZDV�IRUWKFRPLQJ�� ,Q�RXU�&DUERQ�6XSSO\�&RVW�&XUYHV�UHSRUW�ZH�FDOFXODWHG�DYHUDJH�OLIHF\FOH�&2��HPLVVLRQV�RI��W&2��EEO�±�YHUVXV�WKH�(3$¶V�HVWLPDWH�RI�FRPEXVWLRQ�RQO\�&2��HPLVVLRQV�IURP�RLO�RI��W&2��EEO��8VLQJ�QRQ�FRPEXVWLRQ�HPLVVLRQV�RI��W&2��EEO�DQG�PXOWLSO\LQJ�E\��WRQQH&2��UHVXOWV�LQ�D�FKDUJH�RI��EEO�


of analysis,86 but greater disclosure around how such analyses are performed would inform investors as to how rigorously Shell is integrating climate policy risk into its project analyses.

$V�QRWHG�LQ�VHFWLRQ��6KHOO�VXSSRUWHG�D�VKDUHKROGHU�UHVROXWLRQ�¿OHG�E\�WKH�$LPLQJ�IRU�$�FRDOLWLRQ�WKDW�SDVVHG�RYHUZKHOPLQJO\�DW�WKH��$QQXDO�*HQHUDO�0HHWLQJ�WKDW�UHTXLUHV�LW�WR�LPSURYH�LWV�reporting. Following through on that resolution presents an opportunity for Shell to address many of these issues.

We also address the potential for future climate-related controls,

including the potential for restriction on emissions, through the use

of a proxy cost of carbon…. Our proxy cost, which in some areas may

DSSURDFK��WRQ�RYHU�WKH�2XWORRN�SHULRG��LV�QRW�D�VXJJHVWLRQ�WKDW�JRYHUQPHQWV�VKRXOG�DSSO\�VSHFL¿F�WD[HV�

—ExxonMobil

([[RQ0RELO¶V�³SUR[\�FRVW�RI�FDUERQ´�µVHHNV�WR�UHÀHFW�DOO�W\SHV�RI�DFWLRQV�DQG�SROLFLHV�WKDW�governments may take over the Outlook period relating to the exploration, development, production, WUDQVSRUWDWLRQ�RU�XVH�RI�FDUERQ�EDVHG�IXHOV�¶87��7KLV�SUR[\�FDUERQ�FRVW�LV�³HPEHGGHG´�LQ�([[RQ¶V�2XWORRN�IRU�(QHUJ\��ZKLFK�LV�([[RQ¶V�VLQJOH�VFHQDULR�GHPDQG�DQDO\VLV��7KURXJK��WKH�SURMHFWHG�carbon cost varies from less than $20/tCO2 in some regions (e.g. Africa and the Middle East) to as high as $80/tCO2 in other regions. This level of regional detail helps investors to understand how companies are integrating climate risk into their capital investment decisions. However, like Shell, it LV�QRW�WUDQVSDUHQW�KRZ�([[RQ¶V�&2��SULFH�LV�DSSOLHG�88 For example, it is not clear whether the price is applied along the value chain of oil production, (including the largest portion of emissions which come from consumption of the products).

3.4 SUMMARIZING: QUANTIFYING THE DISCLOSURE RESULTS AS AT JUNE 2014: The CTI paper: ³5HFRJQL]LQJ�5LVN��3HUSHWXDWLQJ�8QFHUWDLQW\´89�LV�LQ�HHFW�D�VXPPDU\�RI�PXFK�RI�WKH�DERYH�XVLQJ�&'3V�TXHVWLRQQDLUH��%HORZ�LV�DQ�H[WUDFW�IURP�WKDW�SDSHU�

Methodology 7KH�UHSRUW�DQDO\VHV�GLVFORVXUHV�IURP�WKRVH�OLVWHG�IRVVLO�IXHO�FRPSDQLHV�E\�V\QWKHVL]LQJ��

L�� &7,¶V�OLVW�RI�WKH�WRS��FRDO��RLO�DQG�JDV�FRPSDQLHV�E\�UHVHUYHV�DV�RI�WKH��³:DVWHG�&DSLWDO�DQG�6WUDQGHG�$VVHWV´�UHSRUW��

LL�� WKRVH�IRVVLO�IXHO�FRPSDQLHV�WKDW�UHVSRQGHG�WR�&'3¶V��FOLPDWH�FKDQJH�TXHVWLRQQDLUH�DQG�RLO�DQG�JDV�PRGXOH�E\��WK�-XO\��DQG�

iii) the 20 responses to the Carbon Asset Risk (CAR) letters.

This resulted in 81 companies being included in the synthesis analysis as a sample representative of WKH�IRVVLO�IXHO�LQGXVWU\��RLO�DQG�JDV�FRPSDQLHV�DQG��FRDO�FRPSDQLHV��8QGHU�WKLV�DSSURDFK��VL[�respondents to the CAR letters were not included in the analysis.

�� ³&XUUHQW�DQG�IXWXUH�&2��UHJXODWLRQ�SROLFLHV�RI�WKH�PDUNHWV�LQWR�ZKLFK�WKH�DVVHW¶V�SURGXFWV�ZLOO�EH�VROG�DUH�HYDOXDWHG�LQFOXGLQJ��IRU�H[DPSOH��WKH�SRVVLEOH�LPSDFW�RI�ORZ�FDUERQ�IXHO�VWDQGDUGV�´��6KHOO��VXSUD�QRWH�� ([[RQ0RELO��(QHUJ\�DQG�&DUERQ�0DQDJLQJ�WKH�5LVNV��VXSUD�QRWH�� &'3��³8VH�RI�LQWHUQDO�FDUERQ�SULFH�E\�FRPSDQLHV�DV�DQ�LQFHQWLYH�DQG�VWUDWHJLF�SODQQLQJ�WRRO��D�5HYLHZ�RI�)LQGLQJV�IURP�&'3��GLVFORVXUH�´�'HFHPEHU��KWWSV��ZZZ�FGS�QHW�&'35HVXOWV�FRPSDQLHV�FDUERQ�SULFLQJ��SGI�� $YDLODEOH�DW�KWWS��ZZZ�FDUERQWUDFNHU�RUJ�UHSRUW�FOLPDWHULVNGLVFORVXUHV��

36 | WWW.CERES.ORG

Conclusions:,QVXFLHQW�FOLPDWH�UHODWHG�ULVN�UHSRUWLQJ

The International Organisation of Securities Commissions (IOSCO) outlines that the role of capital PDUNHWV�UHJXODWRUV�LV�WR�µSURWHFW�LQYHVWRUV��PDLQWDLQ�IDLU��HFLHQW�DQG�WUDQVSDUHQW�PDUNHWV�DQG�VHHN�WR�DGGUHVV�V\VWHPLF�ULVN¶�RQ�WKRVH�H[FKDQJHV�FRPSDQLHV�XVH�WR�UDLVH�IXQGV��,W�LV�LQWHQGHG�WKDW�corporate reporting achieve this aim. While some steps have been taken to address increasingly pressing climate-related risks, including the SEC guidance, the UK mandatory greenhouse gas reporting for listed companies (which the UK is now considering repealing) and European Union DFFRXQWLQJ��WUDQVSDUHQF\�DQG�SURVSHFWXV�GLUHFWLYHV��UHSRUWLQJ�UHTXLUHPHQWV�RQ�WKH�ZKROH�UHPDLQ�ZRHIXOO\�LQVXFLHQW��*OREDO�UHJXODWRUV�DUH�QRW�XWLOLVLQJ�WKH�SRWHQWLDO�RI�FDSLWDO�PDUNHWV�UHSRUWLQJ�WR�EXLOG�µFOLPDWH�OLWHUDWH¶�FDSLWDO�PDUNHWV�

&OLPDWH�UHODWHG�ULVNV�WKUHDWHQ�LQYHVWRUV

An energy transition is underway as stakeholders increasingly recognise the potential severity of future climate-related constraints. Coal prices are at a perilous low as demand for heavy polluting FRDO�¿UHG�SRZHU�IDOWHUV�DQG�RLO�DQG�JDV�FDSLWDO�H[SHQGLWXUHV�DUH�VSLUDOOLQJ�WR�HYHQ�PDLQWDLQ�WKH�VWDWXV�TXR�RI�SURGXFWLRQ�OHYHOV��$OO�WKH�ZKLOH��WKH�VXSSO\�FRVW�RI�UHQHZDEOH�HQHUJ\�WHFKQRORJLHV�FRQWLQXHV�to fall. If the resulting potential downside risks to future fossil fuel demand are not disclosed in FRPSDQ\�GLVFORVXUHV�DQG�UHJXODWRU\�¿OLQJV��FXUUHQW�DQG�SURVSHFWLYH�LQYHVWPHQWV�UXQ�WKH�ULVN�RI�destroying shareholder value or depressing group returns – what Carbon Tracker terms “wasting capital in stranded assets.”

��RI�VDPSOHG�IRVVLO�IXHO�FRPSDQLHV�UHFRJQLVH�LW�LV�D�ULVN\�EXVLQHVV«

7KH�VDPSOH�RI��FRDO��RLO�DQG�JDV�FRPSDQLHV�DQDO\VHG�LQ�WKLV�UHSRUW�XQHTXLYRFDOO\�GLVSOD\�DQ�awareness of climate change as an issue and a belief that it could poses a risk to their business. 86% of companies consider climate change to pose physical risks, while 99% of the sample deem climate-related regulation to be a risk.

«%XW�SHUSHWXDWH�XQFHUWDLQW\�ZLWK�D�ODFN�RI�LPSOHPHQWDWLRQ

In spite of this high level of awareness of climate-related risk, companies are failing to connect the dots when it comes to applying this knowledge through risk management measures. 80% of oil and JDV�FRPSDQLHV�GLG�QRW�GLVSOD\�HYLGHQFH�RI�UXQQLQJ�FOLPDWH�VFHQDULR�DQDO\VHV�RI�GLHUHQW�WHPSHUDWXUH�increases due to climate change, with only 10% of companies going on to stress-test projects against conditions similar to a 2°C future. Approximately the same proportion of coal companies conduct climate scenario analyses, with only one, however, disclosing evidence of stress-testing against a 2°C outcome.

Such low levels of examination of low demand and price scenarios within a sample that should be FRQVLGHUHG�DV�µEHVW�LQ�FODVV¶�JLYHQ�WKH\�UHVSRQGHG�WR�&'3¶V�FOLPDWH�FKDQJH�TXHVWLRQQDLUH�DQG�&HUHV�DQG�&DUERQ�7UDFNHU¶V�LQYHVWRU�OHWWHUV��VKRXOG�PDNH�LQYHVWRUV�TXHVWLRQ�ZKHWKHU�LQLWLDO�ULVN�GLVFORVXUHV�E\�IRVVLO�IXHO�FRPSDQLHV�DUH�PHUHO\�ERLOHUSODWH�UKHWRULF�ZLWKRXW�PXFK�LQÀXHQFH��DQG�VKRXOG�VHUYH�DV�D�FDOO�WR�¿QDQFLDO�UHJXODWRUV�IRU�JUHDWHU�VFUXWLQ\�RQ�FOLPDWH�UHODWHG�ULVN�LQWHJUDWLRQ�

7KH�RFFXUUHQFH�RI�UHSRUWLQJ�LQFRQVLVWHQFLHV�UHPDLQV�D�FRQFHUQ

2I�SDUWLFXODU�LPSRUWDQFH�WR�UHJXODWRUV�LV�WKHLU�UROH�LQ�HQVXULQJ�UHJXODWRU\�¿OLQJV�VXEPLWWHG�E\�companies are consistent with those made in other voluntary reporting mechanisms - in essence WR�HQVXUH�ZKDW�D�FRPSDQ\�VD\V�WR�LQYHVWRUV�UHÀHFWV�ZKDW�LV�EHLQJ�LPSOHPHQWHG��2XU�DQDO\VLV�RI�86�listed fossil fuel companies shows that while there appears to be a consensus that climate-related


UHJXODWRU\�ULVNV�DUH�WKH�PRVW�VLJQL¿FDQW��WKHUH�LV�GLVFUHSDQF\�LQ�WKH�SHUFHSWLRQ�RI�SK\VLFDO�ULVNV�in particular between company annual reports and voluntary disclosures. Corporate reports must provide investors with the most accurate information possible.

,QYHVWRUV�QHHG�WR�FDOO�IRU�PRUH

7KURXJK�LQLWLDWLYHV�VXFK�DV�WKH�81�35,��&'3��6$6%��,,5&�DQG�&HUHV�DQG�&7,¶V�&DUERQ�$VVHW�5LVN�,QLWLDWLYH�LQYHVWRUV�KDYH�GLVSOD\HG�GHPDQG�IRU�PRUH�PHDQLQJIXO�FOLPDWH�UHODWHG�LQIRUPDWLRQ�ÀRZV��This research seeks investors to call for a greater focus from fossil fuel companies on their relative risk and resilience to a carbon-constrained scenario.

5HJXODWLQJ�FDSLWDO�PDUNHW�WR�PDQDJH�FOLPDWH�UHODWHG�ULVNV

We recommend:

• Companies to disclose, either voluntarily or due to regulatory amendments, in their regulatory ¿OLQJV��SUHIHUDEO\�XQGHU�D�VHSDUDWH�KHDGLQJ�

• A descriptions of their assessment of climate-related risks, including aggregate demand and SULFH�LPSDFWV�

�� 7KH�FDUERQ�HPEHGGHG�LQ�WKHLU�FRDO��RLO�DQG�JDV�UHVHUYHV�DQG�UHVRXUFHV�

• Details related to resilience in a low price/demand scenario, such as the parameters set out in VWUHVV�WHVWV�LQ�GLHUHQW�SULFH�GHPDQG�VFHQDULRV�

• Relationship of data to corporate capital expenditure strategies and risks to the business model.

�� ,Q�WKH�DEVHQFH�RI�WKH�UHJXODWRU\�UHTXLUHPHQWV�DERYH��FRPSDQLHV�PXVW�FRQWLQXH�DQG�LPSURYH�GLVFORVXUHV�RI�ULVN�WKURXJK�&'3¶V�FOLPDWH�FKDQJH�TXHVWLRQQDLUH�VXFK�WKDW�LQYHVWRUV�UHPDLQ�informed and pressure for mandatory changes grows.

6HFXULWLHV�UHJXODWRUV�DQG�¿QDQFLDO�UHSRUW�VWDQGDUG�VHWWLQJ�ERGLHV

• Increase scrutiny of existing regulations and guidance of coal, oil and gas disclosures based on H[LVWLQJ�DXWKRULW\�

• Scrutiny should include ensuring that fossil fuel companies provide clear descriptions of their assessment of climate-related risks, including aggregate demand and price impacts associated with a low-carbon scenario, and that those assessments are consistent with other company VWDWHPHQWV�RQ�FOLPDWH�ULVN�

• Issue guidance to interpret existing standards related to carbon asset stranding so that preparers of reports fully consider the viability of coal, oil and gas stocks.

�� 5HTXLUH�LQIRUPDWLRQ�LQ�DQQXDO�UHSRUWV�DQG�OLVWLQJ�SURVSHFWXVHV�RQ�WKH�HPLVVLRQV�SRWHQWLDO�RI�UHVHUYHV��DQG�WKH�HPLVVLRQV�WUDMHFWRU\�DVVXPSWLRQV�RI�FRUSRUDWH�VWUDWHJ\�

�� 5HTXLUH�VWUHVV�WHVWLQJ�RI�KRZ�UHGXFHG�GHPDQG�DQG�SULFH�FRXOG�DHFW�WKH�IRVVLO�IXHO�UHVHUYHV�and resources of a company.

9ROXQWDU\�UHSRUWLQJ�JXLGHOLQH�VHWWHUV

Develop technical guidance on reporting the carbon dioxide emissions potential of reserves to SURYLGH�D�IRUZDUG�ORRNLQJ�LQGLFDWRU��HQVXULQJ�FRPSDWLELOLW\�ZLWK�¿QDQFLDO�UHSRUWLQJ�VWDQGDUG�

38 | WWW.CERES.ORG

Figure 16: Carbon Tracker Analysis of corporate responses - regulatory risk

Figure 17: Carbon Tracker analysis of corporate responses - substitution risk


Figure 18: Carbon Tracker analysis of corporate responses – assessing climate risks

)LJXUH��&DUERQ�7UDFNHU�DQDO\VLV�RI�FRPSDQLHV�±�ULVN�VLJQL¿FDQFH

40 | WWW.CERES.ORG

Figure 20: CDP Climate Change Questionnaire

Figure 21: CDP Investor Expectations Governance


Figure 22: CDP Strategy Considerations

4. D IVE STMENT Divestment is particularly dependent on the mandate of the asset owner or fund as discussed in the framework. Simply put, many are prohibited from divesting without seeking a mandate change.90

'LYHVWPHQW�KDV�DWWUDFWHG�D�JRRG�GHDO�RI�SXEOLFLW\�DQG�IRFXV�IROORZLQJ�%LOO�0F.LEEHQ�DQG��RUJ¶V�HRUWV�WR�SURPRWH�LW�DV�D�ZD\�RI�IRUFLQJ�FKDQJH�RQ�IRVVLO�IXHO�FRPSDQLHV��$V�WKH�UHSRUW�E\�WKH�6PLWK�School Stranded Assets program sets out clearly, the pure economic arguments for divestment DUH�QRW�DOZD\V�FOHDU�LQ�WHUPV�RI�FRUSRUDWH�LPSDFW��EXW�WKH�LPSDFW�WKURXJK�³VWLJPDWL]DWLRQ´�FDQ�be substantial. That said, companies such as Peabody are pointing to the movement in its risk disclosures as a factor that may “adversely” impact the company and its share price, and the $XVWUDOLDQ�PLQLQJ�LQGXVWU\�KDV�JRQH�VR�IDU�DV�WR�VXJJHVW�WKDW�FRPSDQLHV�WKLQN�DERXW�GLYHUVL¿FDWLRQ�into renewables and low carbon technologies. Looking at the number of institutions and the prestige of those who have divested, this is clearly an area that can claim action. In addition, indexes and IXQGV�RHULQJ�UHGXFHG�H[SRVXUH�WR�IRVVLO�IXHOV�KDYH�SHUIRUPHG�ZHOO�LQ�UHFHQW�\HDUV�DQG�SRLQW�WR�WKH�economics of some types of divestment from an investor perspective. Here are the primary sources on the issue of divestment.

�� 7KH�GLYHVWPHQW�PRYHPHQW�KDV�UHFRJQL]HG�WKLV�WR�VRPH�H[WHQW�E\�DGYDQFLQJ�OHJLVODWLRQ�WKDW�ZRXOG�FKDQJH�WKH�PDQGDWHV�RI�DVVHW�RZQHUV�RU�IXQGV��)RU�H[DPSOH��&DOLIRUQLD¶V�$VVHPEO\�UHFHQWO\�SDVVHG�D�ELOO�WKDW�ZRXOG�UHTXLUH�&DOLIRUQLD¶V�SHQVLRQ�IXQGV�WR�GLYHVW�IURP�FRPSDQLHV�JHQHUDWLQJ�PRUH�WKDQ��RI�WKHLU�UHYHQXH�IURP�FRDO�E\��LI�FHUWDLQ�FRQGLWLRQV�DUH�PHW��6HH�5HXWHUV��³&RDO�GLYHVWPHQW�ELOO�SDVVHV�&DOLIRUQLD�VWDWH�OHJLVODWXUH�´��6HSWHPEHU��DW�KWWS��ZZZ�UHXWHUV�FRP�DUWLFOH��XV�FDOLIRUQLD�GLYHVWLWXUH�FRDO�LG86.&1�5��$��

42 | WWW.CERES.ORG

4.1. BACKGROUNDAs the report by the Smith School Stranded Assets program91 sets out clearly:

…direct impacts on equity or debt are likely to be limited. The

maximum possible capital that might be divested from the fossil fuel

companies represents a relatively small pool of funds. In contrast,

the market capitalisation of fossil fuel companies, particularly

integrated oil and gas players, is several times higher. Even if the

maximum possible capital was divested from fossil fuel companies,

WKHLU�VKDUHV�SULFHV�DUH�XQOLNHO\�WR�VXHU�SUHFLSLWRXV�GHFOLQHV�RYHU�DQ\�length of time. Financial markets are volatile. Daily swings as high

as ±5% are not uncommon even for large stocks such as ExxonMobil.

Sizeable withdrawals are likely to escape the attention of fossil fuel

management since oil and gas stocks are some of the world’s most

OLTXLG�SXEOLF�HTXLWLHV«�:H�DFNQRZOHGJH�WKDW�GLUHFW�HHFWV�RQ�FRDO�valuations are likely to be more substantial. Coal companies represent

a small fraction of market capitalisation of fossil fuel companies and

coal stocks are also less liquid. Divestment announcements are thus

more likely to impact coal stock prices since alternative investors

cannot be as easily found as in the oil and gas sector.

+RZHYHU�WKH\�¿QG�LW�LV�LQ�UHODWLRQ�WR�³VWLJPDWLVDWLRQ´�WKDW�'LYHVWPHQW�FDQ�KDYH�LWV�ODUJHVW�LPSDFW��

'LYHVWPHQW�FDPSDLJQV�ZLOO�SUREDEO\�EH�DW�WKHLU�PRVW�HHFWLYH�LQ�triggering a process of stigmatisation of fossil fuel companies. We

¿QG�WKDW�HYHQ�LI�WKH�GLUHFW�LPSDFWV�RI�GLYHVWPHQW�RXWÀRZV�DUH�OLPLWHG�LQ�WKH�VKRUW�WHUP��WKH�FDPSDLJQV�ZLOO�FDXVH�QHXWUDO�HTXLW\�DQG�RU�debt investors to lower their expectations of fossil fuel companies’

QHW�FDVK�ÀRZV�LQ�WKH�ORQJ�WHUP��7KH�SURFHVV�E\�ZKLFK�XQFHUWDLQW\�surrounding the future of fossil fuel industry will increase is through

stigmatisation. In particular, the fossil fuel divestment campaign will

increase legislative uncertainty and potentially also lead to multiples’

compression causing more permanent damage to the companies’

HQWHUSULVH�YDOXHV��)LQDOO\��ZH�¿QG�WKDW�VWLJPDWLVDWLRQ��ZKLOH�OLNHO\�to cost fossil fuel companies billions, is unlikely to threaten their

survival. Coal companies will probably be the hardest hit segment of

the market.

�� $WLI�$QVDU��HW�DO��³6WUDQGHG�DVVHWV�DQG�WKH�IRVVLO�IXHO�GLYHVWPHQW�FDPSDLJQ��ZKDW�GRHV�GLYHVWPHQW�PHDQ�IRU�WKH�YDOXDWLRQ�RI�IRVVLO�IXHO�DVVHWV�´��2FWREHU��DYDLODEOH�DW�KWWS��ZZZ�VPLWKVFKRRO�R[�DF�XN�UHVHDUFK�SURJUDPPHV�VWUDQGHG�DVVHWV�6$3�GLYHVWPHQW�UHSRUW�¿QDO�SGI��


Figure 23: Smith School analysis of divestment stigmatization

4.2 SIZING THE MOVEMENT7KH�VL]H�RI�WKH�'LYHVWPHQW�PRYHPHQW�LV�WUDFNHG�E\�D�QXPEHU�RI�RUJDQL]DWLRQV��+RZHYHU��WKH�SURSHU�metric—number of institutions divesting, AuM divested, etc. along with what screen is used—remains unclear and tracking is far from complete. A major issue remains exactly how each asset owner GH¿QHV�³GLYHVWPHQW´�±�WRWDO�H[FOXVLRQ�RI�IRVVLO�IXHOV��LQFOXGLQJ�FRPLQJOHG�IXQGV��FRDO�RQO\��WRS��FRPSDQLHV��DQG�WKH�WKUHVKROG�XVHG�IRU�GH¿QLQJ�D�GLYHUVL¿HG�FRPSDQ\�DV�D�³IRVVLO�IXHO�FRPSDQ\´��RI�UHYHQXHV��RI�UHYHQXHV��HWF��7KHVH�GH¿QLWLRQDO�SUREOHPV�PHDQ�WKDW�DV�RI�\HW�WKHUH�DUH�QR�weighted average impacts available, but simple counts are available from several sources.

4.2.1 The Go Fossil Free Movement92

Go Fossil Free tracks divestment commitments and currently shows 397 institutions that have pledged to divest at some level.93 The plot below shows the types of institutions that are divesting, GRPLQDWHG�E\�IRXQGDWLRQV��IDLWK�EDVHG�JURXSV��SXEOLF�IXQGV�DQG�RWKHU�JRYHUQPHQWDO�RUJDQL]DWLRQV��and universities/schools. According to a report released in September 2015, the total amount of investment funds now managed by portfolio managers who have pledged to divest has reached $2.6 WULOOLRQ��KRZHYHU��WKH�UHSRUW�GRHV�QRW�H[SODLQ�WKH�DFWXDO�DPRXQW�RI�IXQGV�WKDW�KDYH�EHHQ�GLUHFWO\�divested, what percentage of these assets are currently invested in fossil fuels, or what types of screens are being applied to these funds.

�� 5HSRUWV�UHJDUGLQJ�GLYHVWPHQW�DUH�DYDLODEOH�IURP�)RVVLO�)UHH�,QYHVW�DW�KWWS��JRIRVVLOIUHH�RUJ�FRPPLWPHQWV�� $V�RI�6HSWHPEHU��

44 | WWW.CERES.ORG

Figure 24: Divestment by Type of Institution

4.2.2 The Norwegian Example7KH�1RUZHJLDQ�VRYHUHLJQ�ZHDOWK�IXQG¶V�GLYHVWPHQW�IURP��FRPSDQLHV�ZLWK�JUHDWHU�WKDQ��RI�revenues from coal has been one of the biggest divestment announcements to date. The following EULH¿QJ�ZDV�UHVHDUFKHG�DQG�ZULWWHQ�E\�8UJHZDOG�DQG�FR�SXEOLVKHG�ZLWK�*UHHQSHDFH�1RUZD\�DQG�WKH�Future in Our Hands.94 It also shows that divestment from coal is a key starting focus for many asset owners.

Visitors opening the English language webpage of the Norwegian Parliament (Storting) are greeted by a stark image and a strong message these days. A photo of a colossal lump of coal and the IROORZLQJ�DQQRXQFHPHQW��¶7KH�6WRUWLQJ�KDV�PDGH�WKH�XQDQLPRXV�GHFLVLRQ�WR�SXOO�WKH�*RYHUQPHQW�3HQVLRQ�)XQG�*OREDO��*3)*��RXW�RI�FRDO�¶�

The gist of our assessment is that the amount of coal holdings to be excluded by the new criteria is PXFK�KLJKHU�WKDQ�WKH�)LQDQFH�0LQLVWU\¶V�HVWLPDWH��7KH�DQQH[�RI�WKLV�EULH¿QJ�FRQWDLQV�D�GLYHVWPHQW�list of 118 companies whose share of coal business is over 30% and 4 companies, whose coal H[SDQVLRQ�SURMHFWV�DUH�VR�VLJQL¿FDQW�LQ�UHODWLRQ�WR�WKH�FRPSDQ\¶V�VL]H�RU�SRZHU�JHQHUDWLRQ�SRUWIROLR�WKDW�WKH\�DOVR�ZDUUDQW�DQ�H[FOXVLRQ��&RPSDQLHV�ZHUH�RQO\�SXW�RQ�WKH�OLVW��LI�WKHUH�ZDV�VXFLHQW�documentation that they meet the divestment criteria.

And now, the big number: The GPFG’s investments in these ��FRPSDQLHV total NOK 67.2 ELOOLRQ�RU�¼��ELOOLRQ. This is the biggest divestment action to date from the coal industry and sets a new standard for investors worldwide.

4.2.3 Index Providers.Divestment can also take place by adopting indexes that exclude fossil fuel companies in some way. Performance for such indexes has been positive in recent years, which makes an economic argument IRU�IRVVLO�IXHO�GLYHVWPHQW�IURP�DQ�LQYHVWRU¶V�SHUVSHFWLYH��6HYHUDO�DVVHW�PDQDJHUV�KDYH�VWHSSHG�XS�WR�RHU�SURGXFWV�WR�DFKLHYH�WKLV�UHVXOW�DV�ZHOO�

�� 7KH�LWDOLFL]HG�WH[W�H[FHUSWHG�IURP�8UJHZDOG��*UHHQSHDFH�1RUZD\��DQG�)XWXUH�LV�LQ�2XU�+DQGV��³1RUZD\�'LYHVWV�´��-XQH��DYDLODEOH�DW�KWWS��ZZZ�JUHHQSHDFH�RUJ�QRUZD\�*OREDO�QRUZD\�.OLPD�GRNXPHQWHU��'LYHVWPHQW�EULH¿QJ�SGI��


For example, in late 2014 MSCI launched their MSCI ACWI Ex Fossil Fuel index, based on the MSCI ACWI parent index and including large and mid-cap stocks across 23 Developed Markets (DM) and 23 Emerging Markets (EM) countries*. The index represents the performance of the broad market while excluding companies that own oil, gas and coal reserves. It is a benchmark for investors who aim to eliminate fossil fuel reserves exposure from their investments due to concerns about the contribution of these reserves to climate change.

7KH�SHUIRUPDQFH�RI�VXFK�LQGH[HV�FRPSDUHG�WR�EHQFKPDUN�LV�DQ�LPSRUWDQW�TXHVWLRQ�IRU�LQYHVWRUV�considering divestment. Analysis to date shows that performance can match or exceed benchmark RYHU��\HDU�WLPHIUDPHV��)RU�LQVWDQFH��WKH�¿JXUH�EHORZ�VKRZV�06&,�$&:,�([�)RVVLO�)XHO�YV��06&,�ACWI on a 5-year timeframe.

Figure 25: MSCI Fossil Fuel Free Index

Research by Sustainable Insight Capital Management has also examined the performance of three GLHUHQW�IRVVLO�IXHO�IUHH�SRUWIROLRV��DOO�DJDLQVW�WKH�63��,QGH[��6,&0�¿QGV�RXWSHUIRUPDQFH�across 1, 3, and 5 year periods compared to S&P 500. They also highlight a number of important considerations the Asset Owner and Asset Manager should contemplate as they embark on the path of fossil fuel free investing.

7KH\�QRWH�WKH�LPSRUWDQFH�RI�GH¿QLWLRQV�DV�KLJKOLJKWHG�DERYH��

$V�ZLWK�DOO�LQYHVWPHQWV��FOHDU�GH¿QLWLRQV�DUH�QHFHVVDU\��7KLV�LV�particularly true with fossil fuel free investments where a wide range

of interpretations are possible, in turn, giving rise to a variety of

possible investment approaches. Investors must choose whether to opt

for the simplicity and clarity of a negative screen or choose the best-

in-class approach, perhaps with a carbon tilt, or a highly discretional

thematic investment process. Simply by imposing a negative screen,

investors can end up omitting anywhere between 11% to close to 20%

of the S&P 500 Index.

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4.2.4 Making an impact on corporationsAs the Smith School paper cited above suggests, the main impact of divestment is likely to be through WKH�VWLJPDWL]DWLRQ�RI�IRVVLO�IXHO�FRPSDQLHV��:H�SURYLGH�WZR�H[DPSOHV�KHUH��)LUVW��FHUWDLQO\�3HDERG\�Energy95 in its risk disclosures seems to take the movement seriously, although this should be XQGHUVWRRG�ZLWKLQ�D�IXOO�OHJDO�IUDPHZRUN��)XUWKHU�WKH\�FLWH�WKH�SRVVLELOLW\�WKDW�WKLV�FRXOG�DHFW�WKHP�in capital markets:

Concerns about the environmental impacts of coal combustion,

including perceived impacts on global climate issues, are resulting

in increased regulation of coal combustion in many jurisdictions,

unfavorable lending policies by government-backed lending

LQVWLWXWLRQV�DQG�GHYHORSPHQW�EDQNV�WRZDUG�WKH�¿QDQFLQJ�RI�QHZ�RYHUVHDV�FRDO�IXHOHG�SRZHU�SODQWV�DQG�GLYHVWPHQW�HRUWV�DHFWLQJ�WKH�LQYHVWPHQW�FRPPXQLW\��ZKLFK�FRXOG�VLJQL¿FDQWO\�DHFW�GHPDQG�IRU�our products or our securities.

Extracts from the following article96 in the context of the Australian Mining Industry are interesting IRU�VHYHUDO�UHDVRQV��,W�VKRZV�WKH�FRDO�LQGXVWU\�LV�DZDUH�RI�WKH�LPSDFW�RI�³VWLJPDWL]DWLRQ´��,W�VKRZV�DQ�industry looking to counter that but it also shows an open discussion of alternatives to coal and the SRWHQWLDO�QHHGV�IRU�GLYHUVL¿FDWLRQ�E\�FRPSDQLHV��7KLV�GHPRQVWUDWHV�WKDW�GLYHVWPHQW�LV�DOVR�IRVWHULQJ�the type of dialogue many investors are having through direct engagement:

It’s become very clear that something has to be done. Anti-mining

protesters have developed an unprecedented level of sophistication in

their approach to environmental activism… Although the traditional

methods with protesters chaining themselves to trees and machinery

will always be in vogue - with badges of honour to be won and

treasured in the memories of those who were there on the ground - we

are now seeing new social waves of protest in the form of the fossil-

fuel divestment movement … Mining is a long-term business, and

if companies can open their scope to include new developments for

future capitalisation, so much the better. By investing in alternative

energy technologies that may fall under the purview of conventional

businesses, technologies that might even be considered a threat

from traditional points of view, then it is impossible to divest from

that company without divesting from their operations relating to

alternative energy … What is required is a holistic view of energy

production, and a preparedness to bring those projects supported by

the divestment movements into the fossil fuel miner’s fold, with a view

WR�HQKDQFLQJ�WKRVH�WHFKQRORJLHV�IRU�WKH�EHQH¿W�RI�WKH�LQGXVWU\�DQG�their own business, rather than to scotch the whole thing to protect

traditional concerns.

�� KWWSV��PVFXVSSHJUV��EORE�FRUH�ZLQGRZV�QHW�PP¿OHV�¿OHV�LQYHVWRUV��SHDERG\��DQQXDO��UHSRUW�SGI��DW�SDJHV�� %HQ�+DJHPDQQ��$XVWUDOLDQ�0LQLQJ��-XO\��


5. INVE STOR PORTFOL IOS AND SERV ICE PROV IDERS5.1 AODP OVERVIEW7KH�UROH�RI�LQYHVWRUV��DVVHW�RZQHUV�DQG�DVVHW�PDQDJHUV��DQG�SRWHQWLDOO\�IDPLO\�RFHV²UHPDLQV�central to the evaluation and management of CAR. Managing risk has been evident in the (QJDJHPHQW��'LVFORVXUH�DQG�'LYHVWPHQW�FKDSWHUV��,Q�DGGLWLRQ�WR�WKHVH�SULPDULO\�TXDOLWDWLYH�WRROV��ZH�QRZ�WXUQ�PRUH�GLUHFWO\�WR�TXDQWLWDWLYH�PHWKRGV�LQYHVWRUV�FDQ�XVH�LQ�WHUPV�RI�FDUERQ�IRRWSULQWLQJ�DQG�stress-testing at the portfolio level.

Here the available information on CAR uptake is less encouraging, though recent evidence suggests practices are slowly spreading. The Asset Owners Disclosure Project (AODP) tracks investor disclosure in this area. While this is not an exhaustive survey of all investors and does not include $VVHW�0DQDJHUV��$2'3¶V�HYLGHQFH�)LJXUH��VKRZV�WKDW�RXWVLGH�RI�D�KDQGIXO�RI�OHDGHUV��WKHUH�LV�D�ORQJ�way to go to see investors actually stress testing at the portfolio level on a widespread basis.

Figure 26: Asset Owners Disclosure Project – AODP Global Climate Index 201597

�� $VVHW�2ZQHUV�'LVFORVXUH�3URMHFW��³*OREDO�&OLPDWH�,QGH[��´��DYDLODEOH�DW�KWWS��DRGSURMHFW�QHW�LPDJHV�GRFV�$2'3�*/2%$/�&/,0$7(�,1'(;��YLHZ�SGI��

48 | WWW.CERES.ORG

Having said that, a number of tools are available and uptake is increasing for both risk and stakeholder pressure reasons.98 Currently available tools have been recently reviewed by both the 81(3�),�:5,�&$5�SURFHVV�DQG�WKH��,QYHVWLQJ�,QLWLDWLYH�&'&�&OLPDWH�81(3�,QTXLU\�99 As LGHQWL¿HG�LQ�ERWK�UHYLHZV��D�FUXFLDO�GLVWLQFWLRQ�LV�EHWZHHQ�DVVHW��RU�RSHUDWRU�FRPSDQ\�OHYHO�³ERWWRP�XS´�WRROV�YV��SRUWIROLR�OHYHO�³WRS�GRZQ´�WRROV�WKDW�WDNH�LQWR�DFFRXQW�GLYHUVL¿FDWLRQ�DQG�SRUWIROLR�OHYHO�HHFWV��$�IXUWKHU�GLVWLQFWLRQ�FDQ�EH�GUDZQ�EHWZHHQ�SULPDULO\�FURVV�VHFWLRQDO�WRROV�SULPDULO\�XVHG�IRU�assessing exposure or screening and scenario-based tools designed to assess the impact of change in risk factors (technology, policy, market, etc.).

5.2 SERVICE PROVIDERS )LJXUH��7\SHV�RI�TXDQWLWDWLYH�&$5�PRGHOV��

6RXUFH��0RGL¿HG�IURP�81(3�),�:5��DQG��G,,�&'&�&OLPDW�81(4�,QTXLU\��

The table above shows the dominant families of CAR assessment models. This chapter will focus on SRUWIROLR�OHYHO�WRROV�DQG�PRGHOV��$V�GLVFXVVHG�LQ�UHFHQW�ZRUN��WKH�NH\�DGYDQWDJHV�RI�HDFK�TXDGUDQW�

�� (�J��WKH�35,�0RQWUHDO�3OHGJH�DQG�81(3�),�&'3�3RUWIROLR�'HFDUERQL]DWLRQ�&RDOLWLRQ�� )LQDQFLDO�5LVN�DQG�WKH�7UDQVLWLRQ�WR�D�/RZ�&DUERQ�(FRQRP\��,QYHVWLQJ�,QLWLDWLYH��81(3�,QTXLU\��DQG�&'&�&OLPDWH�5HVHDUFK��-XO\��6HH�:5,�81(3�),��G,,�&OLPDWH�6WUDWHJLHV�DQG�0HWULFV��2SWLRQV�IRU�,QVWLWXWLRQDO�,QYHVWRUV�

CROSS-SECTIONAL SCENARIO-BASED

Bottom-up (Asset/operator level) &RUSRUDWH�FDUERQ�GLVFORVXUH��&'3��&HUHV��HWF�

Asset impairment tests (CTI),PSDFW�RQ�UHYHQXHV�PDUJLQV��.HSOHU�&KHXYUHX[��Allianz),PSDFW�RQ�YDOXDWLRQ�'&)�PRGHOV��+6%&��%ORRPEHUJ�&UHGLW�5DWLQJV��63��0RRG\¶V�

Top-down (Portfolio level) 3RUWIROLR�IRRWSULQWLQJ��6RXWK�3ROH��7UXFRVW��06&,��RWKHUV100

Portfolio Stress test (Mercer)


are clear. Cross-sectional analyses require less overall data and assumptions but are limited to the DQDO\VLV�RI�ULVN�H[SRVXUH�DV�RSSRVHG�WR�¿QDQFLDO�LPSDFW��ZKHUHDV�VFHQDULR�EDVHG�PRGHOV�RHU�D�JUHDWHU�OHYHO�RI�ULJRU�ZLWK�FRQFRPLWDQW�HRUW�DQG�FDQ�HVWLPDWH�¿QDQFLDO�LPSDFW��6LPLODUO\��ERWWRP�XS�FRPSDQ\�DQG�DVVHW�OHYHO�PRGHOV�RHU�D�JUHDWHU�OHYHO�RI�WHFKQLFDO�ULJRU�IRU�HDFK�LQGLYLGXDO�VHFXULW\�EXW�ODFN�WKH�DELOLW\�WR�DVVHVV�GLYHUVL¿FDWLRQ�DQG�VWUDWHJLF�DVVHW�DOORFDWLRQ��WKH�VWUHQJWK�RI�SRUWIROLR�VWUHVV�test models like Mercer’s).

7KLV�FKDSWHU�ZLOO�EULHÀ\�LQWURGXFH�UHFHQW�TXDQWLWDWLYH�PRGHOLQJ�DW�SRUWIROLR�VFDOH��LQFOXGLQJ�WKH�FXUUHQW�VWDWH�RI�SRUWIROLR�FDUERQ�IRRWSULQWLQJ��QH[W�VHFWLRQ��DQG�VWUHVV�WHVWLQJ��¿QDO�6HFWLRQ��

5.2.1 Portfolio Carbon Footprinting$V�GLVFXVVHG�DERYH��WKH�SULPDU\�XVH�RI�SRUWIROLR�FDUERQ�IRRWSULQWLQJ�LV�WKH�FURVV�VHFWLRQDO�DVVHVVPHQW�RI�ZKHUH�LQ�WKH�SRUWIROLR�DQ�LQYHVWRU�FRXOG�EH�H[SRVHG�WR�*+*�HPLVVLRQV��,PSRUWDQWO\��WKH�GHJUHH�WR�ZKLFK�SRUWIROLR�FDUERQ�IRRWSULQW�VHUYHV�DV�D�SUR[\�RU�HYHQ�D�VFUHHQLQJ�WRRO�IRU�&$5�LV�D�KRWO\�GHEDWHG�SRLQW��,W�LV�QRW�ZLWKLQ�WKH�VFRSH�RI�WKLV�ZRUN�WR�FRPPHQW�RQ�WKLV�GHEDWH�GLUHFWO\��EXW�WKH�UHDGHU�LV�HQFRXUDJHG�WR�FRQVXOW�WKH�UHIHUHQFHV�WR�WKLV�DUWLFOH�DQG�IRUP�KHU�RZQ�RSLQLRQ�101

&RPSDUHG�WR�HQJDJHPHQW�DQG�GLVFORVXUH�UHODWHG�DFWLYLWLHV��SRUWIROLR�FDUERQ�IRRWSULQWLQJ�LV�D�UHODWLYHO\�QHZ�SKHQRPHQRQ��LQWURGXFHG�LQ�WKH�PLG��¶V��+RZHYHU��WKH�DSSOLFDWLRQ�KDV�SLFNHG�XS�LQ�SDUWLFXODU�VLQFH��QRWDEO\�GXH�WR�YROXQWDU\�LQYHVWRU�FRPPLWPHQWV��VXFK�DV�WKH�81�35,�0RQWUHDO�3OHGJH�DQG�81(3�),�&'3�3RUWIROLR�'HFDUERQL]DWLRQ�&RDOLWLRQ��

�� 7KH�0RQWUHDO�3OHGJH��OHG�E\�8135,��IRFXVHV�RQ�PRELOL]LQJ�LQYHVWRUV�WR�FRPPLW�WR�PHDVXULQJ�and disclosing the carbon footprint of their portfolios. Over 60 investors have signed up to the pledge to date.

�� 7KH�3RUWIROLR�'HFDUERQL]DWLRQ�&RDOLWLRQ��3'&��OHG�E\�&'3�DQG�81(3�),��DLPV�WR�PRELOL]H�LQYHVWRUV�WR�FRPPLW�WR�GHFDUERQL]H�D�WRWDO�RI�86'��ELOOLRQ��DVVHW�RZQHUV�KDYH�MRLQHG�WKH�3'&��ZLWK��PHPEHUV�IURP�(XURSH�DQG��IURP�$XVWUDOLD��

,PSRUWDQWO\��WKH�UHFHQW�LQYHVWRU�SOHGJHV�DUH�FRXFKHG�LQ�ERWK�ULVN�DQG�PRUDO�HWKLFDO�REMHFWLYHV��)RU�LQVWDQFH��WKH�0RQWUHDO�3OHGJH�QRWHV��

We have a duty to act in the best long-term interests of our EHQH¿FLDULHV��,Q�WKLV�¿GXFLDU\�UROH��ZH�EHOLHYH�WKDW�WKHUH�DUH�ORQJ�WHUP�LQYHVWPHQW�ULVNV�«�ZKHUHDV�WKH�3'&�DOORZV�LWV�VLJQDWRULHV�WR�GLVFORVH�HLWKHU�WKH�SRUWIROLR�H[SRVXUH�WR�*+*�UHODWHG�ULVNV��DQG�RU�WKH�SRUWIROLR�DOLJQPHQW�ZLWK�WKH�ORZ�FDUERQ�HFRQRP\��

$QRWKHU�PRUH�UHFHQW�GHYHORSPHQW��WKH�)UHQFK�(QHUJ\�7UDQVLWLRQ�/DZ��LQFOXGHV�WKH�¿UVW�PDQGDWRU\�GLVFORVXUH�IRU�LQYHVWRUV¶�FDUERQ�IRRWSULQWV��DJDLQ�XVLQJ�ODQJXDJH�PL[LQJ�ULVN�DQG�PRUDO�HWKLFDO�LVVXHV��

>7@KH�H[SRVXUH�WR�FOLPDWH�UHODWHG�ULVNV��LQFOXGLQJ�WKH�*+*�HPLVVLRQV�DVVRFLDWHG�ZLWK�DVVHWV�RZQHG��WKH�FRQWULEXWLRQ�WR�WKH�LQWHUQDWLRQDO�goal of limiting climate change and the contribution to the realization of the energy and ecological transition103��

101 The reader is encouraged to consult 2dII (2014), UNEP FI/WRI/2dII (2015) , GICCC (2015)102 More information here: UN PRI Montreal Pledge and UNEP FI/CDP Portfolio Decarbonization Coalition.103 Translation from 2dII (2015).

50 | WWW.CERES.ORG

7KXV��LQ�DGGLWLRQ�WR�WKH�UHTXLUHPHQWV�IRU�GLVFORVLQJ�&$5�DQG�SRUWIROLR�FDUERQ�IRRWSULQW��LQYHVWRUV�DUH�DOVR�UHTXLUHG�WR�UHSRUW�RQ�WKHLU�SRUWIROLR¶V�FRQWULEXWLRQ�WR�WKH�HQHUJ\�WUDQVLWLRQ��D�UHTXLUHPHQW�WKDW�ZLOO�OLNHO\�UHTXLUH�LQQRYDWLRQ�RQ�WKH�SDUW�RI�LQYHVWRUV�DQG�DVVHW�PDQDJHUV�WR�PHHW�104 The Law DOVR�LQFOXGHV�SURYLVLRQV�UHODWHG�WR�OLVWHG�FRPSDQ\�GLVFORVXUHV��LQFOXGLQJ�UHTXLULQJ�&$5�UHODWHG�GLVFORVXUH��WKH�¿QDQFLDO�ULVNV�UHODWHG�WR�WKH�HHFWV�RI�FOLPDWH�FKDQJH�DQG�WKH�PHDVXUHV�DGRSWHG�by the company to reduce them, by implementing a low-carbon strategy in every component of its activities. An implementation decree is expected by the end of the year, and the stringency of the UHTXLUHG�GLVFORVXUHV�ZLOO�OLNHO\�GHSHQG�RQ�LQWHUSUHWDWLRQV�LQ�WKLV�GHFUHH��

Partly driven by these developments, notably the Montreal Pledge, the portfolio footprinting market has expanded considerably over the last year. Discussions with market leaders and surveys by Novethic105 suggest around 60 large institutional investors in 2013 have grown to nearly 200 FRQGXFWLQJ�WKLV�W\SH�RI�DQDO\VLV��JHQHUDOO\�IRFXVHG�RQ�HTXLWLHV�SRUWIROLRV��0RUH�LQWHUHVWLQJO\��LW�VHHPV�WKDW�WKH�PDUNHW�LV�EHJLQQLQJ�WR�PRYH�EH\RQG�µWKH�XVXDO�VXVSHFWV¶��SUHGRPLQDQWO\�SXEOLF�SHQVLRQ�funds and religious groups to include more mainstream funds and asset managers. Industry experts consulted for this study report that the motivation for footprinting portfolios remains a mixture of moral/SRI type motivations and risk, though more clients who may have a predominantly moral driver are beginning to ask about risk exposure.

,QFUHDVLQJO\�HTXLW\�SRUWIROLR�IRRWSULQWLQJ�LV�DOVR�EHLQJ�FRQGXFWHG�DORQJVLGH�RWKHU�ULVN�UHOHYDQW�metrics being developed by data providers, including exposure to fossil fuel reserves, exposure to µJUHHQ¶�DVVHWV�DV�D�&$5�KHGJH��DQG�DOWHUQDWLYH�FDUERQ�PHWULFV�DFURVV�SULYDWH�HTXLW\��LQIUDVWUXFWXUH��DQG�UHDO�HVWDWH�KROGLQJV��$�EULHI�VXPPDU\�RI�FXUUHQW�PDUNHW�RHULQJV�FDQ�EH�IRXQG�LQ�81(3�),�:5,��DQG��G,,�81(3�),�:5,��EXW�LQ�JHQHUDO�OHDGLQJ�VHUYLFH�SURYLGHUV�DUH�RHULQJ�D�VLPLODU�combination of CAR-relevant services, including assessment of:

• Risk exposure from current carbon intensity

• Risk exposure from potential future emissions (fossil fuel reserves)

• Exposure to Clean Technologies as a share of total

• Some level of scenario/regulatory analysis

• Scoring against benchmarks on GHG emissions governance and target implementation for individual companies and their position relative to peers.

$OO�SURYLGHUV�DOVR�RHU�VHUYLFHV�WR�EHQFKPDUN�SRUWIROLRV�WR�FRPPRQO\�XVHG�LQYHVWPHQW�LQGLFHV�VXFK�DV�WKH�63��672;;��HWF��$�JURZLQJ�WUHQG�LQ�WKH�¿HOG�LV�WKH�FUHDWLRQ�RI�ORZ�FDUERQ�DQG�IRVVLO�fuel exclusion indices used for alternative benchmarking, as discussed in the divestment section above.

5.2.2 Portfolio Stress TestingThe other predominant form of portfolio analysis, much rarer to date, is the portfolio-level stress test. $V�GLVFXVVHG�DERYH�WKH�GRPLQDQW�DYDLODEOH�PRGHO�LV�0HUFHU¶V��ZKLFK�ZDV�GHVLJQHG�XVLQJ�VHFWRU�OHYHO�VFHQDULR�DVVXPSWLRQV�WR�DVVHVV�LPSDFWV�RQ�VWUDWHJLF�DVVHW�DOORFDWLRQ�DQG�VHFWRU�OHYHO�GLYHUVL¿FDWLRQ��0HUFHU¶V�PRGHO�KDV�VHHQ�VLJQL¿FDQW�LQWHUHVW��ZLWK�RYHU��XQLTXH�GRZQORDGV�RI�WKHLU�PRVW�UHFHQW�report.

7KH�0HUFHU�6$$�DSSURDFK�LGHQWL¿HV�IRXU�FOLPDWH�VFHQDULRV�DQG�IRXU�FOLPDWH�ULVN�IDFWRUV��DQG�

��G,,�KDV�SURYLGHG�DQ�LQLWLDO�VXPPDU\�DQG�DQDO\VLV�RI�WKH�/DZ¶V�SURYLVLRQV�IRU�LQYHVWRUV��VHH�here��'DWD�ZHUH�JDWKHUHG�E\�OHDGLQJ�IRRWSULQW�RUJDQL]DWLRQV�06&,��6RXWK�3ROH�&DUERQ��DQG�7UXFRVW��0DUNHW�H[SHUWV�VXJJHVWHG�WKDW�WKHVH�SURYLGHUV�OLNHO\�UHSUHVHQW��RI�WKH�RYHUDOO�PDUNHW�IRU�EHVSRNH�IRRWSULQW�DQDO\VHV��1RYHWKLF¶V�VXUYH\�SDQHO�IRXQG�DURXQG��LQYHVWRUV�ZKR�KDG�FRQGXFWHG�D�FDUERQ�IRRWSULQW�VWXG\�LQ�0D\��


integrates these in the modeling process alongside more traditional market assumptions, scenarios, and risk factors. Importantly, the risk factors capture indicators for policy and technology, similar to other CAR assessments, but also with physical impacts driven by catastrophic incidents (for example, VWRUP��ZLOG¿UH��DQG�ÀRRG��DQG�ORQJ�WHUP�ZHDWKHU�FKDQJHV�DHFWLQJ�NH\�UHVRXUFHV��IRU�H[DPSOH��water).

The results provide investors with an insight to potential impacts on return distribution expectations IRU�WKH�6$$��HQDEOLQJ�WKHP�WR�H[DPLQH�WKH�LPSOLFDWLRQV�RI�GLHUHQW�FOLPDWH�VFHQDULRV�LQ�WKH�FRQWH[W�of their current asset allocation, and consider resulting actions and opportunities, such as:

• Developing a formal point of view on climate risk and associated implementation strategy

• Identifying risk, and risk management solutions, at the asset class and sector level (e.g. real asset physical risk exposure across the portfolio)

�� )UDPLQJ�TXHVWLRQV�RQ�VHFWRU�OHYHO�LPSDFWV�ZKLFK�DVVHW�RZQHUV��DQG�FRQVXOWDQWV��FDQ�XVH�LQ�their oversight of external managers, and managers can use in their oversight of companies

• Considering opportunities to access low carbon, high growth investments across asset classes

• Developing an appropriate stakeholder relations strategy

)LJXUH��,PSDFW�RI�FOLPDWH�FKDQJH�VFHQDULR�RQ�WKH�0HGLDQ�$QQXDO�5HWXUQ�,PSDFW�RYHU��\HDUV��6RXUFH��0HUFHU��

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APPENDIX 1: COMPANIE S THAT RECE IVED THE INVE STOR CARBON ASSE T R ISK LE T TER


APPENDIX 2: SUMMARY OF CAR SHAREHOLDER PROPOSALS

OIL AND GAS

ANADARKO

YEAR SUBJECT SHAREHOLDER OUTCOME

2014 Carbon Asset Risk As You Sow 30%

2015 Carbon Asset Risk As You Sow ��

BP


2015 Carbon Asset Risk Aiming for A Coalition led by &&/$��/$3))��FR�¿OHUV�LQFOXGH��

��

CHESAPEAKE


2015 Carbon Asset Risk Unitarian Universalist Association of Congregations

��

CHEVRON


2013 Carbon Asset Risk Christopher Reynolds Foundation

��

2014 Carbon Asset Risk As You Sow Challenged-Omitted

2015 Return capital to investors rather than continue to invest in high risk projects

As You Sow ��

CONOCOPHILLIPS


2015 Executive Compensation linked to ESG and Carbon Asset Risk

United Unitarian Universalist Association of Congregations

��

DEVON ENERGY CORPORATION


2014 Carbon Asset Risk New York State Comptroller ��

2015 Carbon Asset Risk New York State Common Retirement Fund

��

ENERGEN CORPORATION


2015 Carbon Asset Risk Connecticut Retirement Plans and Trust Funds

��

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EXXONMOBIL


2013 Climate Risk Report Christopher Reynolds Foundation

Omitted

2014 Report on Assumptions for Carbon Asset Risk

Christopher Reynolds Foundation

Withdrawn; Company addressing through further engagement

2014 Carbon Asset Risk Report Arjuna Capital Withdrawn; Company addressed with Carbon Asset Risk Report

2015 Return capital to shareholders Arjuna Capital Omitted

HESS


2014 Carbon Asset Risk &RQQHFWLFXW�2I¿FH�RI�WKH�6WDWH�Treasurer

��

2015 Carbon Asset Risk $V�<RX�6RZ��FR�¿OHU��&RQQHFWLFXW�2I¿FH�RI�WKH�6WDWH�Treasurer

��

KINDER MORGAN INC.


2015 Carbon Asset Risk )LUVW�$I¿UPDWLYH�)LQDQFLDO�1HWZRUN��//&

��

2014 Carbon Asset Risk )LUVW�$I¿UPDWLYH�)LQDQFLDO�1HWZRUN��//&

27%

MARATHON OIL



��

NEWFIELD EXPLORATION CO.



Withdrawn; ongoing dialogue

NOBLE ENERGY


2015 Carbon Asset Risk Presbyterian Church (USA) ��

ROYAL DUTCH SHELL


2015 Carbon Asset Risk $LPLQJ�IRU�$�&RDOLWLRQ��OHG�E\�&&/$�DQG�/$3))��FR�¿OHUV�include:

��

STATOIL


2015 Carbon Asset Risk Aiming for A Coalition ��


COAL

ALPHA NATURAL RESOURCES


2013 Climate Risk Report United Unitarian Universalist Association of Congregations

18%

2014 Carbon Asset Risk United Unitarian Universalist Association of Congregations

��

CONSOL ENERGY





PEABODY ENERGY CORPORATION


2014 Carbon Asset Risk &RQQHFWLFXW�2I¿FH�RI�WKH�6WDWH�Treasurer

Withdrawn

ELECTRIC

AES


2014 Sustainability Reporting Laborers’ International Union of North America

Withdrawn;

DTE ENERGY


2015 Changing Business Model New York City Comptroller ��

FIRST ENERGY


2014 Adopt policies to reduce HPLVVLRQV�LQ�OLQH�ZLWK�8�6��goals and address Carbon Asset Risk

New York State Comptroller Withdrawn

SOUTHERN COMPANY


2014 Adopt policies to reduce HPLVVLRQV�LQ�OLQH�ZLWK�8�6��goals and address Carbon Asset Risk

As You Sow Withdrawn

56 | WWW.CERES.ORG

APPENDIX 3: INST ITUT IONS D IVE ST ING

In addition to divestment commitments, a key movement has been to promote the reinvestment of funds to climate solutions. Divest-invest is an NGO-led pledge In terms of the names of key institutions, Divest- Invest lists the following signatories, who have pledged not only divestment but also the reinvestment of 5% of their portfolio to climate solutions.106 Note that the number of institutions—currently 104—is fully contained in the 397 commitments counted by Go Fossil Free.

��KWWS��GLYHVWLQYHVW�RUJ�SKLODQWKURS\�VLJQDWRULHV��

58 | WWW.CERES.ORG

DISCL A IMER

Ceres99 Chauncy Street, 6th FloorBoston, MA 02111 (617) 247-0700 ceres.org

carbon asset risk report

Environment