Fossil fuel investors risk burning their fingers
By Claus Rosenkrantz Hansen, translated from Danish by Katrine Rask Andersen
Even though it is uncertain how climate agreements such as COP21 will impact the demand for oil and gas, most people can agree that fossil fuel investors risk ending up with stranded assets.
Nevertheless, too few investors are aware of this risk.
This is the conclusion of researchers Ken L. Bechmann and Mads Stenbo Nielsen in the research article ”Investeringer i fossile selskaber og strandede aktiver (investment in fossil fuels and stranded assets)”, published by Danish finance journal Finans/Invest.
”The consequences of the climate change necessitates a far larger focus on the risk that investment in fossil fuels get stranded, primarily because of the financial and climate-related consequences, but also because investors and companies have not been diligent enough in this matter", says Ken L. Bechmann.
In addition to including previous research in this area, researchers have made new empirical studies of companies, whose assets are at risk of stranding.
Results demonstrate that even if there are small indications that these consequences for fossil investment have been added to investors and companies' agendas, there are still glaring examples that companies fail to take a position on the consequences of the COP21 agreement.
According to the researchers, ”more odd examples of this are cases where companies and investors' worst case analyses fail to include the current 2°C scenario or where the worst case analysis of oil prices is belied already a couple of months after it has been made".
Photo: UN Climate change
Keep the fossil assets
You might think that an investor with assets in fossil fuels would be wise to get rid of them to avoid the risk of being unable to find buyers for worthless assets.
However, the researchers do not think that this is the way to go.
Instead, they encourage analysis and commitment from think tanks, investment banks and researchers, so that investors and fossil companies will have the opportunity to take a thorough and nuanced position on the risk of stranded assets.
”We do not think that undifferentiated divestment - that every share from companies with assets in fossil fuels is divested - is the way to go. We believe that investors must take part in ensuring a reasonable governance and investment policy in these companies, but it requires that investors assume this responsibility", says Ken L. Bechmann.
”Investeringer i fossile selskaber og strandede aktiver (investment in fossil fuels and stranded assets)” from the Danish academic journal Finans/Invest is written by Professor Ken L. Bechmann and Associate Professor Mads Stenbo Nielsen, both at the Department of Finance at CBS.