Carbon Majors and the Capital Markets

September 7, 2017

In May we discussed the potential financial and capital markets impact of carbon pricing on some of the world’s most carbon intensive companies. More recently, the CDP (formerly the Carbon Disclosure Project) released their 2017 Carbon Majors Database, which tracks and attributes carbon emissions to its survey base of 224 leading fossil fuel companies.

Carbon Majors Database

The Carbon Majors Database highlights several key points in assessing the disclosure issues and risk management challenges faced by some of the world’s leading fossil fuel companies. Of particular interest, the Carbon Majors Database stated that:

  • Emissions from investor owned companies are significant – the 224 fossil fuel companies in their Database account for 30.6 GtCO2e and of these:
    • 30% are public investor-owned enterprises;
    • 11% are private investor-owned enterprises;
    • 59% are state-owned enterprises;
  • Distribution of emissions is concentrated:
    • 50 fossil fuel companies account for approximately half of global industrial carbon emissions;
    • All 224 fossil fuel companies in the Database account for 71% of global industrial carbon emissions.

Capital Markets

So, a relatively small number of companies are at the forefront of a shifting economy, one that is increasingly aware of the social costs of carbon. These companies will play a pivotal role in carbon regulation as they will be responsible for the payment of, or will be responsible for passing on, a large part of carbon costs in the future.

Shareholders are already acutely aware of the potential impact that carbon regulation may have on these companies and the capital markets as a whole. Sweeping regulatory changes, and the contrasting regulatory perspective of the United States compared with that of the rest of the world, has created substantial uncertainty surrounding carbon pricing and regulation. These factors have translated into a number of shareholder proposals centered around climate change disclosure, as shareholders increasingly look to corporations to address the strategic risks associated with climate change. Recently, shareholder proposals to enhance climate change disclosure have been passed at each of ExxonMobil, Occidental Petroleum Corporation and PPL Corp. Interestingly, Blackrock Inc., the world’s largest asset manager, was instrumental in the passing of the shareholder proposals at ExxonMobil and Occidental and has publically stated that climate change disclosure is one of its top priorities. Their message is clear, climate change is a fully fledged and mainstream financial and capital markets issue and is no longer just a “fringe issue” of interest to a variety of social activists.

ExxonMobil, in particular, is no stranger to pressures from shareholders with respect to climate change disclosure. The company is involved in several lawsuits which allege that it made misleading and false statements to investors. One of the suits alleges that Exxon selectively used contrasting carbon costs when evaluating certain oil sands projects. The court filings allege that, instead of using its publically disclosed proxy cost for carbon of $80/ton, ExxonMobil applied a much lower number when determining the value of certain projects. Notwithstanding that there is nothing inherently wrong with a company applying different cost metrics to different projects in different jurisdictions, this case highlights the need for companies to provide more fulsome disclosure to shareholders in order to assure them that the company is adequately managing climate change related risks. Furthermore, such tensions are not limited to fossil fuel companies themselves. This month, shareholders launched a class action against Commonwealth Bank in the Federal Court of Australia. The lawsuit, the first of its kind, alleges that the bank failed to disclose the risks to its business posed by climate change in its recent public filings.

Corporations seem fated to play an important role in the transition to a lower-carbon economy. Shareholders, increasingly aware of the potential financial impact of carbon and climate change, will be looking to these companies for both leadership and information. Companies which fail to adequately engage with shareholders on climate change do so at their own peril and may face an increasing number of shareholder proposals or lawsuits in the future. While asset managers have expressed a willingness to work with management to enhance disclosure and develop sound corporate strategy around climate change, in the words of Blackrock, “[their] patience is not infinite.”

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