Energy markets 'at risk' amid push for climate consensus in Paris
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Some leaders taking part in the COP21 climate talks in Paris say financial markets could be the big losers in the fight against global warming, unless investors read the writing on the wall.
special correspondent at the COP21 climate conference
Former US vice president Al Gore on Thursday delivered an unexpected message at the key UN summit.
He was not promoting a new documentary on the catastrophic effects of rising sea levels. Instead, he wanted to offer some financial advice. "We are seeing a tremendous shift toward renewable energies", he said in reference to consumers who are switching to energy generated by solar and wind power as their market prices decline. "Investors need to look at that trend, unless they want to be left stranded."
The ex-vice president's warning could be disregarded as scaremongering by an aging politician struggling to remain relevant. He is, however, part of a growing group of people expressing concern about the financial risks associated with the traditional energy sources – mainly oil, coal and gas.
If countries are serious about setting a common pathway that would keep the earth's overall temperature from rising by 2°C this century, as they have repeated over and over again at the COP21, many fossil fuels will have to stay in the ground.
A recent study by the London School of Economics and others showed that if countries manage scale back natural-resource extraction to reach the precious 2°C target, as much as 82 percent of the world's coal, 49 percent of gas, and 33 percent of oil reserves will be left untouched.
Gore went further in his admonishment, comparingthe "trillions of dollars of stranded fossil fuel assets" to the US sub-prime lending bubble that precipitated the worldwide Great Recession starting in 2008.
The "carbon bubble" could burst, Gore and a growing number of financial experts are warning, when stranded fossil fuel assets spark a massive sell-off of oil, gas and coal company stocks.
'Potentially huge' risk
The theory about the effects global climate action could have on the value of traditional energy stocks was first put forward in 2011 by the London-based financial analyst group Carbon Tracker. It barely registered among investors back then, but the idea has gained momentum. In September of this year, Bank of England Governor Mark Carney said the exposure of UK investors and insurance companies was "potentially huge".
"The challenges currently posed by climate change pale in significance compared with with might come", Carney told bankers at a dinner in London. "Once climate change becomes a defining issue for financial stability, it may already be too late".
"Having someone as influential as Mark Carney recognise that this is a real risk to investors has been momentous", Michel Lepetit, vice-president of The Shift Project, an energy-transition think tank, told FRANCE 24. Lepetit is also the co-founder of Beyond Ratings, a financial ratings company that takes environmental concerns into account when appraising the stability of nations and corporations.
"The governor of the Bank of England has also highlighted the risk of several class-action suits against energy companies. They will argue that the companies knew the risks they were sitting on and did not disclose that information to shareholders on time," Lepetit added.
Amid growing support for climate policy around the globe, a growing number of companies are also starting to develop "green finance" sectors. For now, these are "specialised divisions within insurance companies and banks," said Lepetit.
They are essentially tasked with calculating the environmental risks associated with their financial operations and lend money to projects that can have a positive impact on the planet. "It is still a niche activity, but we expect it will grow quickly," he added.
The Nordic Environment Finance Corporation (Nefco) is one of the pioneer Green Finance groups. A public bank founded in 1990 by Finland, Denmark, Sweden and Iceland, it has a 500-million-euro budget to invest in projects that reduce carbon emissions. "Examples of projects are wind farms, organic agriculture, or even waste management," said Nefco financial advisor Ash Sharma.
"Investing in solar panel complexes in African countries will obviously become a profitable venture when this renewable energy becomes more widespread in the region," he told FRANCE 24.
If the "carbon theory" proves correct, it could also prove to be a safe shelter for investors who take action before it is too late.