Carbon companies still a SELL

One of the best organisations analysing and reporting about the international systemic risk of listed companies concentrated in resource extraction is Carbon Tracker.  

Its reports are startling in their simplicity and the scale of the research.

We wrote about an earlier report of theirs “….the outstanding issue for me is that credit [debt] and equity analysts around the world have not picked up on this.  Where are they?” and “Why would anyone want to invest in companies whose assets are highly likely to be impaired, and whose product is also killing their children and grandchildren.”

Their report illustrated as clear as day follows night (well, for the moment, give it a few decades and it may not) that there are substantial number of listed commodity companies on international stock exchanges whose assets will be substantially impaired in the near term.  With a high probability.

Now they have delivered another critical report about listed coal companies on the London Stock Exchange: 

New analysis from Carbon Tracker endorsed by WWF shows how the growing number of coal mining companies listing in London exposes the financial market to a significant systemic risk. Investors tracking the FTSE AllShare Index are facing increasing efforts across the world to regulate the carbon dioxide (CO2) emissions from coal-fired power generation, most recently in Australia.­­­Carbon Tracker estimates that coal reserves equivalent to 44.56 GtCO2 are held by companies listed on the London Stock Exchange. This is equivalent to 400 years of emissions from coal power stations in the UK, which currently stand at around 0.1Gt CO2 per annum.

Where are the reserves? A third of coal listed in the UK is actually located in Australia, where the government has recently agreed to deliver a carbon tax and emissions trading scheme.  So “UK” investors are potentially exposed to climate change regulatory risk in Australia.  However, Australia and Indonesia export around three-quarters of their coal production.  So, in fact, around half of the coal owned by UK-listed companies is supplying developing economies in China, Russia, India and South Africa.

They call for regulators “Now is the time for them to also ask financial regulators to deliver a 2°C degree capital market system.”

Essentially the problem is two fold – actually more, but dealing with these.  When considering global strategic issues, there is an agreed limit of 2°C rise in temperature.  That is the world has agreed to cut its carbon emissions so that the temperature rises no further than that.  Beyond that are unknown and frightening climate consequences.

BUT, the amount of (in this report) coal as an asset listed on the world’s stock exchanges is far in excess of the amount of coal allowed to be burnt under the Durban climate agreement of 2°C.  

So in effect, the Directors & Officers, the regulators, the auditors, the CFO’s, and all the investors of these listed companies are wilfully blind to the fact that they are probably reporting false information with respect to assets;  are wilfully blind to regulating that false reporting;  and wilfully blind to investing in it.  

There is a clear yawning gap between a target limit of 2°C with respect to climate change, and unlimited degrees Celsius as amassed on the balance sheet of these listed companies.  And no amount of carbon credits / or trading can offsett the consequences of burning their assets.  If this was a company with internally competing strategies you would sack the board.  

The second problem is that many of these assets are listed on the London Stock Exchange.  Therefore that exchange carries a significant systemic risk when like a flood all these companies start amending their asset values.  Especially for all those pension managers who blindly invest to the index.  

For this I have very little sympathy.  England is fighting tooth and nail to be the global financial centre.  When you are, what you get is the world’s systemic risks in a concentrated form.  

As I have written elsewhere.  The directors of these listed companies are in my opinion wilfully blind to their impaired assets; and regulations already exist for them to commence reporting their assets in a true and fair manner.  After considering all the risks.  Publicly.

We need the regulators to act.  And that is what Carbon Tracker is doing.