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More Stranded Assets

[fa icon="calendar'] Apr 12, 2017 10:30:29 AM / by Bahar Gidwani

Much attention has been paid to the concept that global warming will cause a dramatic drop in the value of carbon
reserves.  A major shift towards non-carbon-based energy and non-carbon feedstocks for chemical processes could “strand” assets tied to oil drilling, coal mining, and fracking activities.  Various groups have tried to quantify the downside risk to energy companies, if the response to climate change occurs.

However, there are other assets that climate change could strand.  And, there are other sustainability trends that could result in stranding other types of assets.  Both corporate managers and investors should probably examine these risks, too.

Other Climate-Related Stranding

Most scientists tie the current widespread pattern of water shortages drought.jpgand droughts to climate change.  They believe that deforestation due to tree harvesting, conversion of forest to farmland, and stress on forests from increased temperatures is reducing flow of water into aquifers and streams.  The continued growth of the world’s population and rising use of water for the production of goods (e.g., the electronics, fabrics, and steel industries are all heavy water users) or food (both for irrigation and in beverages), are making things worse.

One societal response to this issue has been pressure to reduce use of water and to reuse water.  However another response could be for communities to constrain or even expel water-intensive industries from their locality.  A new bottling plant or a solar panel factory may create jobs.  But local politicians will hear screams from their constituents if they run out of drinking water.

Based on this logic, it is easy to imagine a gradual progression where existing water-using facilities become less economic.  Communities could cut off water supplies to irrigated agricultural lands—something that has already occurred in central California as the result of that state’s extended drought.  Companies that have factories or farmland on their books that could be affected by these changes may need to adjust their value downward, if they cannot find a way to mitigate the risks posed by further climate change.

Other Sustainability Trends to Watch

A number of other sustainability-related trends could produce asset stranding.  child labor sm.jpgFor instance, both the US and the UK have implemented rules regarding the use of “conflict minerals.”  These rules per se reduce the value of mines that cannot meet these standards—and reduce the GDP and financial future of the countries where these mines are located.  Rules on child labor and forced labor could eventually reduce much of the cost advantage previously held by clothing factories, fish farms, and electronics groups in less-developed countries.

Many of the world’s largest companies are adopting stringent sustainability standards for their suppliers.  They are asking for details on how supplier employees are hired and paid, what health and safety processes are in place, and how suppliers handle ethics and corruptions issues.  Losing a major customer could put a supplier company out of business—effectively stranding the assets it has accumulated.

Next Steps

Both corporate managers and investors care about risk and seek ways to manage it.  Companies that fully understand the risks posed by sustainability-related trends should be able to devise strategies to mitigate this risk.  If companies disclose their strategies, investors may use this information to adjust their risk assessment for these companies.  (However, there is a chance that investors could adjust their risk assessment upwards instead of downwards, if they had not previously understood that the company and its peers faced a new risk.)

Each identified risk may also generate opportunities for growth and new products.  We have seen this process already in the energy business, which has spawned areas such as smart grid technology, battery technology, and wind power.  Pressure to find new sources of water has driven a renewed interest in desalinization and in safely injecting waste water into aquifers.  Concerns about conflict minerals and labor issues have driven customer companies to find new sources of supply for the materials they need.  There may also be an opportunity for the financial industry to invest in projects that aid these adaptations and for the insurance industry to offer policies that explicitly protect companies (and investors) from sustainability-related risks.

We believe companies need to take a longer term and strategic look at the risks associated with asset stranding.  They can no longer wait to take action after one of their factories collapses or their water taps run dry.

Photos courtesy of Tyler Bell and Maurizio Castanzo via Flickr cc.

 


Bahar Gidwani

Bahar Gidwani is CEO and Co-founder of CSRHub.  He has built and run large technology-based businesses for many years. Bahar holds a CFA, worked on Wall Street with Kidder, Peabody, and with McKinsey & Co. Bahar has consulted to a number of major companies and currently serves on the board of several software and Web companies. He has an MBA from Harvard Business School and an undergraduate degree in physics and astronomy. He plays bridge, races sailboats, and is based in New York City.

CSRHub provides access to the world’s largest corporate social responsibility and sustainability ratings and information.  It covers over 17,000 companies from 135 industries in 133 countries. By aggregating and normalizing the information from 525 data sources, CSRHub has created a broad, consistent rating system and a searchable database that links millions of rating elements back to their source. Managers, researchers and activists use CSRHub to benchmark company performance, learn how stakeholders evaluate company CSR practices, and seek ways to improve corporate sustainability performance.

  

 

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How Fossil Fuel Divestment Will Hurt Fossil Fuel Stock Prices

[fa icon="calendar'] Jan 21, 2015 9:33:25 AM / by Carol Pierson Holding

By: Carol Pierson Holding

If anyone needed more proof that economics trumps sustainability: low gas prices are causing a plunge in electric vehicle and hybrid sales.

Ban Fracking Tax Carbon

The same phenomenon is happening in the divestment movement. Moral outrage pushed 83 churches, universities and non-profits to divest $50 billion before the September climate march. This is a blip for an industry valued at $5 trillion, whose top investor Blackrock owns $146 billion in fossil fuel investments and where a single company Exxon Mobil is valued at $425 billion, and Shell and Chevron at $268 billion and $248 billion respectively.

These numbers are staggering, and the pace of the divestment movement in relative monetary terms is glacial, despite its many moral and symbolic victories. Even if as Bloomberg’s New Energy Finance says this divestment movement has more rapid growth and quicker scaling than any of its predecessors, does it have a chance of affecting fossil fuel company behavior?

Only when it starts to affect the stock price.

Tim Dickinson argues eloquently in this issue of Rolling Stone that divesting has become the smart move for the financially savvy, and not because of divestment pressure. Prompted by the recent 50% drop in the price of oil, now hovering below $45 per barrel —

“From late June to early January, across the world, the 10 oil firms with the largest proven reserves collectively lost roughly 20 percent of their market value.  …Goldman Sachs warned that nearly $1 trillion in planned oil-field investments would be unprofitable – even if oil were to stabilize at $70 per barrel. The industry is already scaling back the hunt for high-cost sources of new oil. Chevron has shelved drilling in the Canadian Arctic, and Hercules Offshore, a significant driller in the Gulf of Mexico, has idled four rigs and laid off more than 300 workers. Plunging profits are also putting the brakes on fracking.”

And that’s only the beginning. Countries around the world are putting limits on carbon emissions, so much so that Governor of the Bank of England Mark Carney warned that "the vast majority of reserves are unburnable." The argument that fossil fuel companies’ reserves will become “stranded assets” has long been a hopeful prediction from activists, but the message has a different tone when it comes from a powerful central banker whose main concern is not sustainability but stability.

Another concerned guardian of the status quo has similar fears. Bevis Longstreth, who served as commissioner of the SEC under Ronald Reagan and later chaired the Finance Committee of the Rockefeller Brothers Foundation, blasts the oil companies: "There is no good reason for this vast expenditure of stockholder wealth. It is wasted capital, an offense against stockholders in terms financial alone."

But my favorite argument for divesting comes from a report generated by Oxford University’s Stranded Assets Programme. The authors bring up the very real reputational risk that a divestment movement creates, which they label “Organisational Stigma,” or “disapproval, even ‘disgust’ at an organisation’s activities, values or behaviour” and tie it directly to stock price: “Even when divestment outflows are small or short term and do not directly affect future cash flows (as is true with fossil fuel divestment), if they trigger a change in market norms that close off channels of previously available money (i.e., the ability to sell stock), then a downward pressure on the stock price of a targeted firm may be large and permanent.”

Add to that the growing perception that the fossil fuel companies’ decisions about where to invest are considered irrational, and you've created a very serious threat to fossil fuel companies' stock price and the managers whose pay and bonuses depends on that price. And that’s the most likely route to real change.

Photo courtesy of Carol Pierson Holding 


Carol Pierson HoldingCarol Pierson Holding writes on environmental issues and social responsibility for policy and news publications, including the Carnegie Council’s Policy Innovations, Harvard Business Review, San Francisco Chronicle, India Time, The Huffington Post and many other web sites. Her articles on corporate social responsibility can be found on CSRHub.com, a website that provides sustainability ratings data on 13,000+ companies worldwide. Carol holds degrees from Smith College and Harvard University.

CSRHub provides access to corporate social responsibility and sustainability ratings and information on 13,000+ companies from 135 industries in 127 countries. By aggregating and normalizing the information from 370 data sources, CSRHub has created a broad, consistent rating system and a searchable database that links millions of rating elements back to their source. Managers, researchers and activists use CSRHub to benchmark company performance, learn how stakeholders evaluate company CSR practices and seek ways to change the world.

 

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[fa icon="comment"] 0 Comments posted in Bevis Longstreth, BlackRock, Bloomberg New Energy Finance, Exxon Mobil, Fossil Fuel Divestment, Shell, Uncategorized, Mark Carney, oil reserves, organisational stigma, Rolling Stone, Tim Dickinson, oil prices, Oxford University Stranded Assets Programme, stranded assets, Carol Pierson Holding, Chevron, Hercules Offshore

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