In December the New York Times featured a story about Exxon Mobil leading the 5 largest oil and gas producers in announcing their expectation of a carbon tax.1 After years of rejecting any kind of tax, what are investors to think about this news?
Why is Exxon Mobil Leading the Way?
Actually, it’s a straightforward example of smart long-range planning. Here’s some background on how it happened: a confluence of investor demands, severe weather occurrences, and the growing probability of government regulation.
A recent report in Bloomberg Sustainability, “Investors Demand Climate-Risk Disclosure in 2013 Proxies,” presents an excellent summary of the pressure driving Exxon Mobil and the rest of the oil and gas industry. Rob Berridge, senior manager of investor programs for Ceres, a premiere environmental advocacy organization, says “investors want to know if oil and gas companies plan to move or fortify their coastal refineries due to sea level rise, and how much that will cost.” Just one example of government pressure includes the SEC decision last February requiring PNC Financial Services Group to allow a vote on a resolution to disclose the company’s exposure to climate change risks.2
Is There a Carbon Bubble?
And then there’s the bubble: the “carbon bubble” that is. To avoid catastrophic climate change, scientists have hypothesized that 80% of fossil fuel reserves cannot be burned. For oil and gas companies, this is a huge problem since approximately 50-80% of their valuation is in their reserves. Stranded assets is another way to think of it. Shareholders are asking how the carbon bubble may impact future cash flow.2
Exxon Mobil has been seeing the handwriting on the wall for a while, as shown when it bought its first natural gas production company in 2010. The company is now the largest producer of natural gas in the world. ExxonMobil now acknowledges that carbon pollution from fossil fuels contributes to climate change.3
Measuring Carbon Risk
In addition, 2013 saw the creation of new analytics tools for measuring the carbon emissions risk, not only for companies but also for portfolios diversified across the entire global economy. Bloomberg recently released the Carbon Risk Valuation Tool (CRVT) to 300,000 terminal users around the world.
Advisors who want to develop or maintain their competitive advantage in 2014 would be wise to introduce their clients to these recent developments in the investment and taxation landscape. Those who do so will likely be in the forward thinking minority for now. But something tells me that those smart, well paid executives in the oil and gas industry and their smart, well paid lobbyists in Washington, DC know at least as much about the future of energy policy as the average financial advisor.
1 “Large Companies Prepared to Pay Price on Carbon.” The New York Times, December 5, 2013: http://nyti.ms/1dRsTZ2.
2 “Investors Demand Climate-Risk Disclosure in 2013 Proxies.” Avery Fellow, Bloomberg.com, Feb 25, 2013: http://www.bloomberg.com/news/2013-02-25/investors-demand-climate-risk-disclosure-in-2013-proxies.html.
3 “The Carbon Time Bomb in Your Retirement Account.” Todd Woody, The Atlantic, Dec 9 2013: http://www.theatlantic.com/technology/archive/2013/12/the-carbon-time-bomb-in-your-retirement-account/282139.