Stock exchanges’ listing rules putting investors at risk, new report finds.
Global stock markets are financing companies which are sitting on three times more coal, oil and gas reserves than can be burned without breaking the 1.5°C Paris climate target, according to think tank Carbon Tracker.
The exchanges, and the associated industry of banks, insurers, lawyers and financial services providers, are profiting from activities that are at odds with their countries’ climate commitments and that put investors at risk, the report said.
Carbon Tracker suggested changes to listings rules would reduce investors’ exposures, as would the further development of alternative indexes.
If more than 40% of these reserves are extracted and burned, the world will comfortably pass 2°C of warming, the research found, while 90% of all listed companies’ carbon reserves and resources must stay in the ground in order to limit warming to 1.5°C, in line with the Paris Agreement goal.
“If governments are really serious about climate change they must ensure that the activities of stock exchanges and the financial centres around them are consistent with national climate goals and net zero commitments or we will lose any chance of meeting the Paris target,” said report co-author and Oil and Gas Analyst at Carbon Tracker Thom Allen.
“This is especially important now as fossil fuel prices and related company stocks soar.”
The report warns that fossil fuel demand will peak as government policies to cut emissions, asset owners’ net-zero commitments and the rapid growth of clean energy technologies combine to transition the economy towards renewables. This could lead to vast amounts of stranded assets if oil, gas and coal companies continue with business as usual.
Earlier this month, United Nations Secretary-General António Guterres said the world had “gambled on fossil fuels and lost.”
“Nothing could be more clear or present than the danger of fossil fuel expansion. Even in the short term, fossil fuels don’t make political or economic sense,” he told the Major Economies Forum on Energy and Climate.
Stock markets urged to take action
Stock markets are failing to respond adequately to the risks of the global transition to a carbon-neutral energy system, putting investors at risk and also threatening the wider ecosystem of banks, insurers, lawyers and financial service providers in financial centres, said Carbon Tracker.
It estimates that more than US$1 trillion of oil and gas assets risk becoming stranded if fossil fuel companies pursue business as usual, including US$600 billion held by listed companies.
New York is the financial sector least aligned with Paris and at greatest risk from stranded assets if fossil fuel companies continue business as usual, the report found.
If oil and gas companies listed there continue as usual, they would spend US$700 billion in the decade to 2030, but only 20% of this would be on projects compatible with the 1.5°C goal.
As of 22 February, fossil fuel companies had a total market capitalisation of US$1.4 trillion, or 3% of the combined value of the NYSE and NASDAQ.
The London Stock Exchange had the second highest market capitalisation of listed fossil fuel companies at US$500 billion but they made up 15% of value on the exchange at that date, making it far more exposed.
The UK government last year set out plans to make the country the world’s first net zero financial centre, with new requirements for UK financial institutions and listed companies to publish net-zero transition plans.
Only around half of the future ‘business as usual’ spending by oil and gas companies listed in London was found to be compatible with 1.5°C, Carbon Tracker found.
Sydney had the second-lowest degree of alignment under a 1.5°C scenario, with just 30% of future spending compatible with 1.5°C and a large share of potential future spending incompatible with even a 2.7°C scenario.
Listing rules and index compositions could change
“Financial centres facilitate, and profit from, both the primary equity raising and ongoing finance requirements for these companies, as well as secondary trading activities,” said report co-author and Head of Oil, Gas and Mining at Carbon Tracker Mike Coffin.
“As such, financial institutions that continue to enable such activities beyond climate limits cannot themselves be viewed as Paris-aligned.”
Embedded emissions in the fossil fuel reserves of listed companies – the amount of CO2 that would be released if they were extracted and burned – have grown by nearly 40% in the last decade, the research found, despite a growing urgency to tackle climate change risks.
Stock markets could change listing requirements to not allow companies who intend to develop new fossil fuels to list, and potentially extend this to financial services companies that continue to support these activities, said Coffin.
Alternate index compositions may help investors who are concerned about the climate impact of their investments to break free of tracking-error limitations if they were to divest from oil and gas investments, he said.