June 11, 2015

In the lead up to the UN climate change talks in Paris this year, there has been a great deal of speculation regarding whether a new international GHG reduction target will be set, and ultimately what this would mean for businesses and the average person. Regardless of what happens in Paris, there is increasing climate change related pressure on energy producers on a number of fronts. One key shift has been around the concept of the carbon bubble, and the related impact of the divestment movement.

What is the carbon bubble?

It is an accepted fact that carbon dioxide is causing an enhanced greenhouse effect that is increasing global temperatures.  Scientists and the countries of the world have agreed that the planet cannot warm by more than 2°C without catastrophic impacts.

Of significant concern to investors is that some fossil fuel companies aren’t taking this target or threat seriously, which could lead to stranded assets and devaluation of companies across the industry.

How is the investment community responding?

The perceived risk associated with investing in fossil fuel companies is exacerbated by the carbon bubble concept. Universities like Stanford and Georgetown, the Rockefeller Foundation and Norway’s sovereign wealth fund are divesting their fossil fuel investments, and some investors and environmental advocates are pressuring other organizations (especially universities, pension funds and community groups) to do the same.

While the divestment movement is gaining momentum, many critics argue that it is not having a financial impact on organizations. By giving up their shares, divestors are losing their voice within companies to those that may not care about environmental impacts. Engaging and participating in a dialogue with energy companies – as investors, consumers, or members of the community – can shift decision making. One recent example is Shell and BP agreeing to be more transparent with respect to their GHG risk, in response to shareholder resolutions on the issue.

What does this mean for organizations in the energy sector?

There is no immediate replacement for fossil fuels at this stage: renewable sources of energy will need to be scaled up significantly before they can truly displace traditional sources of energy. However, the reality is that social license issues continue to grow, as do carbon regulations (in the form of GHG reporting, carbon pricing, or other types of activities, e.g. renewable portfolio standards, energy efficiency initiatives, etc.) and voluntary reduction commitments from both governments and companies.

Many forward-thinking companies and governments are taking this in stride and diversifying into various renewable or other low-carbon opportunities. These organisations will be in a strong position to lead as we transition to a low-carbon economy. While quantification is sometimes difficult, in 2013 E&Y valued the Cleantech industry at $170 billion (grew 18% in 12 months),  the UK’s low carbon economy (and supply chain) have been calculated to generate £120 bn and provided 460,000 jobs in the years 2010 – 2013 and in BC has 14,100 jobs attributed to clean energy on 156 projects.

Demonstrating these values in action at the G7 Summit this week, leaders not only committed to decarbonization, but PM Stephen Harper said, “We simply have to find a way to create lower carbon-emitting sources of energy.” This issue is not going away.