Exposure of fossil fuel assets to carbon risk: will stranding risk increase in a post COP21 Agreement world?

Autore: Isabella Alloisio & Francesco Pietro Colelli

The Agreement reached at COP21 in December 2015 is driving a new momentum in climate policy worldwide, so that carbon intense projects and investments will likely face an increasing risk of stranding. The upstream oil industry is currently facing a dual challenge: economic restraints driven by low fossil fuel prices and expensive extraction and pressures driven by carbon concerns. At the same time, carbon intensive subcritical coal assets face important pressures coming over carbon concerns and other climate regulation. A key question is if a timely, ambitious set of reforms will establish an energy system transition coherent with the retirement of these assets. Furthermore, a framework aligning the decisions of financial institutions with long-term climate goals is taking shape, as a recent strain of literature has started to evaluate how an operator’s carbon risk is passed on to lenders and investors with a stake in these companies. The carbon exposure of investors should be evaluated and managed by a combination of different options ranging from disclosure and engagement to divestment and reallocation. The success of the divestment campaign, in particular, is signaling how it is not possible for operators to ignore changing investor sentiment.