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Carbon Tracker: Financial system unprepared for oil and gas realities

Fossil fuel companies make up a quarter of the value of global equity markets but are on shaky ground, according to a new report from climate change research group Carbon Tracker
Carbon Tracker: Financial system unprepared for oil and gas realities

A new report lays out dire consequences of banks and investors ignoring the risks of continuing to back fossil fuel companies, with a loss of global financial stability to the worst-case scenario. 

Carbon Tracker says if continued spending on growth by companies like BP (BP.), Royal Dutch Shell (RDSB) and other majors is backed by banks and investors for years to come, it could eventually trigger a crash in equity and debt markets.  

The report comes after months of oil price turmoil, beginning when the Covid-19 demand hit was exacerbated by Saudi Arabia ramping up supply following an Opec spat. Carbon Tracker analyst Kingsmill Bond told Investors Chronicle this price crash had “brought the future forward”. “At times where you're close to a structural peak, a cyclical shock such as this can bring that structural peak forward,” he said. 

Last month, BP chief executive told the Financial Times it was possible the world already reached peak oil demand. While most of the oil and gas majors have set emissions targets out to 2050, their production will keep steady or grow for years to come as upstream capital spending is focused on finding and exploiting new assets. 

In its report, Carbon Tracker said oil and gas companies’ growth-focussed approach would mean stranded assets and write-downs as demand falls off and governments bring in more Paris Agreement-related regulation. 

On the debt side, a report from the central bank group Network for Greening the Financial System (NGFS) released at the end of May said banks around the world did not distinguish between ‘green’ and ‘brown’ debt or holdings well enough. A NGFS survey found 61 per cent of banks that responded did no climate or environmental risk analysis on financing activities. 

Mr Bond said Carbon Tracker’s warning was to help avoid a shock to global markets. The research organisation estimated fossil fuel companies make up a quarter of global equity values, at $18tn. 

“[The NGFS report) means that a lot of the systems and assumptions for payback rates and recovery rates that the banks are making in its loans to this sector are likely to be incorrect;  they face the risk of a fossil fuel Minsky Moment,” he said - meaning a rush to the exits. 

Carbon Tracker highlighted thermal coal as a sector where changes had already started. In Europe and the US, coal power has plummeted as a proportion of the power supply in favour of natural gas and in some cases renewables, and miners are selling off their thermal operations under investor pressure. While China is still building dozens of new coal plants a year, BMO Capital Markets says half of all local mines are loss-making despite consumption climbing 9 per cent year-on-year.