« View All Blog Posts

How to Burst the Carbon Bubble: Inaction
By Steve Schueth

By: Steve Schueth and Michael Schweibinz

Investors face one challenge above all others: uncertainty. Unlike risk, uncertainty cannot be quantified or priced. Yet when investors use the words “risk” and “uncertainty” synonymously, they become susceptible to the notion that since it’s so difficult to weave uncertainty into investment analysis, they might as well disregard it.

According to Al Gore’s recent opinion piece in the Wall Street Journal, this is exactly what is occurring with the carbon asset bubble. Gore states that most investors are still factoring in carbon risk as an uncertainty and, therefore, ignoring it when analyzing investments. In actuality, however, they are disregarding a known material risk, and are subjecting their “portfolios to an externality that should be integrated into the capital allocation process.”

Scientists widely agree that an increase of only 2 degrees Celsius in average global temperatures are highly likely to “cause devastating and irreversible damage to the planet.” Also widely agreed is how remarkably quickly we will surpass this threshold at our current rate of carbon fuel consumption which continue to create massive global CO2 emissions.

The International Energy Agency has determined a global “carbon budget” which allows for only one third of current, existing fossil fuel reserves to be burned between now and 2050. In other words, “two-thirds or more of fossil fuel reserves will not be monetized if we are to stay below 2°C of warming.”

This is significant from an investor perspective. The valuations of companies with proven fossil fuel reserves (primarily coal, oil, and gas) are based on the assumption that all those fossil fuels will be dug up and burnt. If they can’t be, or aren’t, for any reason, those assets become worth less—perhaps even worthless. Analysts are beginning to refer to this potential unutilized fuel stock as “stranded assets.”

Any investor who isn’t totally myopic should realize that it’s almost inevitable that the carbon asset bubble is going to burst. When it does, it will not be a surprise. As President John F. Kennedy said, "there are risks and costs to a program of action. But they are far less than the long-range risks and costs of comfortable inaction."

Integrating carbon risk into both debt and equity valuations is essential for both current and long-term risk management. Gore recommends four basic ways to achieve this:

  • Identify carbon asset risks across portfolios.
  • Engage corporate boards and executives on plans to mitigate and disclose carbon risks.
  • Diversify investments into opportunities positioned to succeed in a low-carbon economy.
  • Divest fossil fuel assets.

At First Affirmative, we believe that investors must take responsibility for the impact our money has in, and on, the world. We work to identify and invest in better, more profitable, and more responsible corporate citizens. For clients who want to use their investments to combat global climate change, a fossil fuel free investment solution—one that avoids fossil fuel extraction companies (coal, oil, gas)—may be the right choice.


Posted: November 18, 2013