Investors are becoming increasingly aware of the climate risks associated with extracting and burning carbon. Investors can see that fossil fuel companies are a major source of emissions. so far, shareholder engagement and divestment have been the primary responses, the pressures to halt carbon-based fuel extraction are intensifying.
Policy and technology changes could cause extraction firms to lose $34trn in revenue. Combined with changing investment policies, extraction firms may be unable to realise the value of their fossil reserves, making current market valuations misjudged. Some argue that fossil fuel assets will become uncompetitive as the price of renewable energy drops. The market share fell from 29% of the s&p index in 1980 to 5.3% by 2019.
One response from fossil fuel firms has been to invest in carbon-offsetting measures. Royal Dutch Shell, for example, plans to spend $300m on reforestation. This may sound impressive, however, climate wary investors are cautious, is this a real attempt to address problems, or is it about retaining societal legitimacy so that Shell can continue its activities.
Dr. Q G Rayer and P Walton (2020), Bulk offsetting: half measures, originally published in TRANSFORM magazine December 2020 © IEMA, p16-17, 11 December 2020.