Are Fossil Fuel Companies Telling Investors Enough About the Risks of Climate Change?

By Paul Griffin, Professor of Management at the University of California, Davis and Amy Myers Jaffe, Executive Director for Energy and Sustainability, University of California, Davis. Cross-posted from DeSmogBlog.

Prior to President Donald Trump taking office, there was a push to require oil and gas companies to inform their investors about the risks of climate change. As governments step up efforts to regulate carbon emissions, the thinking goes, fossil fuel companies’ assets could depreciate in value over time.

The Securities and Exchange Commission, for example, was probing how ExxonMobil discloses the impact of that risk on the value of its reserves. And disclosure advocates have been pressing the agency to take more decisive action.

Now that Republicans control Congress and the White House, will the SEC reverse course? And should it?

The Trump administration’s apparent skepticism regarding climate change may portend such a change in direction. And Congress’ decision to roll back transparency rules for U.S. energy companies in the Dodd-Frank Act suggests transparency policy more broadly is being loosened.

The terms of this debate, however, remain premised on the notion that investors don’t have enough information to accurately assess the impact of climate change on company value. A growing body of academic research, including our own, suggests they already do and that a compromise path that improves the terms and conditions for voluntary disclosure might be optimal.

“Stranded” Assets

Such a change in direction would be good news for ExxonMobil in its fight with the SEC over climate change disclosure.

Last year, ExxonMobil announced that 4.6 billion barrels of oil and gas assets — 20 percent of its current inventory of future prospects — may be too expensive to tap. That would be the largest asset write-down in its history. So far, the company has written down US$2 billion in expensive, above-market cost natural gas assets. More write-downs — this time possibly oil sands — may be forthcoming.

It’s not clear how much of that are tied to the risks of climate change, but some took it as evidence that the fossil fuel industry is not doing enough to inform investors about those risks.

Disclosure advocates in the United States and Europe have been urging oil and gas companies to say more about the potential for their booked assets to become “stranded” over time. Stranded assets are mainly oil and gas reserves that might have to stay in the ground as a result of a combination of new efficiency technologies and policy actions that seek to limit greenhouse gas emissions.

The collapse in coal equities last year highlighted that concern. Intensifying price competition from cleaner energy sources such as natural gas and solar energy and the increasing cost of developing cleaner coal overwhelmed the industry’s already declining revenue.

Whatever policy direction the SEC takes on climate risk, it is unlikely to deter those investors who believe the present system of voluntary and mandatory disclosure has failed to provide them with sufficient information on the risks of climate change. And some market participants, such as Bank of England Governor Mark Carney, worry that the underreporting of climate change information is creating a big risk for financial markets — a carbon bubble — that could lead to a major market failure.

Currently, the SEC requires mandatory disclosure of all “material” information, while everything else is voluntary. This system has created a vast amount of publicly available information on the costs and risks of climate change.

But as the recent ExxonMobil revelations highlight, the market clearly does not have all information. There are good reasons for this. For competitive reasons and business survival, certain company information is kept confidential and private.

The courts and the SEC have always acknowledged a company’s right to privacy regarding certain information. Companies, moreover, argue it could be harmful to shareholders if disclosed prematurely. An appropriate balance is required.

Costs of Carbon

Our own research confirms that financial markets already price climate risk into oil and gas company stocks based on company reports and other data available from public and proprietary sources. These data allow investors to estimate reasonably accurately the effects of climate change on companies, including the expectation of write-downs.

For example, our work suggests that investors first began pricing in this kind of data as early as 2009, when the scientific climate change evidence about stranded assets first became known. Our latest research, soon to be published in Contemporary Accounting Research, shows that the share price of the median company in the Standard & Poor’s 500 reflects a penalty of about $79 per ton of carbon emissions (based on data through 2012). This penalty considers all S&P 500 companies, not just oil and gas firms. Importantly, this research also shows that investors are able to assess this penalty from company disclosures and the noncompany information available on climate change risk.

This penalty comprises the expected cost of carbon mitigation and the possible loss of revenue from cheaper energy sources.

Exxon, for its part, says it prices the cost of long-term carbon internally at $80 a ton, matching our market model.

The Right Mix

All this begs the question of what level of additional mandatory disclosure is needed to improve the “total mix of information available” for investors on which to base decisions.

With climate change a pressing concern, investors certainly have a right to demand more disclosure, and we agree with that. But at what cost?

Indeed, the cost of disclosure can be significant, and it’s not just the direct out-of-pocket costs that policymakers should consider when drawing up new regulations. Indirect costs, such as forcing oil and gas companies to disclose vital confidential information to rivals, could be particularly burdensome to particular companies. And society could pay a heavy price if new rules lead companies to make unwise operating or investment decisions or postpone investment unnecessarily. Energy costs could increase or supplies decrease because of miscalculations.

Additionally, the private sector is trying to fill the gap on its own. Moody’s Investor Service, for example, announced in June that it will now independently assess carbon transition risk as part of its credit rating for companies in 13 sectors, including oil and gas.

SEC Voluntary Disclosure Program

Given these and other factors, rather than mandate any new disclosures now, we urge the SEC to first implement a voluntary program along the lines of its successful 1976 program for the disclosure of sensitive foreign payments (like bribes). The SEC’s report on this program showed no harm to the stock prices of participants after they disclosed payments.

In fact, it is often the lack of participation that invites a negative stock price response, as markets often view nondisclosing businesses as those with something to hide.

This voluntary program also helped pave the way for the Foreign Corrupt Practices Act of 1977, which formalized the accounting requirements for bribery payments to foreign officials.

We would hope that a voluntary disclosure program for climate change would achieve a similar goal: that is, formal SEC disclosure requirements that consider the interests of all parties.

Such a program could initially target a defined group, such as the 50 largest SEC-registered oil and gas firms. That would give the SEC and private organizations like Moody’s the additional hard data and experience needed to examine the costs, benefits and financial market impacts of climate change risk disclosures.

Doing this would pave the way for more permanent rule-making to better serve the needs of investors, companies and, ultimately, the public.

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About Lambert Strether

Readers, I have had a correspondent characterize my views as realistic cynical. Let me briefly explain them. I believe in universal programs that provide concrete material benefits, especially to the working class. Medicare for All is the prime example, but tuition-free college and a Post Office Bank also fall under this heading. So do a Jobs Guarantee and a Debt Jubilee. Clearly, neither liberal Democrats nor conservative Republicans can deliver on such programs, because the two are different flavors of neoliberalism (“Because markets”). I don’t much care about the “ism” that delivers the benefits, although whichever one does have to put common humanity first, as opposed to markets. Could be a second FDR saving capitalism, democratic socialism leashing and collaring it, or communism razing it. I don’t much care, as long as the benefits are delivered. To me, the key issue — and this is why Medicare for All is always first with me — is the tens of thousands of excess “deaths from despair,” as described by the Case-Deaton study, and other recent studies. That enormous body count makes Medicare for All, at the very least, a moral and strategic imperative. And that level of suffering and organic damage makes the concerns of identity politics — even the worthy fight to help the refugees Bush, Obama, and Clinton’s wars created — bright shiny objects by comparison. Hence my frustration with the news flow — currently in my view the swirling intersection of two, separate Shock Doctrine campaigns, one by the Administration, and the other by out-of-power liberals and their allies in the State and in the press — a news flow that constantly forces me to focus on matters that I regard as of secondary importance to the excess deaths. What kind of political economy is it that halts or even reverses the increases in life expectancy that civilized societies have achieved? I am also very hopeful that the continuing destruction of both party establishments will open the space for voices supporting programs similar to those I have listed; let’s call such voices “the left.” Volatility creates opportunity, especially if the Democrat establishment, which puts markets first and opposes all such programs, isn’t allowed to get back into the saddle. Eyes on the prize! I love the tactical level, and secretly love even the horse race, since I’ve been blogging about it daily for fourteen years, but everything I write has this perspective at the back of it.


  1. anon

    Can you elaborate on the $79 or 80 per ton price. There are around 35 billion tons of carbon emissions worldwide. So we are talking about $2.5 trillion or so in costs here (worldwide public company profits are on the 3-4 trillion magnitude i believe).

    So just curious if most of these are “hard” costs such as a $79 per ton tax on carbon thtat would raise this 2-3 trillion, or are there a bunch of soft costs etc. Trying to better understand what is implied by this framework of carbon costs that you seem to be advocating. thanks

    1. Ignacio

      This is what they write in their paper:

      We extend the model by adding an equity valuation factor related to GHGE. This factor captures investors’ expectations that higher GHGE will drain more cash flow from the firm in the form of higher future compliance, abatement, regulatory, and operating costs not already reflected in the market’s assessments of residual income or book value (and other control variables in our model).”

      Notice that this is applied for S&P firms. Not to all carbon emitters including you and me. Thus you should multiply, not by all carbon emissions, but those associated DIRECTLY with the activities of the companies studied. The authors conclude that de $79 per ton correspond to a market equity discount of less that 0,5% of market capitalization. Those costs do not include indirect emissions.

      There are soft and hard costs associated with abatement and operation. but these can vary wildly depending on each company. I guess thats why the authors do not like full disclosure. For instance, operation expenses are supposed to increase if de-carbonization requires change to more expensive energy souces.

  2. susan the other

    This isn’t the hapless housing market, clearly. Energy is sacrosanct – No short selling allowed. What’s a free marketeer to do?

  3. BeliTsari

    The bridge-fuel grift has become a bridge too far; with <10% efficiency, what exactly would we turn to once tens of thousands of fracked wells start blowing-out, the climate change hoax floods coastal yuppies while drought, freakish weather changes, novel diseases, pests and "unseen repercussions" all escalate exponentially, and K Street's media can't obfuscate, ignore or distract victims as easily as they've had it so far? Drought precludes GE monoculture petroleum based agriculture & CAFO meat, as it shuts down power plants (gas, coal & nuclear). With millions in foreclosure, their trucks repossessed, indentured by student loans, EZ Credit, medical penury, penalty & interest, asset forfeiture; what are all of Trump's cage-rattled, reality-infomercial conditioned, vengeful racists going to do with their inebriate grandiosity & FLIR scoped, silenced, auto-loading firearms?

    "I can hire one half of the working class to kill the other half." Jay Gould's publicist's anonymous source

  4. Gaylord

    It is death risk investors are gambling on, not money. They will find out soon enough that they can’t eat their money.

  5. Optimader

    Mmm…. to what extent should any energy provider be responsible for informing consumers of existential risks, and is there even a point to it? And to what end, is it supposed to be a more efficacious way to inform the public of this or that?

    Ok in the same vein, how about the “carbon footprints” and various adverse persistent pollution footprints related to other energy sources, or for that matter existential risks related to agricultural products, manufactured goods nanoparticle pollutants ( file under: composite wind turbine blades), battery manufacturing etc etc. And what is the point actually of information being sourced from an industry rather than a technically informed third party?

  6. Jon Claerbout

    CO2 is good. The food growing season in Alaska is now 50% longer than 30 years ago, likewise, Canada, Europe, and Russia have benefitted. You want evidence? Google for “earth greening”. You want to hear from a reputable scientist? Try Wikipedia for Freeman Dyson. “Climate models solve the equations of fluid dynamics. They might do good job of describing the fluid motions of the atmosphere and the oceans. They do a very poor job of describing the clouds, the dust, the chemistry, and the biology of fields and farms and forests. They do not begin to describe the real world that we live in.”

    1. different clue

      Water is a good thing, too. Too much water is too much of a good thing. We call it a “flood”.

      Too much CO2 is too much of a good thing. It traps more heat energy here near Earth Surface than is good for human civilizational convenience. The warmologists started making general predictions decades ago about what rising levels of airborne CO2 would do. Their general predictions have proven correct. “Life Zones” are moving poleward and up-mountain over the last few decades. Average frost-free growing seasons are lengthening. The Arctic-subarctic is warming much faster than the non-Arctic. That is bringing weather instability with it. That has all happened as predicted.

      Did Freeman Dyson predict any climate changes a few decades ago? No? He didn’t? Can he explain how the warmists’s basic predictions happened as predicted for some other reason then the reasons the warmist theory offers? No? He can’t? Freeman Dyson has no knowledge of climate and nothing to offer to the discussion by way of facts or subject matter expertise or anything else climate related, so far as I can tell. Freeman Dyson don’t impress me much.

      But if he impresses you, then you should buy all the land you can afford in South Florida. If you can’t afford land there yourself, at least invest in South Florida-centric Real Estate Investment Trusts. If Dyson is right and I am wrong, you will make a lot of money over the next few decades. And so will your heirs after you.

      1. JW

        CO2 is a ‘greening agent’, that has no relationship with temperatures.
        There is no evidence of ‘arctic warming’ , the highest temperatures in the arctic in 2016 were -20C, no ice melts at these temperatures. The ice coverage today is completely normal as is its thickness.

    2. Normal

      “CO2 is good” is an biased and misleading statement.

      Let’s think about this rationally. Increased CO2 has multiple effects on the environment. Some have positive implications and others negative.

      The negative effects outweigh the positive. Why? Because humans are adapted to the old levels of CO2. We build communities where the is ample water to support civilization and farming. We build in areas don’t flood on a regular basis. We farm crops where the conditions are optimum for a particular crop.

      Nobody knows whether the long-term effects will be net negative or positive. What is clear is that the transition will be long and painful and by the time we adapt to new conditions anyone reading this will probably be dead.

    3. Ignacio

      If you have a garage and a car, please fill the deposit and park the car in the garage, turn on the engine, close all doors and windows and stay there until it stops. Then tell us how good it is, if you can.

  7. Temporarily Sane

    A friend of the family works at Greenpeace on the east coast. This person can slay any climate change sceptic or denier “argument” with ease. They also shuttle back and forth between the east and west coast multiple times each year and attend conferences in Europe and elsewhere.

    The amount of carbon jet fuel burning engines emit into the atmosphere is insane. I don’t have the stats at hand but anyone who is serious (really serious) about reducing their carbon footprint would eschew air travel when at all possible.

    You can see where I am going with this. It seems to me that convenience trumps all. Lots of people talk a good line and many even mean what they say…until they have to choose between their convenience and their stated ideals. The father railing on about the capitalist bastards and economic justice for all suddenly sounds like a neoliberal idealogue when he lectures his adult son, who moved back home after he lost his job and spiralled into depression, to get his act together and find work.

    I try to be congruent and consistent in my words and actions. It doesn’t always work out but I am well aware when it is and make adjustments as needed. Or admit that I’m full of shit and go back to the drawing board. Waving a sign and protesting a travel ban against Muslims because I don’t like the politician who ordered it, for example, while backing his rivals who are responsible for the violent deaths of thousands of Muslims and in favor of “punishing” a nuclear power for no good reason…to me that is just insane. How much more pathologically tone deaf can a person get?

    With “fake news”, “alternative facts” in a “post-truth era” even language is becoming subjective. My definition is just as good as yours and you can’t tell me otherwise. Or when I tell people about the previous administrations war crimes and, during the election, about HRC demeaning women who accused WJC of rape…”No, I can’t believe that.”

    This radical subjectivity is a dangerous byproduct of the neoliberal bullshit machine that produces nonsense like “create your own opportunities” and always be “innovative” and “creative” and “increase your value” and “if you want it, nothing except you is stopping you from getting it.” This is Margaret Thatcher’s throwaway “society doesn’t exist” line taken literally and it is corrupting the foundations of western society. A solipsistic society with no common denominators or common purpose is doomed to destroy itself. If we can’t even agree on what words and concepts means anymore..what hope is there?

    If our culture had guiding principles they would include :

    – Convenience trumps everything
    – Language is subjective
    – Facts and truth are matters of opinion
    – Whether you succeed or fail, only you are responsible
    – The (neoliberal affiliated) media determines what is real. If the media talks about it, it’s real…if the media ignores it or contradicts it, it’s fake
    – When opinions conflict…consult the media

  8. Hilario

    A regular look at No Tricks Zone, where there is a steady supply of links and summaries of peer-reviewed articles in scientific journals by climate scientists who do not always agree with the IPPC views, might cheer up many of your followers who are worried by the catastrophic climate change hypothesis, such as today

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