Stock exchanges’ listing rules are putting investors at risk

Global stock markets are financing companies which are sitting on three times more coal, oil and gas reserves than can be burned without breaking the 1.5°C Paris climate target, according to a new report – Unburnable Carbon: Ten Years On – from the financial think tank Carbon Tracker.

Despite financial centers like New York or London setting goals to transition to a low carbon economy, the report notes that stock exchanges “enable” the ongoing activities of fossil fuel companies by facilitating “primary equity raising and ongoing finance requirements.”

It warned that stock markets are failing to respond adequately to the risks of the global transition to a carbon neutral energy system. “This is not only putting investors at risk but also threatens the wider ecosystem of banks, insurers, lawyers and financial service providers in financial centres,” it added.

The non-profit estimated the potential embedded emissions held in known fossil fuel reserves to be 3,700 gigatons of CO2.

While a portion of these reserves fall under the control of unlisted, state-owned enterprises, a significant chunk — representing 1,050 gigatons of C02 emissions —are held by publicly-traded companies listed on global stock exchanges. That metric has grown nearly 40% in the last decade.

In addition, it said that to limit global warming to the Paris Climate Agreement of 1.5°C, 90% of fossil fuel reserves must remain in the ground as unburnable carbon.

“If governments are really serious about climate change they must ensure that the activities of stock exchanges and the financial centres around them are consistent with national climate goals and net zero commitments or we will lose any chance of meeting the Paris target, ” said Thom Allen, author of the report and oil & gas analyst at Carbon Tracker.

He added, “This is especially important now as fossil fuel prices and related company stocks soar.”

The report revealed that New York is the financial sector least aligned with Paris and at greatest risk from stranded assets. If listed oil & gas companies pursue business as usual, they would spend $700bn in the decade to 2030 – but just 20% on projects compatible with 1.5°C .

On 22 February fossil fuel companies had a total market capitalisation of $1.4 trillion accounting for 3% of the value of the NYSE and NASDAQ.

The London Stock Exchange had the second highest market capitalisation of listed fossil fuel companies at $500 billion but they accounted for 15% of value on the exchange at that date, making it far more exposed.

Only around half of the future ‘business as usual’ spending by oil & gas companies listed in London was found to be compatible with 1.5°C .

In February 2021, the London Stock Exchange Group became the first exchange to commit to “net zero”, but it only covers the LSE Group itself not the exchange, which continues to list fossil fuel companies whose activities are at odds with global climate goals and the UK’s climate commitments, according to the report.

It warns that supporting these companies makes the UK’s financial transition to a low carbon economy harder and that even though their fossil fuels may be produced and consumed overseas, it exposes the country’s financial services sector and UK-based investors to risk in the energy transition.

Allen said, “The UK may claim to be on a path to net zero, but companies headquartered and listed in the UK are investing in, and currently making huge profits from, extracting and selling fossil fuels around the world. As most of these activities occur outside the UK, the emissions are not included in the UK’s carbon budget.”

The report noted that Sydney is also notable both for having the second-lowest degree of alignment under a 1.5°C scenario, with just 30% of future spending compatible with 1.5°C  and a large share of potential future spending incompatible with even a 2.7°C scenario.

Toronto has the fourth-largest embedded emissions by a freely-tradable share measure (behind New York, Moscow and Shanghai), but companies with fossil fuel reserves comrpises only 8% of the total market capitalisation.

Only 40% of future ‘business as usual’ oil & gas spending is compatible with 1.5°C .

Overall, financial centres in China, the US, India, Russia and Saudi Arabia have the highest embedded emissions. In all but the US, they are dominated by the partial listings of state-owned companies, where minority shareholders have limited influence.

The report said that a lack of influence over state-owned companies does not absolve investors from a share of responsibility for emissions. “Even a partial listing provides an important source of capital, improves credit ratings and lowers the cost of borrowing, allowing for further development of yet more fossil fuel projects.

Reserves are often so significant that even the partial listing of a state giant can add significant embedded emissions to the market,” it added.

The report updates Carbon Tracker’s Unburnable Carbon report in 2011, which put finance at the heart of the climate debate. It showed for the first time that there were far more fossil fuel reserves around the world than could be burned while meeting global climate goals, with huge implications for financial markets.

The new report shows how stock markets, and the associated industry of banks, insurers, lawyers and financial services providers, are profiting from activities that are at odds with their countries’ climate commitments and that put investors at risk.

Mounting concern about the impact of climate change has seen investors with more than $130 trillion of assets under management commit to achieving net zero emissions by 2050. The report calls on them to actively use their influence to guide companies towards a strategy that supports global climate goals and reduces their exposure to energy transition risks.”

“Fossil fuel companies are reliant on equity and debt markets for the financing of capital-intensive projects, both to raise capital to finance new investments, but also to maintain existing production facilities and drill new wells,” said Mike Coffin, co-author and head of oil, gas and mining at Carbon Tracker.

The report said, financial centres facilitate, and profit from, both the primary equity raising and ongoing finance requirements for these companies, as well as secondary trading activities. As such, financial institutions that continue to enable such activities beyond climate limits, cannot themselves be viewed as Paris-aligned, and are also themselves increasingly exposed to transition risk.

©Markets Media Europe 2022

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