Cantillon: Fossil Fuel stocks are a hot and risky topic

The traditional cement sector gets annoyed by the focus Ecocem founder Donal O'Riain brings to the contribution the sector makes to carbon emissions and climate change. However, the plain fact is that the cement manufacturing process is one that emits significant amounts of the gases that governments around the world have pledged to reduce in an effort to prevent the globe's temperature growing by more than 2 per cent.

By far the biggest sector in this regard, however, is the fossil fuel industry, an industry that includes a number of the largest companies in the world, many of whom are listed on stock exchanges. Which brings us to a recent report published by Carbon Tracker and the Grantham Research Institute on Climate Change and the Environment at London School of Economics.

Called Unburnable Carbon 2013: Wasted Capital and Stranded Assets , the paper (http://iti.ms/123Qqg2) draws attention to the fact that stock exchanges around the world contain listed fossil fuel companies, the market capitalisation of which is in part based on valuations of their stocks of oil, gas and coal.

Yet an analysis of the global goals on carbon emissions for the coming few decades shows that up to 80 per cent of these stocks cannot be burned if the climate change goals are to be met. Not only that, but these companies spend hundreds of billions of euro every year in the search for new reserves.

The foreword to the report is written by Lord Stern, he of the 2006 Stern Report, who has described climate change as the largest ever market failure. The economist says smart investors can already see that most fossil fuel reserves are essentially unburnable because of the need to reduce emissions in line with global agreements.

The financial crisis, he writes, has shown what happens when risks accumulate unnoticed, and he calls on companies and regulators to work together to declare and quantify the risk associated with these carbon valuations. The report suggests that pension funds also note the risk that they will lose large amounts of money if they have invested in stocks whose value is based on carbon inventories.

Of course, another way of reading the report is that the markets are operating on the basis that the goals set by governments will not be met and the fossil fuel stocks will be burned. In which case, as Lord Stern points out, using different language, we will all be stewed.