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Shareholders File First-Ever 'Carbon Bubble' Resolutions

Shareholder activists are concerned that fossil fuels could become unburnable because of climate laws—and they want firms to divulge the financial risks.

Mar 7, 2013
Mining operations of Consol Energy

Two advocacy groups have come up with a new tactic to show how climate change—and laws to deal with it—could make investments in fossil fuel companies riskier and rock financial markets.

In a pair of first-of-their-kind shareholder resolutions, the groups have asked two of the nation's largest coal producers to report to investors how much of their coal assets would be left "stranded" in the ground if the United States were to pass sweeping greenhouse gas regulations.

As You Sow, a shareholder advocacy group for environmental issues, filed a resolution with CONSOL Energy late last year. The Unitarian Universalist Association, a religious organization that promotes social justice, filed a similar resolution with Alpha Natural Resources.

The groups' point is that coal and other energy companies would be dangerously overvalued in a carbon-regulated world, thus creating a "carbon bubble" that could one day pop.

"This carbon bubble is so big, it's going to make the housing bubble look like chump change," Andrew Behar, CEO of As You Sow, said in an interview. "It's another order of magnitude."

The carbon bubble concept is relatively new, born out of a recent scientific paper that has united climate change activists and some in the financial community in a common pursuit: to rethink the value of investments in coal, oil and gas.

The paper, published in 2009 in Nature, said that at current rates of fossil fuel burning, the world could face dangerous warming in as soon as a dozen years. The finding triggered international attention, because the values of energy companies—which represent a significant portion of stock traded in financial markets—are pegged to future earnings from selling fuels that may have to stay underground.

According to a recent report by banking giant HSBC, major firms like BP, Shell and Statoil could lose up to 60 percent of their market values if countries get tough on carbon.

Shareholder activists often use shareholder votes to challenge fossil fuel companies on climate change issues, but this is the first time social investment groups filed carbon bubble resolutions.

They represent a "new and powerful way" of pressuring firms to act on global warming, said Dan Bakal, director of electric power programs at Ceres, a coalition of sustainability focused investors with $11 trillion in assets. "I think it's likely that more investors will get involved in this kind of activity."

But Bakal said that using the image of a carbon bubble is a bit misleading. The devaluing of fossil fuel stocks "would probably happen in a fairly incremental way. It wouldn't be like a bubble bursting."

Both As You Sow and the Unitarian Universalist Association are part of Ceres' Investor Network on Climate Risk, a group of investors and environmental and public interest organizations.

Nick Robins, who heads the Climate Change Center of Excellence at HSBC in London and was co-author of the bank's carbon report, said the shareholder resolutions are part of a larger awakening to the concept of stranded assets.

"Investors are being more demanding on company management to show that their capital expenditures ... can pay off in a low-carbon world," Robins said.

Both of the social investor groups said they expect to file more carbon-bubble resolutions in the years to come. But Robins cautioned these are still "very early days" in the movement to quantify the risk of stranded fossil fuel assets.

"It's the beginning of a much longer and more profound discussion," he said.

The National Mining Association and American Coal Council did not respond to questions about concerns of stranded assets.

The coal company resolutions were announced Thursday in a report by As You Sow and other sustainable investment groups that said in total, 92 resolutions relating to climate and environmental issues were filed in the 2013 proxy season—the time of year when all shareholders get to vote on company issues. It's about the same number of resolutions filed last year.

'A Lot of Information Is Coming Together'

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