March 12th, 2015


Chief Investment Officer, Bocage Capital

CEO, Carbon Tracker Initiative

Director of Board Governance & Strategy, CalPERS


If you’ve got fossil fuel stocks in your retirement account – and most of us do, whether we know it or not – you could be in for a bumpy ride.  England’s Central Bank has said that coal, oil and natural gas reserves that determine the future earnings of those companies, and therefore their stock prices, may be overvalued.  And as supply grows and global demand decreases, oil prices are dropping by the barrelful.  

So how do financial managers and investors plan to ride this one out?  Several of them joined host Greg Dalton for a Climate One discussion of what the carbon bubble means to our financial futures.

Anthony Hobley is CEO of the Carbon Tracker Initiative, which monitors the risks of fossil fuel investments.  The cost of finding, developing and delivering oil is rapidly rising, he reports. “So fossil fuels are going to become more expensive, at the same time as we’re seeing renewables, things like wind and solar, are becoming cheaper,” says Hobley.  “We call this ‘climate swerve,’ and we know which side we want to be on.”

As director of global governance for CalPERS, California’s public employee pension fund, Anne Simpson keeps a sharp eye on the energy market. With $300 billion in assets to manage, she believes the way to protect her client’s assets is not by divesting from fossil fuels, but by applying pressure to corporate boardrooms.  “We turn to these boards and say, ‘well, your boards of directors are there to act on our behalf,” she says.  “And that means you need to tackle these risks…you have to understand how to navigate these complex and profound changes in the energy market. You can't just shut your eyes, cling tight and hope for the best.’…We need people in boardrooms who get this, who can think long term and who can understand complex challenges.”

Financial transparency and reporting, she continues, is essential to navigating the risky energy markets. “These companies need to adapt,” says Simpson. “So the question is, who’s on the boards of these companies?  What sort of reporting are we requiring them to make?  

“We don’t at the moment have financial reporting which captures these risks and these issues.  So, I think climate change is making the big investors and the big investor community rethink the notion of who’s on boards, but it’s also making us rethink what sort of financial reporting are we getting and what's being missed.  We’ve got risks that aren’t being exposed, and then they’re not being managed.”

And it’s not just the big investors who need to be aware of the risks. You may not feel you have much control over your 401(k) or pension plan, but individual investors wield more power than they know, says Hobley.  He recalls one recent conversation with the manager of a large pension fund in the U.K., representing thousands of investors. “He said ‘I got six letters [from investors] last year,” Hobley relates. “If I got 20, or 50 or even 100 letters from people asking how am I addressing and dealing with climate risk…I would take that seriously.’”  Even five letters from stakeholders would make a difference, the manager told him.

“So, I think you can engage with them.  It’s your money, and they manage on your behalf.”

Kurt Billick, CIO of Bocage Capital, disagrees about investor engagement – and he didn’t mince words:  “I think it's a nuisance that they swat away, quite frankly,” he said. Portfolio managers, after all, are incentivized to produce financial results – and quickly. In order to make the system work, he believes, energy issues must be addressed from the demand side. “So the price on carbon is probably the way that you're really going to change things,” he says, “by creating a market environment where people can actually react to the incentives that they’re seeing.”  

One thing seems to be certain, according to Hobley; while energy demand is on the rise, coal and fossil fuels are not the only way to light up the world, as those companies would have you believe.  “We did analysis to look at the financials of delivering energy to the world’s energy poor via coal or via solar,” he reports, “and it’s clearly cheaper to provide energy and electricity to the world’s poor via solar, for a whole range of reasons.”  

The energy industry, Hobley says, is in a time of massive transition – which doesn’t bode well for the dinosaurs of the sector. “When you look back on all of the big technological shifts, from steam to automobiles, from traditional cameras and film to digital cameras and you could go on, the incumbents almost never make that transition and they go out of business.”

Not necessarily.  Anne Simpson points to recent research by the World Development Report, which projects how different sectors could respond to a climate increase of four to ten degrees over the next 30 years. Their adaptation strategies include energy efficiency, development of renewables and carbon capture.

“So that plan’s there,” she concludes. “What we want to do as a global investor who’s part of all those sectors is make sure that the strategies of those companies and the people running those companies actually line up with that plan.

“I’m not in a doom-and-gloom mode about this, but it does mean investors paying attention.  So, everybody who's a saver through a pension, through 401(k), through a mutual fund, really hold your manager’s feet to the fire. Because you ultimately are the owners of this system.”


Related Links:

The Carbon Tracker Initiative

World Development Report

NY Times: Climate Change’s Bottom Line

Risky Business: The Economic Risks of Climate Change in the United States

The Montreal Carbon Pledge


- Anny Celsi
March 12, 2015
Photos by Rikki Ward
The Commonwealth Club of California