Risky Business

Risky Business

Last week, the Institute for Energy Economics and Financial Analysis issued a report criticizing BlackRock, the world’s largest fund, for making bad bets on the fossil fuel industry that cost the firm billions of dollars.  What I found significant was less the plight of Blackstone’s shareholders than the fact that the energy firms weren’t doing very well. One category consisted of firms that, like GE, had made big investments in producing gas turbines. Those firms ran into trouble when the rapid growth of renewables hammered the expected growth rate for natural gas.  Another company consisted of the major oil companies.  Exxon Mobile ended up with the same share price as it had ten years earlier, at a time when the market as a whole made bundles of money. Like GE, Exxon had made a big bet on natural gas, only to be disappointed by the results. Chevron did better, but still got only about 40% of the returns for the market as a whole. Utilities like Duke Power, which is heavily reliant on coal, also underperformed the market.

There has been considerable empirical research on how climate risk affects financial values.  A recent paper by Patrick Bolton at Columbia and Marcin Kacperczyk at Imperial College fits into a growing body of empirical literature on the issue.  The upshot is that investors demand higher returns for holding stock in carbon-intensive companies because these investments come with added risk.  I know that “higher returns” sounds like a good thing. But think of it this way: if you’re selling stock in a risky company, you’re going to have to lower the value of the stock to make up for the rest. That way, investors will actually get higher returns if things work out well.  So higher investor returns means lower stock prices, holding the company’s prospects constant. Some types of carbon risks impacted returns at the company-by-company level, but other types only influenced judgments about an industry as a whole. The evidence also suggested that information about climate risks is only slowly becoming available and understood by investors, which suggests that prices may not yet fully reflect risk levels.

I’ll mimic all those politicians who say “I’m no scientist” by making it clear that I’m no finance expert. But the market does seem to be confirming that the future of these companies is dicey. If that’s right, it’s a point in favor of the divestment movement, because it supports the argument that a wise investor, not to mention an ethical one, might steer away from those stocks. Or at least, there may be enough doubt about these stocks that a pension fund manager who wanted to divest wouldn’t be violating any fiduciary duties.

From a policy point of view, the most significant take-away is that placing heavy reliance on carbon-intensive industries could be a risky economic strategy. The market certainly doesn’t seem to think that fossil fuels will be eliminated by 2030, but it seems none too confident about their future.

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Reader Comments

5 Replies to “Risky Business”

    1. Thanks for the feedback Pat, in an era of increasingly tragic power of money greed that has been a cultural failure of far too many UC Powers that Be for many, many decades, no matter how bad the consequences are for our newest generations that are increasingly threatened by out of control global warming produced by the fossil fuel industry, etc.

      Another iconic case was the marginalization of Linus Pauling (Nobel Prizes, single recipient for both Chemistry and Peace), creator of Molecular Biology that has saved millions of lives from cancer alone because he threatened their power of money greed as indentured servants of the military-industrial complex that President Eisenhower gravely warned us about in his 1961 Farewell Address.

      Prof. Pauling dared to champion Peace protests at UC during the Viet Nam War:
      LATIMES BOOK REVIEWS : The Price of Doing Things His Own Way. The Life of Linus Pauling
      https://www.latimes.com/archives/la-xpm-1996-02-08-ls-33798-story.html

      There really appears to be no difference between the hellacious greed of politicians in Washington and far too many academics who do not consider the future of the human race as a priority.

      And, the way things are getting out of control with global warming and terrorism, no solutions.

      1. In conclusion, the continuous failures of Legal Planet contributors to respond proves “the way things are getting out of control with global warming and terrorism, no solutions.”

        What a tragedy for our newest generations, including the UCSC students who wrote published
        “We Demand a Fossil Free UC,” to have no support from academics who claim to be the best and brightest intellectuals in our civilization.

  1. Don’t celebrate too soon.

    According to the International Energy Agency, global energy demand is projected to increase by 60% in the next 25-30 years, and fossil fuels are projected to account for more than 75% of new demand. By 2040, petroleum, natural gas and coal consumption are projected to exceed 625 quadrillion Btu annually. While global demand for renewable energy is also projected to increase, annual consumption will be less than 150 quadrillion Btu according to the US Energy Information Agency.

    As long as demand for fossil fuels exist, companies will continue to supply the demand and investors will continue to fund them. In order to achieve greater shift in demand, it will be necessary to improve reliability, availability and affordability of renewable energy, as well as infrastructure, through technological development and innovation. The climate challenges of the 21st century cannot be solved with 20th century technology.

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About Dan

Dan Farber

Dan Farber has written and taught on environmental and constitutional law as well as about contracts, jurisprudence and legislation. Currently at Berkeley Law, he has al…

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