Tough lessons for tar sands in reporting climate risks

For the directors of Canada’s most carbon-intensive companies, climate change can no longer be dismissed as irrelevant to their future and the future profitability of their businesses.

As financial markets and the world’s largest investors acknowledge that we have a “one-way ticket to a low-carbon economy,” companies who do not plan for the transition could see their share prices suffer.

CEOs who continue to ignore investor concerns and simply deny the financial impacts of climate change policy on their respective business models should listen to the New York Attorney General, who disciplined Peabody Energy: “As a publicly traded company whose core business generates massive amounts of carbon emissions, Peabody Energy has a responsibility to be honest with its investors and the public about the [business] risks posed by climate change, now and in the future.”

The Attorney General’s disciplinary letter from last week continued: “I believe that full and fair disclosures by Peabody and other fossil fuel companies will lead investors to think long and hard about the damage these companies are doing...”

The market value of US publicly-listed coal companies has shrunk by 90 per cent when compared to 2011 values.

In its official securities filings and in public communications by Peabody directors, the company provided incomplete and one-sided discussions on future demand for fossil fuels. By cherry-picking and misrepresenting the findings and projections of the International Energy Agency (IEA) relating to future world coal demand, the company misled investors.

In contrast to the company’s statements that demand for coal could only be robust, the Attorney General’s investigation discovered Peabody’s own internal projections showed that coal sales in the US could fall by at least 33 per cent as a result of tougher regulations on existing power plants.

This should sound familiar to investors in Canadian oil sands companies, where directors continue to treat discussions of climate change as puff-piece sustainability reporting, rather than as financially material business risk.

Responding to investment risks linked to climate change is no longer a matter of Syncrude using LED light bulbs, but about investors avoiding a financial disaster arising from management failure to prepare the company for the low-carbon transition that is underway.

Under the agreement announced between the New York Attorney General and Peabody, the company has committed to ending misrepresentations to investors and the public on the financial risks to the company’s business model arising from climate change policy.

In addition, the company must stop telling shareholders that it cannot reasonably project the range of impacts that any future laws, regulations, and policies relating to climate change or coal would have on Peabody’s operations or cash flow.

The directors of Canada’s most carbon-exposed companies who do not currently report this information to their shareholders should read the document in full as it gives a glimpse into the future.

Canadian financial regulators must demand better information for investors

Speaking to the National Post, Brian Ferguson, CEO of Cenovus Energy recently indicated that “the oil sands can be part of a low-carbon future.” But neither he nor any other tar sands oil company directors provide investors with the financial details necessary to assess exactly how these companies might flourish in a low-carbon global economy.

Oil sands company directors frequently indicate that projects using state-of-the-art technology are already reducing GHG emissions. Yet these pilot projects remain extremely expensive, and do not indicate a company’s readiness or ability to pivot to profitability in a carbon-constrained economy. Details on project level break-even costs, internal carbon-pricing models, and demand assumptions are all concealed from investors.

Alongside a host of dangerously leveraged tar sands oil companies with no obvious plan B, directors at coal-exposed companies like Teck Resources and Sheritt International continue to be willfully blind to the implications of local emissions reductions plans and international climate change policy action on their own business models.

It is time for our provincial securities regulators and the Office of the Superintendent of Financial Institutions to demand that these companies disclose material climate risk information in line with their legal duties. Our capital markets and investors require this data to make informed decisions.

Shareholders must demand 2 degree transition plans or risk value destruction

As leaders in the financial sector respond to climate change, and demand to know how companies plan to prosper in a carbon-constrained world, Canadian investors must also start demanding details. For Canada’s largest fossil fuel companies and our banks, investors should know how these companies plan to operate profitably in a world where emissions are capped according to the internationally agreed upon target of 2 degrees warming.

Sophisticated company directors should be able to provide shareholders with “2 degree transition plans” that indicate what steps management is taking to ensure the company will survive and continue to provide returns to shareholders in a low-carbon world.

Carbon Tracker’s “Blueprint Series” already provides a tool for investors to demand companies adapt their business practices to align with an energy transition that delivers a climate secure global energy system.

What are Canadian investors waiting for?

The full text of the NY Attorney General’s Assurance of Discontinuance settlement/agreement with Peabody Energy can be read here.