The investor group Ceres asked the SEC to scrutinize the alleged failure of oil companies to disclose carbon asset risk by oil companies. An April 17, 2015 letter from Ceres on behalf of investors representing more than $1.9 trillion in assets under management specifically requests the SEC to issue comments asking issuers to "address reduced demand scenarios, risks associated with capital expenditures on high cost unconventional resource projects and associated stranded asset risks."
While the letter is a continuation of efforts by some investors
to obtain disclosure of more information related to
climate change and sustainability, it also signals a departure
from previous general requests to the SEC because it identifies
three issuers that the investors want the SEC to give special
scrutiny. The main complaint by the investors is that the SEC
filings by these three oil companies do not discuss future
scenarios where
hydrocarbon demand goes down and how these scenarios affect
decisions on capital and exploration expenditures. The investors
profess a concern that upcoming capital expenditures and their
associated payback periods and break-even prices cannot be
justified if the low hydrocarbon demand scenarios come to
fruition.
The investors suggest that their request is supported by the
changing economics of the oil industry, including an estimate by
the Carbon Tracker Initiative that approximately $1.1 trillion in
capital expenditures will occur in the next 10 years on
carbon-intensive projects that require at least an $80 per barrel
break-even price. The investors note that the SEC rules require
disclosure of material trends and uncertainties and that 2010 SEC
guidance on climate change disclosure specifically suggested
disclosing as a material uncertainty the potential decreased demand
for goods that produce significant
greenhouse gas emissions. As a result, the investors variously
state that they "require" information about (i) the
carbon content of reserves, (ii) capital expenditure plans for new
reserves, including payback periods and alternative uses of
capital, (iii) long-term risks to unproduced reserves, and (iv) the
trend toward high-cost, carbon-intensive exploration projects. For
contrast, the letter points to two other oil companies that agreed
to provide information about low-carbon scenario assessments
starting in 2016.
The Ceres letter continues the drumbeat of investor demands for
more disclosure on these topics, and not just qualitative
discussion but also quantitative analysis. This letter could be
viewed as part of a campaign to discourage carbon-intensive oil and
gas production more than it is an effort to obtain information
needed for investment decision. After all, if an oil company's
assessment of the risk of possible future low-carbon scenarios is
relevant to an investor, the absence of that discussion by the
three companies identified in the Ceres letter should tell the
investor all that it needs to know.
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