Fossil fuel companies hold vast oil, gas and coal riches that they frequently tout to the investing universe to help elevate their market values. However, not a single energy company has ever told investors about the potential effects on the environment if all their hydrocarbon reserves were burned.
And certainly few, if any, have ever told investors that a large chunk of these assets could be doomed to forever remain buried in the ground – and essentially worth nothing – should environmental regulations tighten.
Yet, the specter that these assets might one day end up stranded and theoretically worthless as the clamor for clean energy heats up looms large.
According to estimates in the Financial Times’ Lex column, nearly $900 billion worth of reserves – or about one-third of the value of big oil and gas companies – is at risk of one day becoming worthless as market and policy forces continue to undercut hydrocarbon economics due to the threat of climate change.
In effect, these companies could see a third of their value evaporate if governments aggressively attempt to restrict the rise in temperatures to 1.5C above pre-industrial levels for the rest of this century and avert catastrophic climate change as per Intergovernmental Panel on Climate Change (IPCC) estimates.
Consequently, investors are likely to increasingly price in the risk of asset writedowns by the world’s leading oil and gas companies unless a solution to the ongoing climate change is found within the next