Shareholders face financial risk from climate change mitigation

Shareholders in oil and gas companies could lose out from actions to curb climate change and increasing difficulties in accessing energy reserves, warns a new World Resources Institute (WRI) report. The report also reveals that many companies have not made their investors fully aware of the effect of these issues on future financial performance.


The WRI’s new report calls for investors to pay closer attention to how oil and gas companies assess future costs of environmental risks.

Sixteen leading oil and gas companies were studied including Apache, BP, ChevronTexaco, ExxonMobil, Occidental Petroleum, Repsol, Royal Dutch/Shell Group, TotalFinaElf (TOT) and Unocal.

The report suggested that Occidental, Repsol and Unocal might lose more than 6% of shareholder value over the next decade, while three other companies were deemed to be insulated against environmental pressures. Factors affecting the financial impact of climate change and inaccessible resources included business concentrations, asset mixes, and geographical scope of operations.

WRI warned that the industry faces growing constraints in accessing oil and gas reserves, as the search for new sources clashes with measures to protect biodiversity and ecosystems. A number of companies, such as Apache, ChevronTexaco and TotalFinaElf, have a larger than average share of their upstream reserves in environmentally important areas.

“Investors ignore environmental issues at their own peril,” said Duncan Austin, WRI economist and co-author of the study. “Environmental issues can have a significant impact on a company’s bottom line and stock price.”

The WRI report also investigated different options for future action on climate change, ranging from no action to widespread adoption of the Kyoto Protocol. Overall, future climate policies could create “most likely” financial impacts for companies ranging from a 5% loss in shareholder value to a slight gain.

“Even without U.S. participation in the Kyoto Protocol, U.S. firms will still be affected by it,” said Amanda Sauer, co-author of the report. “Changes in the single, global oil market will be felt throughout the industry, and many US-based companies also have extensive assets in countries where climate policies appear likely.”

Of the companies assessed, only three mentioned the impact of climate policies on future business operations in their annual reports. Several companies raise climate in supplementary reports. No company attempted to quantify the environmental risks in financial terms.

“Investors increasingly acknowledge that environmental factors can materially impact financial performance, but struggle to quantify the specific impact these matters can have on individual stocks,” said Karina Litvack, Director of socially responsible investing at Friends Ivory & Sime. “This study is a challenge to all oil and gas companies to be fully transparent about their environmentally-related business risks.”

In response to the report a BP spokesperson said the company took more than adequate provisions and was confident that the company’s plans would ensure a sound and profitable future for its shareholders.

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