In our view, fossil fuel companies and their shareholders are exposed to the following key risks associated with climate change.
Commodity Price risk:
What is the risk to the value of existing company reserves in a ‘low carbon’ scenario for demand where commodity prices are likely to be lower but certainly more volatile?
What is the relative exposure to future high cost, high carbon developments that may prove unnecessary and hence sub-commercial in a ‘lower carbon’ scenario?
Capital allocation risk:
Is there sufficient flexibility within existing capital budgets to avoid pressure on shareholder dividends and employee levels in a ‘lower carbon’, low price scenario?
Are management and shareholder interests aligned correctly for a ‘low carbon’ scenario, which would likely require a low/no growth investment strategy?