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?
Demand/Volume risk:
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?
Management risk:
Are management and shareholder interests aligned correctly for a ‘low carbon’ scenario, which would likely require a low/no growth investment strategy?
