HSBC Warns Clients of Fossil Fuel Investment Risks

Fossil fuels
A labourer works at a coal factory in Baicheng county, northwest China's Xinjiang Uygur Autonomous Region, January 7, 2007. Picture taken January 7, 2007. China Daily/CHINA OUT REUTERS

Global banking giant HSBC has warned investors of the growing risk of their fossil fuel assets becoming useless, in a private report seen by Newsweek.

In the report, titled 'Stranded assets: what next?', analysts warn of the growing likelihood that fossil fuel companies may become "economically non-viable", as people move away from carbon energy and fossil fuels are left in the ground.

Energy innovation measures, including 'disruptive' clean technologies and the EU's success in decoupling energy use from economic growth, are cited as factors that could in the long term cause fossil fuel assets to become devalued, as green energy becomes cheaper and more easily available.

More stringent government regulation on carbon emissions, especially in the run-up to the Paris climate conference in December this year whose aim is to establish a legally binding global climate commitment, are also cited as longer term risks to investments in traditional energy.

However the analysts also warn that in the short term, low energy prices caused by oversupply should be factored into portfolios.

"The speed of the collapse in energy prices over the past three quarters has taken the fossil fuel industry by surprise, in our view," reads the report. "As rigs are dismantled, capex is cut and operating assets quickly become unprofitable, stranding risks have become much more urgent for investors to address, including shorter term investors."

The paper proposes three options for investors - divesting completely from fossil fuels; shedding the highest risk investments such as coal and oil; or staying the course and engaging with fossil fuel companies as an investor. The report argues that investors who stay in fossil fuels "may one day be seen to be late movers, on 'the wrong side of history'".

The overwhelming majority of climate scientists agree that human activity has contributed to global warming, especially the burning of fossil fuels. In 2009 the United Nations Framework Convention on Climate Change outlined a target of keeping global warming from reaching 2C above pre-industrialisation levels - the point at which climate change will become catastrophic and irreversible.

Other financial institutions have warned of the risk of investment in fossil fuels in recent years. Mark Carney, the governor of the Bank of England, commissioned an inquiry into the dangers of stranded assets in October 2014, and has publicly stated the majority of known fossil fuel reserves need to stay in the ground.

One company looking to influence investors and fossil fuel companies directly is Carbon Tracker, a UK based non-profit organisation which is releasing a blueprint this week for adapting fossil fuel companies to a lower carbon world.

"It's incredibly important that a mainstream financial institution is effectively taking our narrative on the carbon bubble, analysing it and then producing a research report that reinforces our conclusions," says Anthony Hobley, Climate Tracker's CEO. "But they haven't gone far enough which is setting out the roadmap, the transition for these [fossil fuel] companies over the next two to three decades."

"I think we are at the beginning of a very important reframing of this issue, and of climate risk being understood by the mainstream financial markets," he adds.