Pressure globally is building on institutional investors to assess their risk exposure to fossil-fuel companies, including the risk of tighter regulations, a carbon price, stranded assets and falling demand for fossil-fuels.
The financial risks became clearer to investors in 2013, when the Carbon Tracker Initiative and the Grantham Research Institute mapped the world’s coal, oil and gas reserves against the global carbon budget and found that between 60-80% of coal, oil and gas reserves of publicly listed companies are 'un-burnable' and must stay in the ground and will become stranded assets, if the world is to keep temperatures below the two-degree Celsius limit above pre-industrial levels (as defined within the Paris Agreement). Oil reserves carry the greatest financial risk, coal the highest carbon risk, and gas while lower in carbon risk, still faces considerable financial risk.
Over the last five years or so, the price of renewable energy has dropped significantly and fossil fuel-free portfolios are matching or are outperforming standard benchmarks. According to MSCI, which runs global indices used by more than 6,000 pension and hedge funds, investors who divested from fossil fuel companies would have earned an average return of 13% a year since 2010, compared to the 11.8%-a-year return earned by conventional investors.