European Greens Predict Financial Crash When the Carbon Bubble Bursts

The financial system is nearing another crash, like the sub-prime mortgage crash of 2007 and 2008, warns a recently published European Green Party paper, The Price of Doing Too Little Too Late.

The paper analyzes the carbon exposure of 43 of Europe’s largest pension funds and banks, forecasting substantial losses whatever the world’s response to climate change.

This has global implications. Recent research from the Asset Owners Disclosure Project shows that only 5% of global investment currently considers climate risk. The Green report projects that the other 95% of investments – which include public funds and pensions – face carbon shocks contingent on three future courses of action, or inaction, on climate change.

Scientists predict that anything above a two-degree rise in global temperature will cause devastating climatic change. To prevent this from happening, three quarters to half of the world’s fossil fuel reserves must remain unburned.

Scenario one, according to the paper, shows the global community taking the necessary measures to avoid a two-degree rise, defined as a “Low Carbon Breakthrough.” The fuel left in the ground then becomes “stranded assets,” and any public or private money invested in this source collapses. The Low Carbon Breakthrough is the best case scenario for the global economy and for the planet in its entirety.

The second scenario, in which action on climate change is taken later and more drastically, is called an “Uncertain Transition.” Here, more and more investments will continue to be pumped into fossil fuels in the years ahead, only to become stranded later on. In this scenario, the carbon bubble will inflate further and burst harder with a larger knock-on effect.

The financial ramifications of a climate crisis are grim either way. The Green report pinpoints how, from a financial perspective, severe weather, droughts and rising sea levels will hit every investment sector from agriculture to infrastructure to industrial production. This is substantiated by the Stern Review, an independent British judicial paper.

“The financial system is not considering long-term risks of carbon assets,” says Bob Ward, policy and communications director of the Grantham Research Institute on Climate Change, at the London School of Economics.

“This is a systemic problem,” continues Ward, who contributed to the Unburnable Carbon 2013 Report, a cutting-edge academic work which greatly informed the European Green Party report. “One would have hoped this would have been moved forward at the G20, but so far, things are only changing very slowly.”

Ward explains how pension funds are often linked to broad indexes that include the high carbon industries on a global level. He asserts, “We need a new regulatory regime for disclosures and transparency, so people know what their money is going into. This will take more pressure from institution like the Bank of England, the London Stock Exchange, the U.S. Stock Exchange and the Securities and Exchange Commission.”

Although pension firms face similar rules, the European Green Party report shows their differentiation in carbon exposure. The most reliant include the British BAE Systems pension and Universities Superannuation Scheme, a pension fund for British academics. The vulnerability of the latter is surprising; it co-founded the Institutional Investors Group on Climate Change. Additionally, in 2001 it expressed concerns about its high reliance on carbon investments.

Many banks also have high carbon exposures, including British Standard Chartered and Lloyds Group, as well as the French Société Générale and BNP Paribas. Three of these banks received national bailouts during 2008 and 2009.

Additionally, the report picks out how Dutch pension fund PFZW and Finnish pension fund Keva have large proportions of their money tied up in fossil fuels.

On the other hand, some financial institutions have very small or even zero carbon assets. The report praises Dutch Rabobank for its blanket ban on tar sands, and the Norwegian pension fund Storebrand, which is pulling out of coal and tar sands.

Tar sands, along with other unconventional oil, and coal are far more likely to become stranded assets. The report suggests that to mitigate a two-degree rise in global temperature, regulation will likely focus on the dirtiest and therefore least efficient fuel.

Concerning regulations, I ask Ward if he sees conflict of interest issues such as those levied at banking, tax evasion and other sectors.

“It is less of a conflict of interest because if there is another crash, they will get blamed,” he replies. “Also investors want to avoid this. Instead the problem is that there are so many other regulatory issues like the foreign exchange market scandal that is now in the headlines. It is one thing after the other, so carbon is not a top priority. They are still focusing on the legacy of the financial crisis.”

Ward suggests there are ways to achieve a Low Carbon Breakthrough, but “for this, it is crucial to disclose where people’s money is going.”

“The question of what to do is less straightforward,” he adds. “There needs to be an orderly transition. Pensions should take a lead in this as they should be thinking long-term.”

Encouraging pensions to think long-term is at the core of ShareAction’s Green Light campaign, which I wrote about last month, detailing the UK NGO’s campaign against oil extraction and industrialization in the Arctic.

One focus of the campaign is to encourage Shell not to prospect in the Arctic – and there has been success, with the oil giant announcing this winter that it would suspend action in the region. In other recent oil investment news, The Ecologist revealed that the pension funds of West Sussex and Greater Manchester Councils are both involved in fracking.

The claims are particularly controversial as both places are focal points for the fracking industry’s initial attempts in Britain. The Ecologist accuses both councils of a conflict of interest. Video evidence illustrates how Greater Manchester Police also seem to be on the frackers’ side, trampling citizens who are trying to protest.

Fracking investments run the risk of becoming stranded as they are more carbon intensive than conventional gas drilling – not to mention more ecologically devastating, expensive and unpopular.

I contacted Bernard Pennington, a councilor on the Greater Manchester Pension Fund, to ask whether the fund was concerned about stranded assets and to discuss the conflict of interest claims.

As soon as I mentioned fracking, Pennington interrupted with: “Don’t ring me, ring the pension fund itself. Right, bye.” The West Sussex councillors gave a similar response, although without hanging up. So I sent my questions to the PR/communication departments of each council, asking whether they were concerned about stranded assets.

Situated at different ends of the country, both councils came back with remarkably similar responses. They each side-stepped the question, instead suggesting that The Ecologist report had exaggerated two of their investments in fracking. The admission confirmed that both councils have money invested in fracking, though they both denied having investments in one of the three fracking companies mentioned in the report: IGas.

One thing seems likely for the pension firms and others responding today to questions about public investments, and that is this: in the future, they will face even more difficult questions about how those investments turned into stranded assets.