Bloomberg LP Launches First Tool That Measures Risk of ‘Unburnable Carbon’ Assets

Bloomberg LP is now offering a Carbon Risk Valuation Tool through its terminal subscription service (seen here), which is available to more than 300,000 high-end traders, analysts and others. Credit: CUNY Graduate School of Journalism

In a move that underscores Wall Street’s growing unease over the business-as-usual strategy of the world’s fossil fuel companies Bloomberg L.P. unveiled a tool last week that helps investors quantify for the first time how climate policies and related risks might batter the earnings and stock prices of individual oil, coal and natural gas companies.

The company’s new Carbon Risk Valuation Tool is available to more than 300,000 high-end traders, analysts and others who regularly pore over the stream of information that’s available through Bloomberg’s financial data and analysis service. The move significantly broadens and elevates the discussion of “stranded” or “unburnable” carbon reserves—expanding it beyond climate groups and sustainability investors to the desks of the world’s most active and influential investors and traders.

“It demonstrates that there’s demand for the information—more and more investors are interested in these issues,” said Ryan Salmon, senior manager of the oil and gas program at Ceres, a nonprofit that organizes businesses, investors and public interest groups interested in climate change and other issues.  

Investors and Bloomberg are responding to a growing body of work suggesting that a variety of factors—including carbon emission limits, falling demand and the spiraling costs of new oil production—could force fossil fuel companies to abandon reserves that underpin share prices and future earnings.

While energy companies and most financial analysts see those issues as merely new risks for an industry that has thrived despite periodic financial, technological and political setbacks, others see long-term peril—especially when it comes to threats related to climate change.

To keep warming within the predicted safe range of 2 degrees Celsius, governments could, for example, establish limits on the carbon emissions that come from burning oil, coal and natural gas. Without some kind of technological fix, such restrictions could force fossil fuel companies to leave large oil and coal deposits in the ground, because burning them would exceed the limits. That’s one of several potential developments that could strand those assets and permanently erase their value.  

Having to forsake prized reserves or suffer big losses on them would be a potentially stunning reversal of fortune for an industry whose primary asset—crude oil—has been among the world’s most coveted commodities for the better part of a century.

It could be equally devastating for investors with stock in the affected companies.

“People are getting the idea that one of the main risks—perhaps the main risk—from climate change for investors and pension funds relates to hydrocarbon investment,” said Craig Mackenzie, head of sustainability at the Scottish Widows Investment Partnership, which manages $234 billion in assets and is a part of Lloyds Banking Group. “The fact that 20 percent of [investment] portfolios are invested in oil, gas and mining companies, and that those companies could be a lot less valuable in the future, has sort of brought it all home.”

Using Bloomberg’s carbon risk analysis tool, investors can measure the vulnerability of a single company or groups of companies using assumptions about future oil, coal and natural gas prices, as well as already compiled information about each company’s financial performance, the quantity and type of their retrievable reserves, and how much it costs each company to extract those reserves.

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Stranded Carbon? Looking at oil giant BP using Bloomberg’s tool, one scenario would “strand” some of the company’s reserves, cut free cash flow after 2020 and erase 43% of its stock value. Credit: Bloomberg

The information gives investors a general sense of which companies could still make money if fossil fuel prices fell to specified levels. But since companies typically provide only their average cost of extracting reserves—and not how much oil they could sell profitably if oil prices fell to $70 a barrel, for example—the tool lacks the kind of precision investors crave.  

Because of that and other limitations, Curtis Ravenel, Bloomberg’s global head ofsustainability projects, likened the current version of the assessment tool to a beta test or an “opening serve” to get investors thinking about the potential implications for fossil fuel companies and the best way to measure possible damage.

At this point, “this is not something that I would use to make investment decisions,” Ravenel said. “It’s something to start the conversation among the mainstream [financial] community.”

He expects the carbon risk analysis to improve as Bloomberg refines the calculations, companies release more information, and more investors and analysts focus on measuring the impact of a host of hard-to-quantify risks.

“For us, this moves the conversation from uncertainty to risk,” Ravenel said. “Uncertainty is something where people kind of throw their hands up and say, ‘it’s uncertainty—we can’t measure that.’ But the point about stranded assets is that actually, it might be measurable to some degree.”

Ravenel, who leads corporate-wide internal sustainability efforts and directs related new product initiatives, said the carbon risk valuation tool was a joint effort of Bloomberg New Energy Finance and primary developer Greg Elders, Bloomberg’s senior analyst of environmental, social and corporate governance (ESG) data.