LONDON, February 13

In a letter to the U.S. Securities and Exchange Commission as part of its ongoing review of disclosure, the Carbon Tracker Initiative highlights that fossil fuel company disclosures have not effectively conveyed the risks to company business models of trends towards a low-carbon economy.

The “Management, Discussion & Analysis” (MD&A) component of Regulation S-K requires fossil fuel companies to identify the material legal, technological, political and scientific trends that may affect their businesses and discuss the impact on the company’s financial condition and results of operations.  Notwithstanding this regulatory requirement, few fossil fuel companies discuss how trends towards a low-carbon economy will impact their results and financial condition.

Clearly, existing company disclosures have not satisfied investor demand.  In the 2014 proxy season nearly one out of every five shareholder proposals dealt with energy and climate change. Demand for these disclosures is driven by the underlying risks posed by climate and, more importantly, societal responses to address it.

“Carbon Tracker’s financial analysis makes clear that the move towards a low-carbon economy will result in a material departure from business-as-usual trends in fossil fuel use; companies should be informing investors of how they will adapt to changed circumstances,” said Mark Campanale, founder and executive director of Carbon Tracker.

Policy actions to promote an energy transition have accelerated in recent years at the national, state, and municipal level.

However, company disclosure all too often does not grapple with the direction of travel, and while the sum total of governmental commitments do not add up to a 2 degrees-limited world today, the best proxy for quantifying this energy transition is that limit, which is defined by international agreements and echoed through national and subnational energy targets.

The letter further emphasizes that, “[by] failing to disclose downward pressure towards 2 degrees or analyze the implications of that goal, companies are implying that the risk that policy makers will bend the demand curve low enough to have a material impact on their business is ‘remote.’”

Carbon Tracker’s research has shown that an energy transition would likely result in flattening then declining fossil fuel demand, placing stress on high-cost projects.

The letter emphasizes, “Effective disclosure of the market risks from climate change would focus on how low-carbon scenarios would impact commodity demand and price and include the knock-on effects of those shifts on future capital expenditure plans, liquidity and reserves valuations, if any.”

“The science is clear, the world cannot continue with business as usual as leaders at all levels of government and society are acknowledging this climate reality.  Fossil fuel companies need to acknowledge these shifts and discuss their material implications with shareholders,” said Robert Schuwerk, senior counsel for Carbon Tracker.

The letter also proposes two disclosure improvements that would address the core, material risks posed by climate reality: disclosures of future Capex by break-even price bands and the carbon content of reserves and resources.  Carbon Tracker believes these proposals would provide investors with leading indicators of which companies are adjusting their business models to a carbon-constrained world.