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Carney raises the heat on climate: you can’t burn all the oil

Published on the Emerging Markets website on the 12th October 2014
Story by Jon Hay

A public call by Bank of England governor Mark Carney that the vast majority of oil reserves should be considered “unburnable” if the world wants to avoid catastrophic climate change makes him stand out among mainstream figures.


Mark CarneyMark Carney has re-emphasised his support for the idea that oil companies’ reserves could be stranded assets – still valued by investors, but ultimately going to embody losses.

“The vast majority of reserves are unburnable,” the Bank of England governor said – if the world is to avoid catastrophic climate change.

Thinking of hydrocarbon deposits as stranded assets has gained prominence in recent years, helped by movements like the US student drive to persuade university endowments to disinvest from fossil fuel companies.

Climate science indicates that if the world is to cut CO2 emissions enough to avoid disastrous global warming, all the world’s already discovered oil reserves cannot be burnt. Yet such reserves still constitute a big part of the value of companies like ExxonMobil and BP – and few large investment firms have yet accepted the stranded cost analysis.

That makes Carney’s stance – which he has aired in public before – unusual and bold among leading, mainstream financial figures.

Carney was speaking at a World Bank seminar on Friday on integrated reporting. This is the idea – backed by the World Bank – that companies and public bodies should include in their annual reports, not just statutory financial information, but a holistic account of their business strategy and how it relates to stakeholders of all kinds, now and in the future.

“With the right information [for example, on how a company’s business interacts with environmental needs], all groups can express their view, and influence the allocation of capital and credit today,” Carney said.

The value of integrated reporting, he argued, was to help investors think about “not just things that can be managed in the short term” but also “costs companies are likely to be exposed to as policy responds to challenges” like climate change.

He referred to a “tragedy of horizons” – the market failure by which actors including some investors, companies and governments are not looking far enough ahead to coming problems like the environment, even though these are known to them.

Carney became interested in integrated reporting partly because of an initiative called the Enhanced Disclosure Task Force. This private sector venture, begun in 2011 by the Financial Stability Board, was a collaboration between banks, investors and rating agencies to “do the right thing”, in the words of Russell Picot, group chief accounting officer at HSBC – by providing higher quality and more relevant information about banks, in a bid to restore trust in them.

The EDTF made 32 recommendations, most of which have now been implemented by the world’s biggest banks. And HSBC has become enthusiastic about integrated reporting.

Paul Druckman, CEO of the International Integrated Reporting Council, said: “I like to describe integrated reporting as looking at an organisation through the doorway of its strategy rather than the weeds of its data.”

Financial statements would always be necessary, agreed Mark Vassen, global head of International Financial Reporting Standards, the accounting norms used in 110 countries, but: “We have come to a realisation that IFRS has created benefits, but that is only one dimension of what is needed. We need something on top to assess the sustainability of business models.”

Druckman said integrated reporting should address six kinds of capital: financial and manufactured – the usual domain of accounting; natural and social – often covered in corporate social responsibility reports; but also intellectual and human.

BNDES, the Brazilian development bank, is promoting the idea too – the first meeting it held a year ago attracted 17 companies. One this August drew 216.

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