The definition of how energy companies define their reserves for their balance books could have massive implications on share prices and the value of pension funds.
Assuming that energy companies carry on investing at the same level as last year, they will spend around £4 trillion turning fossil-fuel deposits into drillable reserves over the next 10 years.
However, economic analysts point out that the reserves of gas, coal and oil should only be counted if they can be fully exploited.
The problem is with global warming agreements which could make large portions of those mineral deposits more difficult and more expensive to get out the ground to turn into resources.
That means that their balance sheet value will never be realised.
Global warming
The issue has been highlighted by a group of financial analysts based in London who are concerned about the steps energy companies would have to take to meet their global climate commitments.
They call themselves the Carbon Tracker Initiative and they have teamed up with the climate research centre, the Grantham Institute, to work out how much carbon will be needed to reach government targets.
They also aim to calculate what this would mean for the stock markets – and for pension funds.
The group says that to meet government targets of keeping global warming below two degrees, a figure set in 2010, then between 60% to 80% of all reserves listed on the world’s stock exchanges would be unusable.
Not only does this have an impact on the share prices of energy companies, but also for the massive investments made by pension funds into these companies.
The group says that energy firms are naively assuming there is zero risk of devaluation.
Tar sand investments
With so much pension money invested into energy companies, the future prosperity of people in retirement is being called into question.
A recent calculation by HSBC revealed that shares in coal companies would be devalued by between 40% and 60% should the world act positively against the threat of climate change.
In addition, the credit ratings agency Standard and Poor’s said that in similar circumstances those companies involved in exploiting tar sands would see their values plummet in a world looking to constrain carbon emissions.
However, they say there are vast amounts of pension assets being invested in tar sands.
The Carbon Tracker Initiative says there is a worrying disconnect between the governments of the world and their climate policies and the actions of capital markets.
The real issue, the group says, is that if climate change does worsen, then governments will be under increasing political pressure to act more than they already are doing.
