Reducing carbon emissions in line with the Paris climate accord could come at the expense of at least 5% of the value of listed energy and utility companies, according to risk and actuarial consultancy Triple A Risk Finance.
A more abrupt transition away from fossil fuels could increase these losses to up to 25%, said Ridzert van der Zee, senior risk consultant at the Amsterdam-based firm, last week during a meeting for large investors about climate risks and energy transition.
The losses would come as a consequence of stranded assets, reduced turnover and potential emissions taxes, he said.
Together with energy consultancy Ecofys, and commissioned by the German government, Van der Zee has calculated the impact of the energy transition on investments.
While highlighting that the findings were a snapshot in time, he cited the example of coal-fired power plants, which are being closed in the Netherlands following government policy based on the 2015 climate agreement.
Van der Zee said that equity would take the worst hit, followed by corporate bonds.
The impact on government bonds would be limited, but it could increase for countries with a high dependence on fossil fuel for their energy needs, he said.
According to the consultant, based on current fossil-fuel-based energy generation, reducing CO2 emissions would mean a significant decrease of turnover for energy companies.
Under the Paris accord’s central scenario – limiting the average global temperature rise to two degrees above pre-industrial levels – energy and utility companies would lose more than 5%. Losses would increase to 12% if governments were to set the target at 1.5 degrees.
Stranded assets would in particular hit mining companies and energy firms, while utility companies would suffer from high costs for replacing their equipment. Steel and cement producers would have to invest heavily in reducing carbon emissions, he added.
According to the consultant, an abrupt energy transition could drive up losses to 70% at some companies as a combined result of lost turnover, costs and stranded assets.
This meant investors must not just look at the carbon footprint, “as this is only part of the story”, Van der Zee said. He suggested that investors should include assessments of stranded assets and costs to their method of analysing risks, as a way to further fine-tune their equity selection.