There is increasing pressure on energy producers from climate risks. One key concept which is gaining prominence in lieu of the risks is “Carbon Bubble” and the related impact of divestment movement. As a part of the Paris climate agreement, 192 countries reaffirmed their commitment to reduce emissions and limiting the global temperature increase to less than 20C. Energy producing companies are under scrutiny from investors, shareholders, employees and customers and other related stakeholders to reduce carbon footprint and to demonstrate that their business are aligned to help build an efficient “Low Carbon Portfolio”. The goal is to channelize investments, assess climate risks and opportunities and mitigate future climate change trajectories, align it as key service for fossil fuel energy divestment, portfolio and asset management.

1. How are investors responding to the
concept of carbon bubble and the impact
of divestment on fossil fuels sector?
Let’s cap on the future emissions and build sustainable strategies
Eco Endeavourers Network
Striving for the planet in peril
About Us:
Eco Endeavourers Network is a thought leadership platform to create awareness, carry out research, and
disseminate knowledge & capacity building on Environment, Sustainability, Climate Change and Energy. We aspire
to promote environmental friendly and sustainable policies to varied stakeholders.
To begin with we are a team of two, with few members and volunteers joining in and hope to strive and leverage
the opportunity of developing thought and knowledge partnerships within and beyond borders for a united cause
of serving the mother earth and striving to promulgate environmental stewardship.
Our Team:
Dr. Prachi Ugle Pimpalkhute,
Founder, Eco Endeavourers Network
Sachin Pimpalkhute,
Co-Founder, Eco Endeavourers Network
Email : ecoendeavourers@gmail.com
prachiugle@gmail.com
Follow Us
http://fb.me/ecoendeavourers
https://www.linkedin.com/company/eco-endeavourers-network
https://twitter.com/EcoEndeavourers
Dr. Prachi Ugle Pimpalkhute,
Founder, Eco Endeavourers Network

2. Introduction
There is increasing pressure on energy producers from climate risks. One key concept which is
gaining prominence in lieu of the risks is “Carbon Bubble” and the related impact of divestment
movement. As a part of the Paris climate agreement, 192 countries reaffirmed their commitment
to reduce emissions and limiting the global temperature increase to less than 20C. Energy
producing companies are under scrutiny from investors, shareholders, employees and customers
and other related stakeholders to reduce carbon footprint and to demonstrate that their business
are aligned to help build an efficient “Low Carbon Portfolio”. The goal is to channelize
investments, assess climate risks and opportunities and mitigate future climate change
trajectories, align it as key service for fossil fuel energy divestment, portfolio and asset
management.
Of significant concern to investors is that some fossil fuel companies aren’t taking this target or
threat seriously, which could lead to stranded assets and devaluation of companies across the
industry. Since most of the financial funding flows into oil, gas and coal, the onus lies in raising
accountability per se about the potential bubble and its impact to the economic dynamics and in
negating the risks.
What is carbon bubble?
Carbon bubble aims to valuate dependence on fossil fuel based energy production as most often
true costs of CO2e are not yet valued at the stock markets. Moving ahead the question that often
arises is what are the losses companies would face if the carbon bubble were to burst and impact
of it on the financial markets? To resolve carbon bubble, identifying outliers includes analyzing
the sectors and companies where risk is more and informing carbon reduction strategies.
Investor’s response to climate risks associated with fossil fuel companies?
The perceived risks associated with investing in fossil fuel companies have gained momentum
like never before. Divestment drive too has gained prominence, however most of the companies
feel that it is not yet having financial impact on organizations. When giving up the shares, these
divestment personnel often tend to lose their say in the company as the few among do not
prioritize environmental impact as a criteria for consideration. As regard to the shareholders
response, the companies need to identify, act, be transparent, accountable, respect and work on
the perceived risks associated. Renewable energy use has gained momentum across all levels and
countries are marching ahead towards being carbon neutral or zero emissions hubs, however not
all countries especially the developing countries can apply it all levels. Though subsidies are
available for application of renewable energy, however it is not a 100 % option for most of them
as they are certain other priority areas or issues of concern that need equal attention. With this
perception, only phase wise and areas with high requirements are opting for renewable energy as
source. In order to address and achieve the task of zero emissions, fossil fuel companies need to
work on creating a low- carbon portfolio, for example: Shell, BP are, already creating.
Benchmarking the portfolio help capping future emissions and for investors to take wise
decisions.

3. More so if the fossil fuel companies fail to adhere to the target and risks associated, they would
incur stranded assets and devaluation of companies. In connection with this, a notable mention
towards building low carbon portfolio is “carbon pricing” – it helps mitigate the impact, innovate
new business models and makes relocation of carbon prices conducive for the investors as well
as associated stakeholders. It shall also allow defining rules, modalities and procedures for
efficient carbon market implementation and in building future trajectories.
Carbon regulations and actions in the form of renewable portfolio standards, voluntary reduction
commitments have gained prominence and so were the action implementation demonstrated at
the G7 summit on decarbonization and creating lower carbon emitting sources of energy. Back in
2013, the UN climate panel had briefed that carbon emissions be capped at trillion tons, at we are
half way there, and the question that now arises is how the remaining emissions be apportioned.
The fact that climate change could create “carbon bubble” in equity markets is concern among the
investors and this fact was validated when HSBC released an analysis finding that oil majors are
at significant risk from “unburnable” reserves and agreeing to consider divestment from fossil
fuel companies. International Energy Agency (IEA) calculates that no more than about 1,440
gigatons of carbon can be emitted globally by 2050. It stated that emissions have already reached
400 gigatons, which leaves 1,000 gigatons current reserves to be burned. The bigger threat to the
fossil fuels companies’ value in India comes from reduced demand for renewable energy. Even if
the rates are subsidized and on the basis of divestment, it’s usage is maximized the extent of
area/places/cities who avail benefit differs as priority issues differ from place to place. This leads
to lower oil and gas prices and also the potential value for fossil fuel players at risk could increase
to 45 – 55 % of current market capitalization. The investors do price in this risk when
considering the project as diversification, off grid markets and clean energy portfolio have gained
momentum and companies in this sector are taking carbon risks as priority area of concern.
Case Study briefing: According to the Transition Pathway Initiative of Management Quality and
Carbon Performance of Large Corporations (Grantham Institute, United Kingdom) database,
when one takes into account two major oil and gas companies: ONGC is rated as CA 100 company.
2018 was its first carbon performance assessment year and, pledged that it will continue that as
the very strategy in their company low carbon portfolio. The following questions were placed for
performance assessment study:
ONGC findings as per TPI (Transition Pathway Initiative):
1. Does the company acknowledge climate change as a significant issue for the business? – Yes
2. Does the company explicitly recognize climate change as a relevant risk and/or opportunity to
the business? – Yes
3. Does the company have a policy (or equivalent) commitment to action on climate change? –
Yes
4. Has the company set greenhouse gas emission reduction targets? – No
5. Has the company published information on its Scope 1 and 2 greenhouse gas emissions? – Yes

4. 6. Has the company nominated a board member or board committee with explicit responsibility
for oversight of the climate change policy? – No
7. Has the company set quantitative targets for reducing its greenhouse gas emissions? – No
8. Does the company report on Scope 3 emissions? – Yes
9. Has the company had its operational (Scope 1 and/or 2) greenhouse gas emissions data
verified? – Yes
10. Does the company support domestic and international efforts to mitigate climate change? - No
11. Does the company have a process to manage climate-related risks? – No
12. Does the company disclose Scope 3 use of product emissions? – No
13. Has the company set long-term quantitative targets for reducing its greenhouse gas emissions?
– No
14. Has the company incorporated environmental, social and governance issues into executive
remuneration? – No
15. Does the company incorporate climate change risks and opportunities in their strategy? – No
16. Does the company undertake climate scenario planning? – No
17. Does the company have an internal price of carbon? – No
18. Has the company reduced its operational (Scope 1 and 2) greenhouse gas emissions over the
past 3 years? – No ; as 2018 was their first year of carbon performance assessment
19. Does the company provide information on the business costs associated with climate change?
No ; as 2018 was their first year of carbon performance assessment
Global warming potential of proven reserves:
As per the European Free Alliance (European Green Party), when the investors realize that a large
part of fossil fuel reserves cannot be burned, energy undertaking could lose 40 - 60 % of their
value on stock exchange.
As regard to Carbon Tracker Initiative study on Unburnable Carbon, the total carbon potential of
the Earth’s known fossil fuel reserves comes to 2795 GtCO2. 65% of this is from coal, with oil
providing 22% and gas 13%. This means that governments and global markets are currently
treating it as assets, reserves equivalent to nearly 5 times the carbon budget for the next 40 years.
The investment consequences of using only 20% of these reserves have not yet been assessed
If 2°C target is applied meticulously then most of the declared reserves owned by the World’s
largest listed coal, gas and oil companies and their investors would be subject to losses as most of
their assets would become stranded.

5. Data Source: BP Statistical Review of World Energy
Listed companies by estimated carbon reserves in India:
Coal (Gt Co2) Oil (Gt Co2) Gas (Gt Co2)
Coal India Ltd. 6.69 Oil India Ltd. 0.16 Oil & Natural Gas Corp. Ltd. 0.18
Tata Steel Ltd. 2.29 - - - -
Tata Power Co. Ltd. 1.49 - - - -
NTPC Ltd. 0.28 - - - -
Jindal Steel & Power Ltd 0.26 - - - -
Neyveli Lignite Corp. Ltd 0.19 - - - -
Gujarat NRE Coke Ltd. 0.40 - - - -
Gujarat NRE Coking Coal
Ltd.
0.12 - - - -
Data Source: BP Statistical Review of World Energy; Sustainable Stock Exchange
12.63 12.28
0.19 0.16
0
2
4
6
8
10
12
14
Total (Gt Co2) Coal (Gt Co2) Gas (Gt Co2) Oil (Gt Co2)
Distribution of fossil fuel reserves between stock exchange - India
Total (Gt Co2)
Coal (Gt Co2)
Gas (Gt Co2)
Oil (Gt Co2)

6.  Are the capital markets aware of the risks and how to protect their investments from climate
change risks?
 Are asset allocation and benchmarking done by all the fossil fuel companies?
As per Carbon Tracker Initiative, Unburnable carbon report –
Company level:
o Reserves x carbon factor = carbon-dioxide potential
o Exchange – level = Sum of company carbon-dioxide potentials = Exchange total
o Global- level = Sum of exchange totals > Global carbon budget
As per the Potsdam Institute research calculation – to reduce the change of exceeding 2oC
warming to 20%, the global carbon budget from 2000 -2050 is 886 GtCO2. If one minuses the
emissions from the first decade of this century, this leaves a budget of 565 GtCO2 for the
remaining 40 years to 2050.
Strategies:
 Identifying outliers, where risks are concentrated to better inform and facilitate carbon
reduction strategies
 Tilting company portfolios towards lower carbon emissions / intensity ; portfolio
optimization
 Most of the strategies revolve around the requirement to retrofit cooling towers for the
power plants. Of relevance as per the Environmental Protection Agency (EPA) has been
application of cooling towers that reduce water withdrawal and also reduce water
discharge temperature. Also focus strategy is on Best Available Technology.
 Identify companies with greater risks with carbon management strategies relative to
peers.
 Preparing transparent and understandable carbon portfolio.
 ESG criteria, one market index of relevance to coal, oil and gas sector.
 Engage with market regulators for greater disclosure on climate risks
 Assessing impact on cash flow and valuation of stocks and reinvestment in energy
efficiency

7. According to the Impax asset management study and Grantham Institute the following are the
recommendations that investors should follow:
 Reduce exposure to E&P Stocks whose assets are likely to be most impacted by Carbon
Prices
 Maintain their energy factor exposure, redeploy the reduced amounts into stocks whose
principal business is in the Energy Efficiency sector (“Energy Efficiency Stocks”) – prices of
these stocks* correlated to retail energy prices
MSCI World Energy study on why companies active in renewable energy markets are not
included?
 Their stock prices have lower historical correlation to both the oil price and the MSCI
World Energy Index than do Energy Efficiency Stocks, most likely due to the high exposure
of renewable energy markets to changes in government policies
 Renewable E&P Stocks is dominated by a small number of large cap names, provides
unattractively high level of stock-specific risk.

8. References:
1. www.carbontracker.org
2. Carbon Tracker http://www.carbontracker.org/report/the-us-coal-crash/
3. http://aswathdamodaran.blogspot.co.uk/2014/12/the-oil-price-shockprimary-
secondary.html
4. Investing in a Time of Climate Change’, Mercer, 2015
http://www.carbontracker.org/report/lost_in_transition/
5. http://www.theactuary.com/features/2015/06/carbon-risk-how-do-we-measure-and-
manage-it
6. http://www.iigcc.org/files/publication-files/Carbon_Compass_final.pdf
7. Carbon supply cost curves series, available at
http://www.carbontracker.org/library/#capex-analysis
8. http://www.smithschool.ox.ac.uk/research-programmes/stranded-assets/satc.pdf
9. “US solar shares rise on hopes for tax credit extension” -
http://www.reuters.com/article/us-usa-stocks-solar-idUSKBN0TY2KF20151215.