Individuals hold more than half of the oil industry’s stranded assets in

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When an oil company invests in an expensive new drilling project today, it’s a risky bet. Even if the new well is a success, future government policies aimed at slowing climate change could render the project unprofitable or force it to shut down years earlier than expected.

When this happens, the well and the oil become what is called blocked assets. This may seem like the oil company’s problem, but the company is not the only one taking this risk.

In a study published on May 26, 2022in the journal Nature Climate Change, we trace ownership of over 43,000 oil and gas assets to reveal who ultimately loses misguided investments that end up stranded.

It turns out that individuals hold more than half of risk assets, and ordinary people with pensions and savings invested in managed funds bear a surprisingly large share, which could exceed a quarter of all losses.

More climate regulations are coming

In 2015, almost every country in the world signed the Paris Climate Agreement, pledging to try to keep global warming well below 2 degrees Celsius (3.6 F) above pre-industrial averages. Rising global temperatures were already contributing to deadly heat waves and worsening forest fires. Studies have shown the the risks would increase while greenhouse gas emissions, mainly from the use of fossil fuels, continue to rise.

It is clear that the achievement of the Paris objectives require a global energy transition away from fossil fuels. And many countries are developing climate policies designed to encourage this shift to cleaner energy.

But the oil industry is still launching new fossil fuel projects, suggesting it doesn’t think it will be responsible for future stranded assets. UN Secretary General António Guterres has called for a recent wave of new oil and gas projectsmoral and economic folly.”

How risk moves from the oil field to the small investor

When an asset is locked in, the owner’s anticipated gain does not materialize.

For example, let’s say an oil company buys drilling rights, does the exploration work, and builds an offshore oil rig. Then he discovers that the demand for his product has declined so much due to climate change policies that it would cost more to extract the oil than to sell it.

The oil company is owned by shareholders. Some of these shareholders are individuals. Others are corporations which in turn are owned by their own shareholders. Lost profits are ultimately felt by these remote owners.

In the study, we modeled how demand for fossil fuels could decline if governments honored their recent emission reduction pledges and what that would mean for stranded assets. We found that $1.4 trillion in oil and gas assets on a global scale would risk being blocked.

Stranded assets mean loss of wealth for the owners of the assets. We have traced the losses from the oil and gas fields, through the extraction companies, to the immediate shareholders and fund holders of those companies, and again their shareholders and fund holders if the immediate shareholders are corporations, and down to the people and governments who own shares. in companies in this chain of ownership.

It’s a complex network.

On their way to ultimate owners, much of the loss goes through financial companies, including pension funds. Worldwide, pension funds that invest their members’ savings directly in other companies own a considerable sum of these future blocked assets. Moreover, many defined contribution pensions have investments through fund managers, such as BlackRock or Vanguard, who invest on their behalf.

We estimate that the total global losses incurred by the financial sector, including through cross-ownership of one financial company by another, from assets tied up in oil and gas production could be as high as $681 billion. Of this amount, about $371 billion would be held by fund managers, $146 billion by other financial firms, and $164 billion could even affect bondholders, often pension funds, whose collateral would be reduced.

American owners are by far the most exposed. Ultimately, we found that losses of up to $362 billion could be distributed through the financial system to US investors.

Some of the assets and businesses in a chain of ownership are also offshore, which can make the risk exposure for a fund owner even more difficult to track.

Someone will get stuck with these assets

Our estimates are based on a recent global shareholding snapshot. At the moment, with oil and gas With prices near record highs due to supply chain issues and the Russian war in Ukraine, oil and gas companies are paying splendid dividends. And in principle, each shareholder could sell his holdings in the near future.

But that doesn’t mean the risk goes away: someone else buys that stock.

In the end, it’s like a game of musical chairs. When the music stops, someone will end up with the locked asset. And since the more affluent investors have sophisticated investment teams, they may be in the best position to exit in time, leaving less sophisticated investors and defined-contribution pension plans to join the oilfield workers and gas companies as losers, while oil company executives unfurl their golden parachutes.

Alternatively, powerful investors could successfully lobby for compensation, as has happened repeatedly in the WE and Germany. One argument would be that they couldn’t have anticipated tougher climate laws when they invested or that they could be pointing the finger at governments asking companies to produce more in the short term, as happened recently. in the USA substitute for Russian supplies.

However, divesting immediately or hoping for compensation are not the only options. Investors – the owners of the company – can also pressure companies to switch from fossil fuels to renewable energy generation or another choice with future growth potential.

Investors can not only bear the financial risk, but also the financial responsibility that comes with it, and ethical choices can help preserve both the value of their investments and the climate.

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