Are fossils fuelling the next sub-prime crisis?

Fossil fuel companies don’t want to be seen as evil villains who are cooking the planet. Yet increasingly, it’s not their reputations but their future profits they should be worrying about.

On what is predicted to be the hottest day of the year so far, spare a thought for the chief executives of fossil fuel companies. Many of them will be feeling the heat even more than you are.

Oil, coal and nuclear energy producers face an increasingly uncertain future, with pressure from all sides. You could even say they’re going into meltdown. Firstly, evidence of continued global warming is leading to calls for their activities to be dramatically reduced. Secondly, renewables such as solar and wind power are taking a bigger share of the global energy market every year.

At the same time, serious questions are being asked about these companies’ finances. As reported in The Guardian on 25 June 2015, the Centre for International Environmental Law (CIEL), based in Washington D.C., believes the big ratings agencies like Moody’s and Standard & Poor’s are grossly over-valuing the assets of the big fossil fuel companies, putting both the agencies and the investors who rely on them at risk. They say ratings agencies need to take more account of two major factors: event risk, which relates to the damage climate change can cause, and assets stranding: the possibility that some reserves of fossil fuels won’t be extracted after all.

In fact, CIEL believe the figures are so over-inflated that they could even trigger the next great financial crisis, with effects similar to the sub-prime lending debacle that led to the 2008 crash.

To add fuel to the fire, oil companies have amassed huge debts trying to find new supplies. It’s true that low-carbon natural gas is becoming a bigger part of the energy mix, shale exploration has lowered energy prices in the US, and companies are responding to environmental concerns. However, since 2005, the collective borrowing by Western oil companies has increased threefold to $600bn, much of it used to hunt for fossil fuels in increasingly hard-to-reach environments, such as the Arctic or ultra-deepwater fields in the mid-Atlantic. Heavily indebted, and with a business model under threat from new technologies, it’s no wonder the debate about fossil fuel companies – and what this means for investors – is heating up.

At AML, we work with some of the best asset managers who have been leading the way on sustainability issues and renewable energy investing for many years, having spotted these trends early on. And their forward-looking approach is something we build into our work for them – ensuring that it’s an integral part of their advertising, content and digital environments, as well as their investments.