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Do investments in oil and gas constitute “systemic risk”?

Published:  20 October, 2016

IHS Energy Strategic Report by Daniel Yergin and Elena Pravettoni. A new IHS Energy report disputes concerns by some central banks and regulators that climate change may pose “systemic risk” to the financial system.

This view was articulated by Mark Carney, governor of the Bank of England, who declared in a September 2015 speech that climate change—in particular “transition risk”—could threaten financial stability via a sudden and significant collapse in asset values.

In response, the Financial Stability Board, which reports to the G20 governments and is chaired by Governor Carney, launched a task force to develop a climate risk disclosure framework for market participants. The task force will release its voluntary, unified guidelines for climate risk disclosure in December 2016.

A key consideration in this debate is the valuation of oil and gas reserves. In the September 2015 speech, Governor Carney cited the “carbon bubble” thesis, stating that a key risk to financial stability could come from potential sharp drops in the valuation of oil, gas and coal companies, owing to stranded reserves that may never be produced.

However, IHS Energy research on oil and gas company valuations in the financial marketplace has shown that the risk of overvaluation of these companies is limited, owing to how fossil fuel reserves are valued and contribute to the market capitalisation of oil and gas companies.

Overall, the report says, any transition that unfolds over decades—as would take place with any energy transition given the extensive amount of capital invested, the long life spans of energy assets, among other factors—does not constitute abrupt systemic risk to the financial system

The complete report, Do Investments in Oil and Gas Constitute “Systemic Risk? is available for download at: https://www.ihs.com/Info/1016/strategic-report-systemic-risk.html

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