Thread by @KellerZoe

Green fortunes will be made as the economy is forced to decarbonise. The rapidly changing investor sentiment and the winners and losers it will create.
By Ambrose Evans-Pritchard
telegraph.co.uk/business/25-tr…

Two powerful shocks have hit the fossil industry and its financial ecosystem at the same moment:
- Australia’s six million hectare inferno
- The Netherlands watershed court case

Last month the Dutch supreme court ruled that the country’s climate targets were not stringent enough. It ordered the government to slash CO2 emissions much more deeply than it had planned – or is capable of doing without radical measures – and to do so by the end of this year.

The Hague is casting about trying to find ways to cut emissions by 25% from 1990 levels, not 20% as supposed, though that lesser target was already in doubt. Never before has a complex industrialised economy been forced to decarbonise so drastically.

The activist group Urgenda – victor in the long legal battle – is demanding the closure of 3 new coal plants built defiantly in 2015-16 without carbon capture; as well as Vattenfall’s Hemweg plant in Amsterdam. Some €3bn (£2.5bn) of sunk costs are exposed.

What is unique about the case is the reliance on human rights law: the UN Convention and the European Convention on Human Rights. This sets a precedent and variants are spreading like wildfire.

A parallel case in Poland aims to shut down PGE’s Belchatow coal plant, a 5 GW lignite monster with emissions to match New Zealand. The Philippines has already ruled that oil majors such as Shell and BP can be pursued for past damages based on rights law.

The dam broke on climate litigation cases in 2019. There are now 1,380 known lawsuits worldwide. “My advice to companies is that you had better have a 2050 net-zero strategy or you risk losing your societal licence” said Liebreich, founder of Bloomberg New Energy Finance

Litigation risk brings forward a perfect storm for the fossil industry – and not just for them – already on the ropes as the political vice tightens, renewable costs plummet to parity or below, and investors start to discount anything brown.

Big Oil’s 6pc dividend is a red flag, not a sign of health. “Nobody wants to be the last one holding a stranded asset so there is a rush for the exits,” said Mr Liebreich. Markets are neuralgic about long-tail legal liabilities and are quickly becoming the green enforcers.

Some $120 trillion of investment funds, pension funds, and wealth under management are formally linked in groups pushing for decarbonisation. Superficial “greenwashing” no longer cuts any ice. Company boards must give chapter and verse.

Investors’ priority is to protect themselves against “catastrophic risks” as the energy switch accelerates from a slow Waltz to a fast Tarantella, but it does not stop there. BNP has geared its whole €440bn portfolio to a Paris-compliant model, excluding thermal coal.

“We’ll be looking at the carbon intensity of every company across our investable universe, and that includes steel, cement, and manufacturing. The fashion industry is going to get a lot of attention over the next year because it has a horrendous environmental footprint” said BNP

The investor activist network includes:
- Climate Action 100
- the UN-backed Principles for Responsible Investment (PRI)
- the City-based Institutional Investors Group on Climate Change.

The PRI – a $90 trillion alliance – says societies will act to stop their leaders “sleep-walking” into an unlivable world and therefore that a regulatory sledgehammer is about to come crashing down. This is not in the distant future.

It will hit before 2025 and then gather force. “People won’t be allowed to drive a car with an internal combustion engine, and it’s coming a lot earlier than many think,” says Fiona Reynolds, the chief executive.

The group tells its members to brace for “forceful, abrupt, and disorderly” action. It expects electric vehicles to sweep the market as soon as life-time costs plunge demonstrably below petrol and diesel, leading to peak global oil demand as soon as 2026-28.

Almost 70% of the world’s car fleet will be EVs by 2040 (not 15% as suggested by BP and others). Oil use in road transport will collapse. Carbon taxes/prices will rise rapidly. Thermal coal will be “virtually non-existent” in the world by 2040. Asia will not come to the rescue.

The speed of change is staggering. “3 years ago the consensus view was that EVs wouldn't become mainstream for a couple of decades. That has completely changed. Daimler says they will not invest a single dollar ever again in a new internal combustion engine,” BNP’s Lewis said.

Equity brokers Redburn have derated the entire oil sector, with a double downgrade for ExxonMobil. They are starting to price in “existential risk”, warning that establishment forecasts for crude demand are wildly wrong. They expect global oil use to decline by 2% a yr from 2025.

It is another universe from that inhabited by BP’s outgoing chief executive, Bob Dudley, who insists that oil, gas, and coal will still make up 73pc of global energy in 2040, almost unchanged from today. That is broadly the view of OPEC and the International Energy Agency.

But it cannot be squared with the stated policies of the world’s governments and faces a forensic attack from high quarters. Carney, BoE Governor, says those betting on business-as-usual will be in for a rude awakening. A big chunk of their assets will be rendered “worthless”.

He has flagged potential “losses” above $20 trillion. Carney thinks the green switch can put excess global capital to work and act as a net growth accelerant, but there will be winners and losers: those ahead of the curve may reap fat rewards: those that stall will be “punished”.

The nexus of investor groups is aligned with the ever-more stringent demands of the G20’s Task Force on Climate-related Financial Disclosures (TCFD). For now TCFD rules are voluntary. UK aims to go first and make them mandatory by 2022. This is already concentrating the mind.

The oil majors know that a carbon tax is coming and many see it as self-protection. Companies are pencilling in a rising scale to $40-60. Internal documents show that ConocoPhillips now requires that all future projects must be viable at a carbon tax of $40 as soon as 2024.

Big Oil’s main thrust is to crack down on emissions and methane leaks from their own operations (scope 1) and from their power supply (scope 2). What happens to their oil once it goes to consumers (scope 3) is a responsibility shared with the whole of society.

Shell and Repsol are going radical with plans for net-zero by 2050, including scope 3. They will have to offset all the emissions of the actual oil and gas they sell. Global reforestation is one potential route.

But how far can such steps shield their business models? A tidal wave of rival technologies is smashing into them. BNEF estimates that new wind and solar are already cheaper today than new coal for two-thirds of the world’s population. Digging up coal may become a cost absurdity.

The final tipping point arrives when “dispatchable” renewables (combined with quick storage back-up) undercut even the marginal cost of running natural gas plants. Carbon Tracker expects that to be fully achieved worldwide by the mid-2030s. That sets off the culminating cascade.

Kingsmill Bond, former Deutsche Bank now at Carbon Tracker, says paper losses will be eye-watering for those who linger on the losing side, and they do not have long to wait. “We are near the beginning of write-downs on a huge scale. Now is just the tip of the iceberg,” he says.

“The fossil sector is the biggest system in the world. There is $25 trillion of stuff above ground in pipelines, wells, refineries, or power plants that will have to be written off if we are going to get anywhere near Paris,” he says.

The technology is already at hand. Carbon Tracker’s assumption is that market forces will sweep away the incumbents because they can no longer compete.
Brown fortunes will be lost. Bigger green fortunes will be made. It is the time-honoured brutality of technological disruption.