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Worthless Fossil Fuel Assets Get Tallied in Step Toward ESG Debt Market


By Esteban Duarte

(Bloomberg) A think tank is number crunching assets that may potentially be written down by Canadian energy companies in order to limit C02 emissions, a first step for establishing a market to help finance the transition into greener production methods.The effort to count so-called stranded assets has a particular resonance in Canada, where having a functioning sustainable debt market is key not only for activities typically considered green, but also for polluters transitioning to cleaner technologies. That’s because its oil and gas companies — most of them located in the provinces of Alberta and Saskatchewan — account for more than 20% of the country’s exports.“The first step is to start collecting data and running the models, so that allows us to say this is the size of the problem,” said Ryan Riordan, head of research at the Institute for Sustainable Finance at the Smith School of Business.

A stranded asset refers to fossil fuel investments that risk being rendered near-worthless from the cost of policies designed to combat climate change. An estimate of these assets is needed to define the maximum size and a process for an eventual transitioning bond market.

“The biggest issue is to reach agreement about what a transition process or asset is,” Riordan said. “Then it will be easier to have a dialog with investors.”

The energy industry is the largest source of greenhouse gas emissions, contributing to 26% of the total, according to an interim version of a government-mandated report written by experts, including Royal Bank of Canada board member Andy Chisholm, who is also on the think tank’s advisory board.

“Transition risks are of particular significance for Canada given its endowment of carbon-intensive commodities, the current importance of some of these carbon-intensive sectors for the Canadian economy, and the energy needs for cooling and heating,” according to a Nov. 19 article written by Canada’s central bank researcher Miguel Molico.

Measures to limit carbon dioxide emissions so warming doesn’t go above two degrees Celsius may mean leaving a higher proportion of Canadian oil reserves unused compared to other countries, according to a 2015 study written by University College London academics Christophe McGlade & Paul Ekins, which was cited in Molico’s article. A goal of the 2015 Paris Agreement is to hold increases in global temperatures within a range of 1.5 to 2.0 degrees Celsius.

The ISF expects to have an initial estimate of the size of energy-sector stranded assets by early next year, said Riordan. On a parallel track, a Canadian Standards Association’s task force, made up of bankers, investors such as pension funds, and social groups is developing nationwide classifications of activities that could be included within sustainable financing before joining global talks on the subject.

The ISF created an independent network of almost 50 academics from 16 universities coast to coast, said Riordan. The initial funding has been provided by three not-for-profit organizations, including the Ivey Foundation, which also was among institutions that hosted roundtables that helped Canada’s government appoint experts to gather views ahead of producing the report.

“The energy industry is important for Canada so the stranded assets problem has to be large,” said Riordan, who earlier this year received the Bank of Canada’s Governor’s Award.



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