This working paper investigates whether the development and adoption of firm-level environmental, social and governance (ESG) practices affects national macroeconomic performance, and whether this differs between developed countries and emerging economies. Using dynamic panel techniques - generalised method-of-moments (GMM) estimators - we find that an increase of micro-ESG performance can result in the improvement of living standards as measured by GDP per capita. When we test this link by country type, we find that firm-level social performance in a country is positively associated with GDP per capita in both developed countries and emerging economies. As for the other two components of firm-level ESG measures, namely environmental and governance performance, we find that these affect macroeconomic performance in emerging economies, but that the effects remain insignificant in developed countries. While further research is needed, these results may be of particular interest to policymakers and central banks, as they suggest that encouraging the adoption of ESG practices at the firm-level could support macroeconomic performance.
Given their size, influence, and long-term investment horizons, Sovereign Wealth Funds (SWFs) are uniquely placed among asset owners to promote and implement the alignment of finance with the Paris Agreement and the Sustainable Development Goals. Yet, to date, sustainable investment has remained on the periphery of SWF investment decision-making. The One Planet Sovereign Wealth Fund Group was established in December 2017. Its founding members are the Abu Dhabi Investment Authority, Kuwait Investment Authority, the New Zealand Superannuation Fund, Norges Bank Investment Management, the Public Investment Fund of the Kingdom of Saudi Arabia, and the Qatar Investment Authority. These six funds together hold approximately USD 3.07 trillion in assets under management as of June 2018, representing around 40% of the sector globally. On the 6th July 2018, the One Planet Group published a voluntary framework outlining principles for integrating climate change into SWF governance and investment processes. These principles are structured around three key themes: alignment, ownership, and integration. In this briefing paper we make recommendations to help guide SWFs in their implementation of the Framework and its principles.
Sustainability Improvement Loans: a risk-based approach to changing capital requirements in favour of sustainability outcomes
12 June 2019 | Jakob Thomä, Ben Caldecott, Soline Ralite | Working Paper
Policymakers are exploring whether to introduce Green Supporting Factors (GSFs) that would incentivise banks to lend to 'green' activities under capital requirement frameworks. This takes capital requirement frameworks away from their risk-based origins and this move is widely contested. This paper suggests an alternative pathway that satisfies the objective of aligning capital requirements with sustainability, while preserving their core role of supporting risk management. We introduce the concept of Sustainability Improvement Loans (SILs) that could merit lower capital charges as they are lower risk. We define SILs and how they could incentivise sustainability practices as well as reduce risk. The potential pathway to policy application and its estimated effects on banks' capital and profitability is assessed, as well as the extent to which the policy is aligned with the financial stability objectives of central banks and financial supervisors.
Summary of Proceedings: 7th Sustainable Finance Forum and 2nd Asset-level Data Initiative (ADI) Annual Meeting at Waddesdon Manor, 7th - 8th June 2018
The University of Oxford's Smith School of Enterprise and the Environment and The Rothschild Foundation, together with the KR Foundation, held the 7th Sustainable Finance Forum at Waddesdon Manor, Buckinghamshire, on the 7th and 8th June 2018. The 7th Forum was focused on monitoring and measuring the impacts of investments and investee companies on climate change and the SDGs. This report provides a summary of the proceedings and deliberations from the Forum. It outlines the key discussion points and issues that emerged during the sessions held.
Carbon Lock-in Curves (CLICs) analysis can be used to assess current and planned assets globally, within regions, within countries, and within companies. We can also assess investor portfolios and bank loan books which contain these assets. It means that groups can no longer make unsubstantiated claims about how their assets or investments are aligned with climate change mitigation or the Paris Agreement. Using CLICs we can now verify and evaluate such claims objectively and transparently, and this is essential if we are to move the power sector, and indeed other sectors, towards net zero carbon emissions. As a case study in this report we have applied CLICs to analyse Southeast Asia's current and planned fossil fuel generation assets. We find that around 84 percent of these assets are incompatible with a Paris Agreement aligned carbon budget.
Climate risk analysis from space: remote sensing, machine learning, and the future of measuring climate-related risk
23 July 2018 | Oxford Sustainable Finance Programme, Carbon Delta, GFZ | Report
The exponential increase in space-based sensing, computing power, and algorithmic complexity means that the development of a global catalogue of every physical asset in the world is within technical feasibility. Accurate asset-level data can dramatically enhance the ability of investors, regulators, governments, and civil society to measure and manage different forms of environmental risk, opportunity, and impact. In particular, remote sensing can help identify the features and use of assets relevant to determining asset-level GHG emissions. This report examines the potential role of new technologies to secure better asset-level data and at higher refresh rates.
10 May 2018 | Edited by Ben Caldecott | Forewords by Achim Steiner, Lord Nicholas Stern | Including chapters by Sarah Barker, Ben Caldecott, Elizabeth Harnett, Alexander Pfeiffer and Daniel Tulloch | Book
Drawing on the work of leading researchers and practitioners from a range of disciplines, including economic geography, economics, economic history, finance, law, and public policy, this edited collection provides a comprehensive assessment of stranded assets and the environment, covering the fundamental issues and debates, including climate change and societal responses to environmental change, as well as its origins and theoretical basis. This book will be of great relevance to scholars, practitioners and policymakers with an interest in include economics, business and development studies, climate policy and environmental studies in general.
The topic of 'stranded assets' created by environment-related risk factors has risen up the agenda dramatically, influencing many pressing topics in relation to global environmental change. Taken as a whole, this book provides some of the latest thinking on how stranded assets are relevant to investor strategy and decision-making, as well as those seeking to understand and influence financial institutions.
Directors' Liability and Climate Risk: National Legal Papers for Australia, Canada, South Africa, and the United Kingdom.
17 April 2018 | Sarah Barker, Alice Garton, Christine Reddell, Janis Sarra, Alexia Staker, Cynthia Williams | Reports
The Commonwealth Climate and Law Initiative (CCLI) is examining the legal basis for directors and trustees to take account of physical climate change risk and societal responses to climate change, under prevailing statutory and common (judge-made) laws. These are the first comprehensive legal assessments of the discharge of directors' duties in the climate context for four Commonwealth common law countries: Australia, Canada, South Africa, and the United Kingdom. These have been complemented by conferences in Australia (August 2016), Canada (October 2017), South Africa (January 2018) and the UK (June 2016). The national legal papers follow a uniform structure and can be downloaded here: Australia, Canada, South Africa, and the United Kingdom.
A key barrier for financial institutions responding to environmental risks are shortcomings in the availability of appropriate forms of data. This report outlines the potential benefits and users of asset-level data and details the construction of a demonstrator asset-level database: the Assets@Risk database. This demonstrator database aggregates asset-level data across the globe for the major carbon emitting industries: Power, Steel & Iron, Cement, Automobile, Airlines, and Shipping, and applies robust peer-reviewed methodologies for the construction of Cumulative Committed Carbon Emissions (CCCEs) and technologies for Reducing Cumulative Committed Carbon Emissions (RCCCEs) to each individual asset. Each industry database comprises sufficient assets to account for at least two-thirds of total global emissions within its industry. This combined database uniquely allows for the granular estimation of global climate related-risks and the potential for their mitigation.
Which oil & gas company strategies are more or less likely to be successful under different energy transition scenarios? How can we identify company strategies more 'robust' to climate-related transition risks? Which company strategies exhibit these characteristics and which ones don't? These are questions that the Oxford Sustainable Finance Programme and E3G have been exploring in the context of our 2 Degree Pathways project. At the heart of the project is a simulated wargame', where players roleplay oil & gas companies, exploring for and buying and selling assets, diversifying to 'green' investment, and setting dividend policy. This wargame is designed to discover unintended consequences and path dependencies to help understand how decisions today could affect company success over the longer term. This report summarises the findings from the first phase of the project.
This Briefing Paper reviews the roles and behaviours of Investor Relations (IR) functions in listed fossil fuel companies, particularly those listed in London. It is based on an ongoing study that seeks to illuminate the poorly understood role of IR teams in the context of climate change engagement. The project has been conceived as a way to help improve efforts to engage with listed fossil fuel companies on climate change, particularly by civil society and investor coalitions. These engagement efforts have increased significantly over recent years. The paper provides an overview of IR, gives insight into IR professionals themselves, and sets out how civil society and investors can develop strategies that could lead to more productive engagement with fossil fuel companies through their IR departments.
15 February 2018 | Gerard Dericks, Robert Potts, Ben Caldecott | Working Paper
More than one quarter of China's housing stock is currently located in 'resource-based cities' (RBCs), where the majority of economic activity is derived from the extraction of non-renewable resources. We hypothesise that residential and commercial property assets may become stranded in RBCs as China implements more stringent policies to mitigate the environmental pollution caused by extractive industries. Should this lead to a widespread fall in property prices in RBCs, it could have a profound effect on wider financial stability, as it is estimated that the majority of China's outstanding debt is in the real estate sector with a material proportion of this tied to RBCs.
Concerns misplaced: will compliance with the TCFD recommendations really expose companies and directors to liability risk?
25 September 2017 | Alexia Staker, Alice Garton, Sarah Barker | Briefing Paper
In this briefing from the Commonwealth Climate and Law Initiative (CCLI), experts refute misplaced fears in industry about the legal risks of climate disclosure. New analysis confirms that saying nothing at all about climate issues in corporate reporting puts directors at far greater risk of being sued than disclosure would. Complying with the new reporting recommendations from the Task Force on Climate-related Financial Disclosure (TCFD) will actually protect companies from the kind of liability claims they fear. It is highly likely that there will be additional regulation requiring disclosure of climate risk, or, at the very least, existing laws will be interpreted as requiring robust climate risk analysis. For all these reasons, astute directors should embrace the TCFD recommendations and recognise that climate-risk disclosure is a key component of financial reporting.
The fate of European coal-fired power stations planned in the mid-2000s: Insights for policymakers, companies, and investors considering new coal
Between 2005 and 2008 European utilities were determined to embark on a major coal-plant construction programme. They announced plans to build 49 GW of new coal-fired power capacity. To date 77% of this new capacity has been cancelled, with more likely to be cancelled soon. The economics of existing plants have deteriorated too. There are a number of important questions that stem from this: why did the majority of plant proposals not go ahead; what makes the projects that did proceed different; what challenges are these new plants likely to face now and in the future; and to what extent are the projects that did succeed likely to become stranded generation assets? The results are relevant not just to understanding the fate of the remaining coal-fired power stations in Europe, but also the future of those currently planned or being built in other countries. This working paper examines each of these questions in turn.
The entire global population of 212,615 Ultra High-Net-Worth Individuals (UHNWIs) was worth US$30 trillion in 2016, compared to OECD pension funds with assets of US$26 trillion. Despite their significance and growing importance, very little research has explored the financial and economic geography of UHNWIs. This working paper makes a significant contribution to understanding UHNWIs and also to how they may or may not support the growth and development of sustainable finance. It is based on extensive primary research with both UHNWIs and their private bankers/financial advisers, including 47 semi-structured interviews, a structured quantitative survey, and a multi-stakeholder research forum.
We analysed the exposure of current and planned coal-fired generation in China to the risk of asset stranding. We examined the environment-related risks facing every coal-fired power station owned by the top 50 coal-fired power utilities in China (which together comprise 89% of China's coal-fired capacity) and measured each power station's exposure to 19 different environment-related risks. To examine the scale of potential stranded coal assets in China, we also developed four illustrative scenarios reflecting the different speeds and scales at which risk factors could realistically materialise. This analysis can help to inform specific investor actions related to risk management, screening, voting, engagement, and disinvestment.
Download Full Report in Chinese
Stranded coal assets are inevitable given concerns about pollution and competition from cleaner technologies. This will have associated economic, social, and political implications. Central and provincial-level government in China, as well as other stakeholders, have a significant interest in successfully managing the economic and political consequences of power station closures. This discussion paper undertakes an initial assessment of the political economy implications associated with the premature closure of coal assets in China. It discusses stranding facing the coal industry more broadly, before focusing on coal-fired generation specifically. The paper estimates the potential scale and geographical distribution of stranded coal-fired generation assets at a provincial-level before outlining avenues for future research in China and internationally.
Download Full Report in Chinese
28 February 2017 | David Robinson, Xin Li | Working Paper
This working paper addresses two issues related to coal-fired generation in China. The first is how selected countries in the European Union and North America are making the transition away from unabated coal-fired power. The second is to identify power market reforms that could ease a similar transition in China. While China is very different from the OECD countries that are the focus of this study, there are many challenges and opportunities where international experience may be relevant for China.
Download Full Report in Chinese
17 February 2017 | Author: Kingsmill Bond | Discussion Paper
Orthodox thinking on the nature of change in energy systems tends to focus on how long it will take for the current fossil fuel based system to shift to a renewable based system which will be equally dominant. This is important for many reasons, above all as a tool to calculate how long it will take for the world to reduce and eliminate carbon emissions. However, this is not the key issue for incumbent companies and financial markets. What matters for companies and for financial markets is marginal change. For a company, marginal change is simply sales growth; and for financial markets marginal change acts as a signal of coming success or failure. This discussion paper examines when renewables will make up all the marginal growth in global energy supply and the disruptive change incumbents are likely to face as competition intensifies between fuels, prices fall, and assets become stranded.
15 February 2017 | Author: Elizabeth Harnett | Working Paper
This discussion paper outlines the current understanding of climate change in the investment markets in the UK and Australia, providing novel insights from 58 semi-structured interviews with a range of investment professions and a survey of 154 investors. The UK and Australia both have substantial and growing institutional investment systems, as well as increasing activism surrounding Responsible Investment. Given this, more responsible management of these assets could, potentially, provide significant impetus in shifting capital towards lower carbon economies.
The University of Oxford's Smith School of Enterprise and the Environment and The Rothschild Foundation held the fifth Stranded Assets Forum at Waddesdon Manor, Buckinghamshire, on the 15th April 2016. The Forum examined ultra high-net-worth individuals (UHNWIs), the advice they receive on sustainable investment topics, and how they could shape demand for and the practice of sustainable investment. This report provides a summary of the proceedings and deliberations from the Forum. It outlines the key discussion points and issues that emerged during the sessions held.
We identify and assess the environment-related risks facing financial, human, natural, physical, and social assets along the Indonesia palm oil value chain. This working paper also assesses the extent to which these risks are currently being addressed and reviews current ESG initiatives related to the Indonesian palm oil value chain and whether these are a suitable response. Finally, we look at the companies involved in the Indonesian oil palm oil value chain and examine the extent to which they are addressing these issues.
Deploying a 'bottom up' asset-level methodology, we analysed the exposure of all of Japan's current and planned coal-fired power stations to environment-related risk. Planned coal capacity greatly exceeds that required for replacement - by 191%. This may result in overcapacity and combined with competition from other forms of generation capacity with lower marginal costs (e.g. nuclear and renewables), lead to significant asset stranding of coal generation assets. Stranded coal assets in Japan would affect utility returns for investors; impair the ability of utilities to service outstanding debt obligations; and create stranded assets that have to be absorbed by taxpayers and ratepayers.
Download full report in Japanese here.
The University of Oxford's Smith School of Enterprise and the Environment and The Rothschild Foundation held the fourth Stranded Assets Forum at Waddesdon Manor, Buckinghamshire, on the 23rd October 2015. The Forum explored how environment-related risks, such as climate change, intersect with developments in prudential regulation and financial conduct. This report provides a summary of the proceedings and deliberations from the Forum. It outlines the key discussion points and issues that emerged during the sessions held.
The top 100 coal-fired utilities, top 20 thermal coal miners, and top 30 coal-to-liquids companies have been comprehensively assessed for their exposure to environment-related risks, including: water stress, air pollution concerns, climate change policy, carbon capture and storage retrofitability, future heat stress, remediation liabilities, and competition from renewables and gas. The research is designed to help investors, civil society, and company management to analyse the environmental performance of coal companies and will inform specific investor actions related to risk management, screening, voting, engagement, and disinvestment. The research also has clear implications for current disclosure processes, including the new Task Force on Climate-related Financial Disclosures.
Protected areas (PAs) are a large and growing asset class with unique legal and social characteristics. This report sets out a new asset framework for PAs, that involves new typologies for assets, investments, value creation, value capture, and risk management. This new framework could help PAs to generate more value, attract new investment, and better manage the risks that could strand PA assets. The new asset framework also represents a heuristic tool that can help underpin the case for new investment in PAs. In the report, we apply the framework to case studies in Brazil and Tanzania, conduct a systematic meta-analysis of the literature on PA value creation, undertake a preliminary assessment of the state of investments into PAs, and review current and emerging risks facing PAs.
Making Climate Policy More Like Monetary Policy: Calibrating Climate Policy Through Corporate Solvency
17 November 2015 | Ben Caldecott, Gerard Dericks | Working Paper
We propose that corporate solvency metrics be used as an objective tool for policymakers to calibrate the optimal magnitude of climate policies, and thereby achieve greater emissions abatement at lower social cost. In particular, solvency metrics could calibrate the optimal severity of climate policies and/or the generosity of industrial compensation. Policymakers currently monitor and regulate certain aspects of corporate solvency for financial firms (such as capital reserve requirements) in order to reduce the risk of bankruptcy while simultaneously maintaining profitability. In a similar vein, policymakers could do likewise with respect to climate change policies which target carbon-intensive firms.
25 August 2015 | Ben Caldecott, Dane Rook | Working Paper
Investment consultants are key 'gatekeepers' for asset owners, such as pension funds, and are instrumental in determining whether products and services are accepted or not by the financial community. Empirical research conducted as part of this study suggests that inadequate investment consultant-asset owner relationships are hindering the development of green investment. This study investigates this problem and examines its potential causes. We make recommendations to remedy these issues, set out new criteria to assess the capabilities of investment consultants with respect to green investment, and outline a new algorithmic tool to empower asset owners.
Cognitive Biases and Stranded Assets: Detecting Psychological Vulnerabilities within International Oil Companies
16 July 2015 | Dane Rook, Ben Caldecott | Working Paper
The trend for a larger volume of capex to be spread across a smaller number of projects increases the risk of psychological error - they become more likely as projects become larger, more complicated, and of lengthier duration. To help shareholders and companies guard against cognitive biases, we assessed and ranked the Boards of the six major international oil companies to see how susceptible they are to groupthink and salience, which can exacerbate psychological errors. We also set out diagnostic tools that can be used for this purpose.
20 April 2015 | Ben Caldecott, Dane Rook | Conference Proceedings
The University of Oxford's Smith School of Enterprise and the Environment and The Rothschild Foundation held the third Stranded Assets Forum at Waddesdon Manor, Buckinghamshire, on the 6th March 2015. The Forum explored whether the investment consultant industry is up to the job on environmental, climate, and sustainability topics and examined ways to address potential barriers. This report provides a summary of the proceedings and deliberations from the Forum. It outlines the key discussion points and issues that emerged during the sessions held.
27 March 2015 | Ben Caldecott, Gerard Dericks, James Mitchell | Working Paper
We have located subcritical coal-fired power stations in Australia and identified the ones most at risk of stranding due to their carbon intensity and local environmental impacts. The research shows which companies own these assets in Australia and ranks companies by exposure. In addition, we examine the implications of subcritical coal for Australian policymakers, in particular we look at the costs, benefits, and mechanisms for phasing out subcritical coal in Australia.
13 March 2015 | Ben Caldecott, Gerard Dericks, James Mitchell | Report
We have located subcritical coal-fired power stations globally and identified the ones most at risk of stranding due to their carbon intensity and deleterious effects on local air pollution and water stress. The research shows which companies own these assets and ranks companies by exposure. Furthermore, we examine how environment-related risks facing subcritical coal assets might develop in the future.
10 February 2015 | Dane Rook, Ben Caldecott | Working Paper
This paper sets out new metrics to assess whether natural resource company capex is responsibly diversified. There is growing criticism of existing metrics for assessing the prospects of oil majors, such as Reserve-Replacement Ratios, and we have sought to address this directly by introducing two novel, and straightforward, metrics - capex density and capex evenness. The paper also includes a starter manual for how to use these new metrics and is accompanied by a capex balance calculator, which can be downloaded here.
3 February 2015 | Ben Caldecott, Guy Lomax, Mark Workman | Working Paper
Negative Emissions Technologies (NETs) have the potential to remove carbon dioxide from the atmosphere and this could reduce the impacts of ocean acidification and anthropogenic climate change. To see whether carbon budgets can be extended by NETs and if so, for how long, we quantify the 'extra space' that they could create and then examine the potential implications for carbon-intensive sectors.
Protected areas (PAs) are a large and growing asset class with unique legal and social characteristics. This discussion paper provides an update on the development of a new asset framework for PAs, that involves new typologies for investment, situated assets, forms of value, value capture, and risk. This new framework could help PAs to generate more value, attract new investment, and better manage risks that could strand PA assets.
10 October 2014 | Ben Caldecott, Dane Rook, Julian Ashwin | Conference Proceedings
The University of Oxford's Smith School of Enterprise and the Environment and The Rothschild Foundation held the second Stranded Assets Forum at Waddesdon Manor, Buckinghamshire, on the 4th September 2014. The topic was fossil fuel divestment and endowments. This report provides a summary of the proceedings and deliberations from the Forum. It outlines the key discussion points and issues that emerged during the sessions held.
1 September 2014 | Ben Caldecott, Nick Robins | Briefing Paper
This Briefing Paper was produced to help inform an International Institute for Sustainable Development (IISD) and UNEP Inquiry collaboration with policymakers in China, particularly those from the Development Research Center of the State Council (DRC) and People's Bank of China (PBoC). The paper examines the risks and opportunities associated with stranded assets, provides five international case studies, and identifies how these issues might be relevant to Chinese policy makers.
Download Full Report in Chinese
14 July 2014 | Ben Caldecott, Jeremy McDaniels | Working Paper for UNEP Inquiry into the Design of a Sustainable Financial System
This Working Paper does three things: first, summarises the underlying logic for why the financial sector should care about the environment and environment-related risks; second, reviews the barriers preventing the financial system from managing such issues; and third, identifies the researchers and organisations working on these topics. This is a reference guide for those concerned with both how environment-related risks could affect the financial sector and what financial institutions can do to manage such risks.
25 April 2014 | Ben Caldecott, Jeremy McDaniels, Gerard Dericks | Conference Proceedings
The University of Oxford's Smith School of Enterprise and the Environment and The Rothschild Foundation held the first Stranded Assets Forum at Waddesdon Manor, Buckinghamshire, on the 14th and 15th March 2014. This report provides a summary of the proceedings and deliberations from the Forum. It outlines the key discussion points and issues that emerged during the sessions held.
28 January 2014 | Ben Caldecott, James Tilbury, Christian Carey | Discussion Paper
Scenarios can help investors, firms and policy makers increase the resilience of assets by making them better prepared for inherently hard to predict events. In this high-level discussion paper we review existing scenarios to determine trends and gaps in the literature and propose a general type of scenario that would be most useful for the management of stranded asset risks.
Stranded Generation Assets: Implications for European Capacity Mechanisms, Energy Markets and Climate Policy
17 January 2014 | Ben Caldecott, Jeremy McDaniels | Working Paper
An increasing number of major EU utilities have decided to mothball or prematurely close recently built, high-efficiency combined-cycle gas turbine (CCGT) power plants. This working paper examines how EU utilities are reacting, how these stranded assets are affecting firm value and strategy, and what implications may exist for energy market design, low-carbon energy and climate policy.
Stranded Down Under? Environment-related Factors Changing China's Demand for Coal and What this Means for Australian Coal Assets
16 December 2013 | Ben Caldecott, James Tilbury, Yuge Ma | Report
China's demand for coal is changing as a result of environment-related factors, including environmental regulation, developments in cleaner technologies, local pollution, improving energy efficiency, changing resource landscapes and political activism. We look at how this evolving demand picture could then translate into impacts on the coal price and then on the stranded asset risks faced by coal and coal-related assets in Australia - a country that is a large and growing coal exporter to China.
Stranded Assets and the Fossil Fuel Divestment Campaign: What Does Divestment Mean for the Valuation of Fossil Fuel Assets?
8 October 2013 | Atif Ansar, Ben Caldecott, James Tilbury | Report
The fossil fuel divestment campaign has rapidly gained traction throughout university campuses and elsewhere since its launch. As part of our research we test whether the divestment campaign could affect fossil fuel assets and if so, how, to what extent, and over which time horizons. We also look at the similarities and differences between this campaign and others, such as tobacco and apartheid.
9 August 2013 | Ben Caldecott, Nicholas Howarth, Patrick McSharry | Report
This report maps out environment-related risks in the agricultural supply chain and shows how they might create stranded assets over time. We have systematised the different risk factors and have completed an assessment of where and how risks might affect agricultural assets. We have also completed a high-level Value at Risk (VaR) assessment to give an indication of the magnitudes of capital exposed and to stimulate further work in this area.