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IEEFA analysis of Paris Climate Accord:

Much work still to be done to inform investors of perils of fossil-fuel markets

Analysts from the Institute for Energy Economics and Financial Analysis said the emission-control deal signed over the weekend in Paris underscores the impact public policy can have on investment choices.

“The accord is a sensible step forward, and one that’s been a long time coming,” said Tom Sanzillo, IEEFA’s director of finance. “It’s a clear acknowledgement that the global economy is moving away from fossil fuels.”

Sanzillo cautioned, however, the “much work remains still to educate investors about the perils of sinking money into coal, for instance.”

He noted that IEEFA over the past several years has published research around the growing stranded-asset risk investors run when they take a stake in fossil fuel companies, especially those that pursue greenfield development projects.

“The financial market implications of stranded coal mines and stranded coal-fired power and stranded coal-related rail and port infrastructure assets are hugely increased by the Paris understanding,” Sanzillo said. “The immediate proof of that is in the month leading up to and during the summit, which marked significant losses in the value of oil and coal stocks as markets increasingly factored in the prospect of a successful agreement being reached.”

In a U.S. equity market that has been flat over the past month, Peabody Energy shares are down 36 percent, having fallen 11 percent over the past week alone, down 92 percent in the past year. Arch Coal is down 38 percent over the past month and 25 percent in the past week. Consol Energy Inc. is down 6 percent in a month and 79 percent over the past year. China Shenhua Energy is down 6 percent and 15 percent, respectively.

Global mining majors have likewise taken a hit, not just from the Paris Agreement but because they have overestimated demand from China, assuming than Chinese economic growth would continue at an unsustainable 7-8 percent rate going forward and betting that a structural shift to fewer commodities and less energy-intensive service-sector growth would not materialize. Investor wealth destruction has been severe. AngloAmerican shares are down 22 percent in the past week, down 36 percent in a month and 73 in the past year. Glencore Plc shares are down 4 percent, down 8 percent and 70 percent over the same timeframes. BHP shares are down 1 percent, 15 percent and 35 percent. Rio Tinto, having progressively exited many coal assets over the past two years, has done better by comparison but is still down 3 percent, 11 percent and 20 percent over the past week, month and year. 

Australian coal stocks have been similarly battered.

Sanzillo and Tim Buckley, IEEFA’s director of energy finance, Australia, posted an online commentary on the topic.

“The risk unfolding across the fossil-fuel sector exposes not just businesses, investors, and shareholders but in some cases significant segments of entire national economies through refusal to accept the inevitable rise of technology and innovation in energy markets,” Sanzillo and Buckley wrote. “The ever-lower cost of renewable energy, combined with strides in energy storage, stand to create an enormous wealth-transfer effect that will move capital out of fossil fuel companies.”

For more information 
Institute for Energy Economics and Financial Analysis (IEEFA)
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