The Fossil Fuel Transition Blueprint B lu e epr p ri n t arbon a rbon Tracker Tracker Initiative n a e About Carbon Tracker The Carbon Tracker Initiative is a team of financial specialists making climate risk real in today’s financial markets. Our research to date on unburnable carbon and stranded assets has started a new debate on how to align the financial system with the energy transition to a low carbon future. You can download this report from: http://www.carbontracker.org/report/companyblueprint/ Acknowledgements This report was authored by: Energy Transition Advisors: Mark Fulton, Founding Partner at Energy Transition Advisors (ETA) and Advisor to Carbon Tracker Initiative Paul Spedding, former Global Co-Head of Oil And Gas at HSBC and Research Advisor to ETA Carbon Tracker Initiative: Robert Schuwerk, Senior Counsel at Carbon Tracker Initiative Luke Sussams, Senior Researcher at Carbon Tracker Initiative Typeset and designed by: Margherita Gagliardi, Communications Officer at Carbon Tracker Initiative Context: The Blueprint Series The Fossil Fuel Transition Blueprint Series Carbon Tracker is developing a transition road map for the fossil fuel industry (the “Blueprint Series”). This will outline the steps we believe that the industry and individual companies will need to take to adapt their business practices and models to move down a trajectory consistent with an energy transition that delivers a climate secure global energy system. We launch this series with a document looking at the framework for hard wiring the necessary risk management and associated governance procedures into the decision making processes of companies to manage climate risk, preserve value and manage the transition. Our focus is primarily on how demand could be disrupted by climate regulation, emerging clean technologies, efficiency and economic assumptions and flow on to commodity prices. These changes could manifest themselves in either an orderly or a disorderly manner. Governance processes within companies need to be fit for purpose to manage these risks however they manifest. Further documents in the series will also be designed specifically for investors and regulators concerned with transparency. These will help them understand more fully these risks and the specific steps they should be requiring the companies they own or regulate to incorporate into their governance structure to manage risks. The goal of the series is to provide a signposted roadmap to test the progress of companies towards being able to cope with a more climate secure global energy system consistent with the 2ºC budget. This will be a critical tool for shareholders in their engagement with companies around climate risk. . Content 0. Executive Summary 5 Managing corporate risk from an energy transition: an oil and gas focus 1. Introduction 10 Creating shareholder value by lowering risk and boosting returns 2. Overview 13 Climate/economic risk management Good governance 3. Checklist 17 4 Risk Management checklist and corporate governance 26 Appendix 1 - Mind the gap – A look at oil company assumptions on demand compared to the IEA 32 Appendix 2 - Managing Demand scenarios – Carbon Tracker’s approach 34 Appendix 3: Quantifying Valuation and Risk measures Carbon Tracker & Energy Transition Advisors Executive Summary Managing corporate risk from an energy transition: an oil and gas focus Focusing on higher internal rates of return (IRR) - lower cost projects reduces risk for companies and shareholders. It might also create additional value by improving stock ratings should historic return/rating relationships persist. In our view, fossil fuel companies and their shareholders are exposed to the following key risks associated with climate change. Commodity Price risk: What is the risk to the value of existing company reserves in a ‘low carbon’ scenario for demand where commodity prices are likely to be lower but certainly more volatile? Demand/Volume risk: What is the relative exposure to future high cost, high carbon developments that may prove unnecessary and hence sub-commercial in a ‘lower carbon’ scenario? Capital allocation risk: Is there sufficient flexibility within existing capital budgets to avoid pressure on shareholder dividends and employee levels in a ‘lower carbon’, low price scenario? Management risk: Are management and shareholder interests aligned correctly for a ‘low carbon’ scenario, which would likely require