How Bloomberg’s New Financial Tool Helps Investors Game Out The Risks Of The Carbon Bubble


The financial world’s concerns with the “carbon bubble” just became about as concrete as they can get.

Last week, the financial media company Bloomberg LP unveiled a new tool that helps investors quantify and game out the risks climate change can pose to their portfolios. The Carbon Risk Evaluation Tool is available to over 300,000 high-end traders, and allows them to try out several different future scenarios — all with adjustable parameters — for how policies at the national and local level around the globe could effect the stock of companies invested in fossil fuels.

Central to that question is the “carbon bubble.” Most scientists agree two degrees Celsius of global warming is the limit beyond which climate change becomes genuinely catastrophic. Staying under that threshold will require leaving most of the world’s proven reserves of oil, coal, and natural gas in the ground. But most of those reserves are already owned by various companies, and are calculated as part of their future worth. So if global policy gets serious about cutting down greenhouse gas emissions, many of those reserves would be left “stranded” or “unburnable” — forcing a possibly drastic revision in the value of the companies that own them. That in turn would pose a threat to the portfolio of anyone invested in those companies, be they a major financial firm or just an everyday pension-holder.

“People are getting the idea that one of the main risks — perhaps the main risk — from climate change for investors and pension funds relates to hydrocarbon investment,” Craig Mackenzie, head of sustainability at the Scottish Widows Investment Partnership, told Inside Climate News. “The fact that 20 percent of [investment] portfolios are invested in oil, gas and mining companies, and that those companies could be a lot less valuable in the future, has sort of brought it all home.”


Nor are policy decisions by national governments the only questions on the table. There’s also local efforts to cut carbon emissions and pollution, efforts to reduce water use, the rise of renewable energy, and pressure from organized movements, such as the one pushing divestment from fossil fuel companies across the United States.

The Carbon Risk Evaluation Tool was inspired by a Carbon Tracker Initiative report on the carbon bubble, and is the first step toward giving investors some way to quantify and anticipate that threat. But because much of the information needed to make really in-depth predictions isn’t provided by companies, the tool remains something of an experiment. Curtis Ravenal, Bloomberg’s global head of sustainability projects, compared it to a beta test when talking to Inside Climate News. “It’s something to start the conversation among the mainstream [financial] community,” Ravenal said. And thanks to Bloomberg’s scope and clout within the financial world, “when we introduce things like this, we do have a unique ability to elevate the conversation a bit.”

Concern over climate risks is growing in the global financial world, so it’s an experiment that could very well pan out. Shareholder meetings in which investors officially inquired into a company’s climate risks increased markedly over the last 10 years, and filers included the California State Teachers’ Retirement System and the New York State and New York City Comptrollers’ Offices. Seventy of the largest pension funds in the U.S. are pressuring fossil fuel companies for detailed studies of how future climate policy will affect their bottom lines. Norway’s Storebrand, which holds over $30 billion in assets, recently began excluding major fossil fuel companies from its investments. And the London School of Economics pegged the size of the carbon bubble at as much as $6 trillion.

Hopefully, the rising demand for information will drive companies to release the data Bloomberg needs to refine the tool. Meanwhile, governments like the United States can help investors by enacting concrete policies — like a carbon tax or new regulations or some other approach — to price the effects of climate change into the market and curb carbon emissions. That would provide a predictable path for just how much of the world’s fossil fuel reserves will actually get burned.

As for the fossil fuel companies themselves, they apparently remain sanguine: “The most consistent message that the companies give is ‘we’re not worried about stranded assets, because if you look at the [International Energy Agency] forecast, the Wood Mackenzie forecast and the BP Energy Outlook, demand is going to keep growing for coal and for oil up to 2030 or 2040. So this is not an issue,’” said Mackenzie. Which is rather like Republicans’ conviction that the United States is headed for a debt crisis; it takes one projection, based on one set of assumptions that could very easily turn out wrong, and then assumes its inevitability.