Oil and gas companies are under significant pressure to adapt to climate change and the low carbon energy transition. Strategic responses have included setting emissions “ambitions”, dipping into low carbon energy sources, and lots of sustainability reports. However, companies still sanction projects that don’t make economic sense in a low carbon world, pay their directors based on increasing fossil fuel production volumes, and have financial statements underpinned by prices that assume sustained high fossil fuel demand. This document discusses the latter of these, where high price assumptions may mask the financial risk to marginal projects and indicate a lack of conservativeness or even overinflated financial statements.
Climate change creates two types of potential risks for financial institutions: physical climate risks leading to physical damage to assets, and carbon risks altering the financial viability of a part of the capital stock and business models.