A group of 65 leading U.S. investors with collective assets totaling $7 trillion has teamed up with the European investment management firm F&C Investment to put a halt to Wall Street financial regulators' softening of the rules on tar sands reserves disclosed by oil and gas companies. The move reflects changing attitudes among a very large group of mainstream investors about the impact of commercial activities that could exacerbate global warming.

Members of the Investor Network on Climate Risk (INCR) and F&C Investment are concerned that the escalating risks posed by climate change have broad implications for oil and gas companies that could impact their future earnings.  

At a time when governments around the world are taking an increasingly hard line on carbon pollution, these investor groups feel it is essential that investors have an opportunity to assess accurately the risk profile of reported reserves.

As quoted in the UK Guardian, Elizabeth McGeveran, senior vice-president of F&C's governance and sustainable investment team said, "Understanding climate risk will assist investors in understanding and evaluating reserves. Regulations already require the disclosure of known trends that companies can reasonably expect will have a material impact on net sales, revenues or income from continuing operations, and we believe that the disclosure of any estimated additional risks posed by the extraction and development of additional reserves will be important."

The SEC had been reviewing the regulations on the way reserves are calculated since 2004, when Shell fell afoul of SEC rules and was forced to re-allocate a quarter of the assets on its books. The move led to steep fines, the ouster of its chairman, and a plunging share price.

Three months ago, the SEC changed the rules to allow previously excluded resources, such as tar sands, to be classified as oil and gas reserves that -- as with oil or gas -- could be listed as probable, possible, and proven reserves.

Previously, tar sands were defined as mining materials, and contain no oil in their natural state. Liquid can be extracted only if the rock is heated to the boiling point. However, so much heat is required to extract a significant amount fuel from the rock that this is a far less efficient source of energy than conventional oil. 

As oil prices rise, companies that use a high ratio of oil to the marketable product are obviously far more affected by price rises. Tar sands mining has an input of one unit of fossil energy in for every 3.5 units of energy (their product) out. The lower this ratio, the more the cost of producing oil from shale will rise as fossil energy prices go up.

But more importantly, this unusually high-carbon method of extraction means that tar sands mining has a significantly heavier climate impact than that of regular oil and gas.

The INCR -- whose members include the California Public Employees' Retirement System, Ceres, and Parnassus Investments -- has signed a letter of concern about the tar-sands proposals and called for the new carbon implications to be taken into account.

Ceres president Mindy Lubber says that there is a need for financial institutions to evaluate these kinds of projects with carbon prices that reflect their true long-term costs once carbon-reducing regulations take hold around the world. "Much of the problem is our reliance on outdated accounting systems," Lubber says. "Our economy uses accounting systems that are precise in measuring capital goods and profits, but weak in measuring natural and human resource impacts. This narrowly-defined accounting system means that companies are often able to "externalize" natural resource costs. In other words, they can emit global warming pollution for free without paying for environmental damage. Society and taxpayers shoulders these costs instead."

Therefore, filers of reserves should be required to provide investors with information about the carbon content of proven, probable and potential oil reserves in their portfolio as well as the potential liabilities posed by their continued extraction and use.

Photo courtesy S. Jocz