Stockholm (NordSIP) – COP29 get underway in Baku, Azerbaijan today 11 November 2024 with the fossil fuel sector still riding a wave of record profitability. However, there are signs that the recent oil and gas bonanza may be slowing as clouds gather on the horizon. While climate activists at COP29 urge delegates to strengthen the wording of commitments to transition away from fossil fuels for environmental reasons, a major European Regulatory body has significantly altered its stance towards the risk inherent in fossil fuel assets.
On 7 November 2024 the European Insurance and Occupational Pensions Authority (EIOPA) published new recommendations for European insurance companies, which increased the capital requirements for any fossil fuel assets held on their balance sheets. According to the regulator, insurers should increase their capital coverage of fossil fuel holdings by 17% and 40% for equity and bonds respectively. This excess is designed to cover what EIOPA consider the sector’s higher exposure to transition risk. These recommendations are part of a set of proposals submitted by the regulator to the European Commission regarding improvements in the treatment of sustainability-related risks within Solvency II. It will be up to the Commission to take this further through the EU legislative process, but it is symptomatic of the growing concern over the management of fossil fuel-related risks within institutional investment portfolios.
According to the International Energy Agency’s (IEA) World Energy Outlook 2024, some of the geopolitical factors behind the energy crisis that led to the oil sectors record profits have receded. While vulnerabilities remain and the risks remain high, the greater global awareness of the importance of energy security has provided a boost to the clean energy transition. Analysis by the IEA shows that oil producers have been wrong-footed by China’s rapid domestic electrification programme. Previously projected high oil demand from the country’s increasingly electrified transport sector is likely to be overstated, which is contributing to a decline in fossil fuel prices. The IEA is still predicting global oil demand to peak by 2030, despite the sharp forecast increase in electricity demand driven by the spread of electric vehicles (EVs) and artificial intelligence (AI). The agency is pushing for a significant global investment in electricity grids and battery storage. It believes that the commitment to triple global renewable energy capacity made at COP28 cannot be achieved without more than 25 million kilometres of electricity grids to be built or upgraded, and global energy storage capacity to grow to 1500 GW by 2030.
Independent financial think tank Carbon Tracker believes that not just insurance companies, but all institutional investors should reconsider whether traditional fossil fuel holdings have any place in a prudent, long-term investment portfolio. According to the think tank’s founder and Director Mark Campanale: “For an investor reading the latest World Energy Outlook, what screams out is the warning that we are in for a period of lower oil prices and growing overcapacity. This is the death knell for the profitability of many oil and gas producers, many of whom require high break-even prices on each barrel to generate the returns investors have grown to expect. And if low prices are sustained, combined with falling demand, why should any investor accept this additional risk, regardless of any climate concern?”
While COP29 has begun under a cloud of political uncertainty, disappointment over the absence of key political leaders, and worries about the excessive involvement of fossil fuel producers, there are signs that pragmatic economic concerns may continue to provide the impetus needed for the global low-carbon transition.
