Glencore takes a stand on its fossil fuel reserves

Ivan Glasenberg, the chief executive of Glencore, is rarely short of an opinion. So it was no surprise to see him tackle climate change and the subject "stranded assets" head-on this week.

"Some of our stakeholders are concerned about the future of our fossil fuel reserves; in particular that they may become stranded assets," he said in the company's 140-page sustainability report.

"Although climate change issues are part of the political, societal and regulatory landscape, we do not believe that the global energy reality will economically support carbon measures that would prevent us from fully utilising our fossil fuel reserves," he added.

Whether or not you agree with Glencore, the world's biggest supplier of seaborne thermal coal, which is used to generate electricity in power stations, the fact that it decided to address these topics speaks of their growing importance to the investment community.

The idea that fossil fuels present a risk to investors first emerged from research by a London think-tank called Carbon Tracker just over three years ago. The argument is that most of the world's proven coal, oil and gas reserves may be "unburnable" if global warming is to be kept within safe limits.

It has struck a chord with some big investors and asset allocators. The heirs to the Rockefeller family oil fortune have announced plans to shed their investments from oil and coal, while California's Stanford University is selling its shares in coal mining companies.

Regulators and policy makers are also becoming interested in the debate. Late last year, the Bank of England said it would examine the risks fossil fuel companies pose to financial stability, while Britain's energy secretary, Ed Davey, has also called for tougher rules to be applied to companies holding fossil fuel assets that could fall in value because of global action to tackle climate change.

Jeremy Leggett, chairman of Carbon Tracker, says there is spectacular groupthink at work in the resources industry and it is particularly acute among the owners of major coal assets given the pace of clean-air policy making in China.

In his experience, many coal producers think they have nothing to worry about. A typical line of defence, he says, is not to question the arithmetic of some scientists and that 80 per cent of the world's coal reserves will need to stay in the ground if global warming is to be kept below 2 degrees.

Glencore says the concept of stranded assets does not apply to its resources, "which will continue to be supported by growing global demand for coal from developing nations and lower volumes from the US and European producers".

"In fact, we anticipate that we will need to invest more capital in order to maintain our existing production levels and to stay abreast of world demand," it says in a policy document on its website.

Given the low costs of its coal operations, Glencore has reasons to be confident that its reserves will be in the "burnable" 20 per cent. The same cannot be said of higher-cost producers around the world.

As the world slowly shifts to a low carbon economy, and new rules and regulations on carbon pricing and air pollution come into force, they could find it increasingly difficult to make an economic return or meet investment hurdles.

Just how difficult may become clear later this year. In December, a climate change agreement is due to be finalised that could lead to a global pact to reduce greenhouse gas emissions.

The Commodities Note is an online commentary on the industry from the Financial Times

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