The gangster Al Capone did not go to jail for all the people he massacred, but the US authorities got him in the end – for tax evasion. The effect was the same: Al Capone was off the streets. Job done, you could say.
In a similar vein, what really brought the slave trade to an end in the UK was not the Slavery Abolition Act of 1834, welcome though that was, but Parliament's decision to withdraw insurance from slave ships, says Mark Campanale of Carbon Tracker, an independent financial think tank that carries out in-depth analysis on the impact of the energy transition on capital markets.
Now he is hoping that a new enhanced disclosure requirement, currently out for consultation by the UK's Financial Conduct Authority (FCA), will do something similar to the fossil fuel industry.
Aimed at companies seeking to list on UK regulated markets or primary multilateral trading facilities, the proposed enhanced disclosure requirement would require mineral companies, including those in mining, oil and gas, to report on how the development of their reserves would be consistent with the goals of the Paris Climate Agreement, and not pose a risk to the remaining carbon budget while protecting overall market integrity.
The new reporting requirement, called an Atmospheric Viability Test, is contained in the FCA Consultation paper – and if this is something you feel strongly about, you have until this Friday October 18 to respond to the consultation.
Game changer?
This is the first time anyone has ever attempted a piece of legislation like this – and it could be a game changer, says Mark, who is also an advisor to FaithInvest.
'For many years now, financial markets with their rules and regulations, particularly around how fossil fuel companies raise money on the London Stock Exchange, have been oblivious to our international obligations under the Paris Climate Agreement,' he says.
'Most, if not all, new fossil fuel projects will break the goals of the Paris Agreement' – Mark Campanale
'As I studied the regulations closely, here is set of rules and disclosure principles that could be amended, that would help protect investors' capital, manage risk, whilst be cognisant of our climate obligations.
'Because if you think about it, most, if not all, new fossil fuel projects will break the goals of the Paris Agreement, and according to the International Energy Agency, no new coal, conventional oil and gas is needed to keep to 1.5C. So companies raising capital will need to explain this in their legal documents and prospectus.
'And if you're an investor and it says very clearly: "The reserves we plan to develop may not be consistent with the Paris goals of ‘well below 2 degrees’, but please still give us the money", investors with their own net zero commitments – or pension funds who have to report to the TCFD (Taskforce on Climate Related Disclosures) on a 1.5C pathway – may just decide to opt out.'
Although the Atmospheric Viability Test applies to UK-listed organisations, it would have a significant impact, according to Mark.
He explains: 'The UK is the world's most important financial centre for fossil fuels, along with New York. Carbon Tracker’s Unburnable Carbon report found that London-listed fossil fuel companies had the equivalent of 15% of the remaining carbon budget to 2 degrees, with 100 GTC02 (gigatonnes of carbon dioxide) versus some 700-800 GTCO2 budget to 2 degrees).'
'How is it that these companies can raise their billions without any explanation of whether the new fossil fuels they're planning to develop are consistent with the Paris Agreement?’
The proposed change came about following discussions between Carbon Tracker and the FCA. 'Fossil fuel companies are raising money for projects all the time. We asked the FCA, how is it that these companies can raise their billions without any explanation of whether the new fossil fuels they're planning to develop are consistent with the Paris Agreement?’ says Mark.
Current disclosure requirements, known as the Competent Person's Report, are intended to build investor confidence, ensure compliance, manage risk, promote transparency and ensure accurate valuation.
Yet, there is no requirement in the CPR for the viability of fossil fuel reserves to be tested against the Paris climate goals or the UK Climate Act.
'This leaves investors unnecessarily exposed because of over-estimation of the realisable value of reserves and under-estimation of depreciation charges on capital items such as drilling rigs,' says Mark.
'We believe companies should explain why they believe their fossil fuels will be developed, given our climate goals, which is why we proposed the introduction of the Atmospheric Viability Test in the CPR.'
More information
The deadline for responding to the FCA consultation document CP24/12 is Friday 18 October.
Find out more at Carbon Tracker's website – including how to respond to the FCA consultation and links to the Investor Response Template
Work is also underway to enhance the IASB Sustainability Accounting Standards Board standards, including disclosures related to reserves. The exposure draft is expected in the first half of 2025. The IFRS Foundation is also working on accounting rules around fossil fuel reserves.