FinanceMap is a platform generating metrics and analysis on commonly held investment portfolios (e.g. listed funds) through the lens of climate change, facilitating the inclusion of this key risk area in investment decision making. What makes this unique is that our metrics will be made publicly available. This will allow use by all parts of the investment chain, including small asset owners. It will also prompt better disclosure by the financial sector and drive competitive improvement among asset managers in the products they create and sell.
InfluenceMap will use the Sustainable Energy Investing Metrics and other relevant methodologies for assessing the portfolios of the world's listed funds and key asset managers. The data will be made public to allow fund buyers and asset owners to easily incorporate climate risk into their investment decisions. It will also be driven competitive improvement within the fund management industry. The resulting metrics will cover individual companies as well as portfolios, for example in this analysis of the fossil fuel production sector. InfluenceMap will also generate media and business focused reports deriving from our data platform to maintain awareness of climate risk in finance. Our launch report is entitled Who Owns the World's Fossil Fuels.
InfluenceMap is collaborating on this work with the 2 Degrees Investing Initiative, convenor of the Sustainable Energy Investing Metrics program that drives our assessment methodology. Another key collaborator is the WWF European Policy Office. We are also working closely with dozens of asset owners, financial data providers and financial consultants to ensure our work is accurate and taken up by users. The work is funded by the KR Foundation and Climate-KIC.
While our FinanceMap project will consider all industrial sectors sensitive to climate risk, the Who Owns the Fossil Fuels media release is an output based on the initial phase of this project. It demonstrates our mapping of the finance sector and considers a key component of portfolio climate risk - the fossil fuel production companies. We have mapped out fossil fuel ownership trends globally and the resultant back-end database has been in use by the climate and asset owners communities since May 2018, with the media report released in late November 2018.
The research considered a group of listed companies who control the largest amounts of fossil fuel (thermal coal, oil, gas) reserves and production. This includes large conglomerates such as Japan's Itochu, for whom fossil fuel production is only a minor business but whose size renders them a substantial player. This research defines these companies as the "largest" based on an aggregation of their sales, market cap and the amount of physical reserves and production they control.
These roughly 300 companies control more than 95% of all oil, gas and thermal coal reserves within listed companies and represent roughly $5 trillion in combined market capitalization as of Oct 2018. It should be stressed that this $5 trillion in market value is the aggregate of all the companies, not the value attributed to their fossil fuel production business. As noted, companies like Itochu and Berkshire Hathaway maintain a relatively small share of their business in fossil fuel production. When weighted for % of sales due to fossil fuels, the value within the fossil fuel business of these 300 companies is closer to $2 trillion.
Therefore, this group of companies is important for investors looking to utilize their power as shareholders to address climate change. All data on these 300 companies is based on the latest financial and annual report disclosures from the companies themselves (in most cases, as of end 2017).
The majority of proven reserves of oil and gas are controlled by non-public entities, such as Saudi Aramco. However, roughly half of all thermal coal reserves are controlled by publicly listed producers, and thus are held by the world's capital market investors. This research covers thermal coal only and excludes the significant amount of metallurgical coal mined for industrial use. This data will be updated annually, next in mid-2019.
The process of classifying and accounting for fossil fuel reserves varies considerably between companies, as well as between different authorities that require this disclosure. Where possible, this research takes oil/gas reserve data as classified under the 1P (proven), 2P (proven + probable) and 3P (proven + probable + possible) Security Exchange Council (SEC) or Society of Petroleum Engineers PRMS system. Where this has not been possible (e.g. for many of the Russia-based companies) the disclosure has been converted as accurately as possible to match the 1P, 2P, 3P system. While this research has collated data on 3P reserves where disclosed, this data is not currently available online nor does it feed into the computations. Where a company has not disclosed 2P data this has been set to zero, so that in these cases 2P is taken to be equivalent to 1P. This research maintains a single reserve number for proven coal reserves. Thus, 2P is used in allocating oil/gas reserves to shareholders while the single proven reserves number is used for thermal coal.
Data on the coal, oil and gas reserves and production for each company is taken from annual reports or financial disclosures. The quality and structure of disclosure by fossil fuel companies on their reserves varies by region and company. This research deploys a flexible tagging system to identify the location and characteristics of reserves (e.g. method of extraction, type of oil) for each company. We recognize that due to inadequate disclosure of reserve details by the sector, large investors and industry players may use proprietary databases (such as woodmac.com) which are not public. A secondary goal of collecting and publicizing this data is to challenge the fossil fuel sector to make more precise disclosure on its reserves.
To arrive at the potential CO2 emissions equivalent in gigatonnes (GtCO2), reserve totals are multiplied by an emissions factor specific to the type of reserve, which accounts for vented, flared and fugitive emissions (Heede et al, 2015). The IPPC 5th Assessment total 2C carbon budget represents the total emissions that can be released to give a 66% chance of remaining within a 2C temperature change relative to pre-industrial levels, while the IPPC total 1.5C carbon budget (as stated in the October release Global Warming of 1.5 °C) provides a current estimate for keeping temperatures within 1.5C. As well as oil and gas reserves, this research covers thermal coal only and excludes the significant amount of metallurgical coal mined for industrial use. It also recognizes that a portion of extracted oil and gas is used for non-fuel combustion but does not attempt to analyze this in depth. An October 2018 IEA report The Future of Petrochemicals estimates that in 2017 12% of crude oil was used for petrochemicals, a proportion expected to rise rapidly through to 2050 as transport fuel use declines.
Heede's methodology used for CO2 equivalent emissions factors from coal, oil, gas used in this repprt notes "Other estimates of potential emissions from reserves (IPCC, IEA, Carbon Tracker) assume that all of the carbon in the fuel reserves is combusted to the atmosphere. This study makes the more realistic assumption that not all carbon in fuel reserves is burned; we deduct for carbon in the products used for non-energy purposes, such as waxes, lubricants, petrochemicals, carbon fibers, pigments, fertilizers, steelmaking, and road oil. The methodology also accounts for emissions from subsequent combustion of non-energy products, such as tyres, waxes, lubricants, and plastics."
While the fossil fuel companies directly control fossil fuel reserves, these companies are owned by shareholders who in theory can impact the management of these reserves. The method this research deploys is to compute the reserves each shareholder effectively "owns" through their aggregated holdings. Two metrics are computed. One is simply expressed in tons of coal or BOE (barrels of oil equivalent) for oil/gas. This metric is useful as it can be directly correlated to greenhouse gas emissions should these reserves be combusted. The other metric is the monetary value of these aggregated reserves in US$. For each company, the value of its fossil fuel reserves is calculated by multiplying its market capitalization by the percentage of sales it accrues from the fuel. This percentage value is obtained from company disclosures. For example, this research estimates that ExxonMobil gains 30% of its sales from oil and hence the value of its reserves are 30% x $360 bn, or $108bn. A shareholder holding 2% of Exxon's shares will therefore be allocated $2.16bn in oil reserves value from its ExxonMobil holding.
At present, we do not track changes in reserves of the fossil fuel companies through time. Corrections in reserves attributed to shareholders as a result of any increase or decrease in reserve levels from 2016 to end 2018 are therefore not at present included in the system. The initial assessment of any resulting errors indicates that this correction is likely not material to the results (i.e less than 10%). The exception to this is thermal coal reserves, wherein we have tracked major changes in companies like Arch Coal, Rio Tinto and Glencore over the 2016-18 period and these adjustments are reflected in the reserves allocated to shareholders of the companies in the 2016-18 time span.
Clearly, the aggregated $ value of a shareholder's reserves in oil/gas/thermal coal will vary with both the shareholder's holdings and with the value of the underlying companies. However, the physical quantity of the shareholder's aggregated reserves (tons, or BOE) will only vary with changes in the shareholder's holdings. Therefore, the change in this metric is a useful indicator of how the shareholder is adjusting their portfolio in terms of thermal coal, gas or oil assets. Tracking these trends is useful for the Fossil Fuel Divestment movement, which is pressuring Asset Owners and Asset Managers to remove fossil fuel holdings from their portfolios.
Despite being commonly used, the terms 'oil' and 'gas' cover various types of hydrocarbons, as defined by different physical properties. It is therefore not always immediately clear what these terms specifically refer to. This research uses the following classifications:
Gas: Consisting primarily of methane, this refers to natural gas derived from both conventional and unconventional extraction techniques. This includes shale gas, tight gas, associated gas, non-associated gas, coal bed methane (coal seam gas) and Liquefied Natural Gas (LNG).
Oil: Companies frequently disclose crude oil reserves/production aggregated with the figures for natural gas liquids (NGLs) or condensate - often referred to as ‘liquids’. As such, this research uses the term 'oil' to encompass: crude oil extracted through conventional and unconventional methods, including tight oil and shale oil; NGLs, including liquefied petroleum gas, pentane-plus and condensate; and synthetic crude derived from bitumen, tar sands and oil shale. ‘Liquids’ might be a technically more accurate term but it is not widely recognised. The term 'oil' has therefore been used for communications purposes.
While all coal has similar geological origins, slight differences have resulted in varying properties. Depending on these properties, coal is used for one of two primary purposes: direct combustion for energy generation (thermal coal) or the creation of coke used in industrial processes such as iron and steel making (metallurgic coal). From a climate change perspective, thermal coal is the key concern due to the high greenhouse gas emissions resulting from the combustion process. Other uses of coal include coal gasification to produce Syngas which in turn may be used to generate power. A related, although at present test-scale process converts coal to hydrogen, with the hydrogen destined for energy generation for transport. The IEA states that in 2017 86% of global coal production was thermal with the other 14% accounted for by coking coal intended for metallurgical use. Coal destined for Syngas and other gasification uses is likely a minor proportion. BP's Statistical Review of Energy classifies coal as anthracite, bituminous, sub-bituminous and lignite, all of which to varying degrees are used in power generation, as noted by the US EIA in 2017 data on coal use for power. Bituminous coal also has metallurgical uses. Based on IEA estimates we assume 86% of coal production and reserves are thermal.
The research process looks at all coal production and reserves by the companies in our study. It then determines what portion of these reserves are thermal coal by the latest disclosures from the companies. Such disclosure varies and can be characterized by the type of coal or by its end use. If the company specifies only the type of coal in their production/reserves mix, we characterize lignite, anthracite and sub-bituminous coal as thermal coal. Where companies disclose by end use (which is usually the case) we categorize thermal coal as any coal tagged by companies as thermal coal, and also include coal gasification to generate syngas, which we assume is primarily used for power generation. The latter is significant in the case of coal producer Sasol of South Africa, for example.
This research maps out the finance sector (i.e. investment management) in a hierarchical manner as follows. At the top are "financial groups" (e.g. Blackrock), which are affiliations of commercial entities with cross-holding structures. Under this are nationally registered entities (e.g. Blackrock Ltd, Blackrock Inc.), which are "asset managers" that are the registered owners of shares on behalf of their clients. These asset managers may also operate "Listed Funds" (e.g. iShares ETFs), which are pools of capital market assets that can be traded on exchanges and are the registered owners of shares on behalf of the owners of the Listed Funds. Another class of funds, which are not traded on markets, are known as "pooled investment funds." These are special purpose investment companies managed by hedge funds and asset managers and sold to wealthy individuals and institutions. Our system at present does not identify these individual non-traded funds but it does assess the aggregated holdings of the asset managers who run them.
Outside of this structure are "asset owners" (e.g. pension funds, foundations and government funds) which may either own shares directly, employ asset managers to own shares on their behalf or invest in Listed Funds. In addition, there are also "other shareholders" such as corporations, wealthy individuals or government treasuries who own large portions of fossil fuel companies for strategic reasons.
The terms "financial groups" and "asset manager groups" are used interchangeably. Groups such as BlackRock are primarily engaged in asset management while groups like HSBC engage in asset management in addition to a variety of banking activities (hence these are better known as financial groups). Likewise, many financial groups - like AXA, Aviva and Legal and General - have extensive insurance branches as well as asset management businesses. Our system aggregates all companies, regardless of type of business, within their financial groups and aggregate all shareholdings we can track to these groups. We maintain a separate database of holdings by each of the companies within the financial groups.
Our data on shareholders in listed companies rely on a number of disclosure sources, which may be mandatory (e.g. US SEC 13-F filings applying to asset managers with more than $100mn under management) or voluntary (e.g. the Government Pension Fund of Norway's portfolio disclosure). These disclosures vary by region and shareholder type. Our data is most accurate for listed funds, followed by asset managers and then by asset owners. In terms of region, the US offers the most disclosure on shareholders. For example, roughly 70% of ExxonMobil's shareholders may be identified, while this figure is far lower for Chinese and Russian fossil fuel companies and investors. The gap in knowledge of any company's shareholders is primarily due to the lack of disclosure requirements for individual investors, special purpose companies, or small-scale asset managers to declare their holdings. We point users to our Terms and Conditions for issues relating to the use of and reliance on our data. In particular, our data should in no way be considered as guidance on investment activity.
We update our shareholding data bimonthly and the data on the fossil fuel companies each year as new Annual Reports become available. The system tracks ownership of shares via specific ticker symbols representing types of shares traded on particular markets. We aggregate all such ticker symbol-ownership attributed to a shareholder to arrive at the portion of the company own. The ownership % held by a shareholder is computed as the shares held divided by the total number of shares outstanding.
The system can thus state the minimum holdings held by an entity and measure any recent changes in these holdings. It should be noted that all such financial data is necessarily out of date in that it relies on past disclosures, generally up to several months prior to the date of data taken.
The project will cover all sectors where climate change presents business risk (e.g. chemicals, utilities, automotive). We will incorporate bond holding data into our system in the coming year, as part of our roll out of the full set of portfolio metrics.
This research considers "listed funds" as collective pools of capital, managed by investment professionals and traded on markets or offered to institutional/other investors in a regulated manner. The database used in this research is derived from the Thomson Reuters Lipper financial database, which states "Lipper includes mutual funds, closed-end funds, ETFs, hedge funds, retirement and pension funds, and insurance products."
The open-ended segment of this market is likely to contain up to 30% of all global market assets, according to the European Fund and Asset Management Association as of Q2 2018. The dynamics of these markets are thus highly important to short and long term market direction. Low cost funds which track external indices from index providers such as S&P or MSCI (and thus require minimal input from the asset manager providing the funds) are an increasingly popular investment mechanism, accounting for the strong recent growth exhibited by US asset manager giants Vanguard, Fidelity and BlackRock.
Listed funds are commonly described as passively or actively managed. In reality there is a spectrum of management strategies used by the fund management industry. To distinguish between different methods of fund management, this research employs the following designations and definitions from leading financial data provider Thomson Reuter's Lipper database. The database flags funds which track indexes, as well as identifies the specific method of index tracking.. The database identifies two methods of fund management in which the portfolio is fully allocated by tracking an index: 'Full Index-Tracking' (defined as funds which hold positions in all securities of the underlying index in proportion to their weightings in the index) and 'Swap Index-Tracking' (in which the fund manager does not have to physically hold the securities, but instead gains exposure to the underlying index through the use of derivatives, which serve as contracts obliging a 3rd party to pay the fund manager the exact performance of the index). In this study, 'Full' and 'Swap' index-tracking funds are grouped together due to their precise tracking of indices. Lipper identifies a separate category of partly index-tracking funds, labelled 'Optimized'; these funds involve some input from a fund manager, who aims to replicate exposure to an index by investing in a representative sample of securities. Funds not flagged by the database as employing an index-tracking method may or may not involve active management, and are therefore designated 'non-index tracking' in this research.
This research tracks 4000 Asset Managers, which are registered companies providing financial services in specific geographies. Our financial data tracks their shareholdings both directly, and through the listed funds they operate. It also tracks the total amount of capital market instrument (equities, bonds, other) assets they have under management (AUM). The research then "tags" each of these asset managers if they are part of larger financial groups (a term used interchangeably with "asset manager group"). For example, BlackRock UK Ltd will be tagged with "BlackRock". To arrive at the largest asset manager groups, the research aggregates all the operating companies under a given group's control. The 15 largest Asset Manager Groups manage a combined $40 trillion in AUM, representing more than 21% of all global capital markets value ($185 trillion in 2017, according to the IMF).
This method of categorizing the asset management sector may differ from others (for example the IPE Top 400 list does not aggregate asset managers to their highest corporate group level). In addition, our research also consider groups like Charles Schwab, which may provide transaction-only services for a large portion of the $3.5 trillion the company lists as AUM in our ranking. In reality, all asset managers may provide a spectrum of offerings - from low cost transaction services to bespoke institutional investment solutions covering multi-billion dollar portfolios - often within the same asset management group. All are in a position to provide some level of climate risk-related information or advice to their clients and hence are of interest to our project and platform.
In assessing the assets held by these large asset manager groups, our research effectively considers all the companies operating under the parent grouping. In some cases (e.g. AXA or Legal and General) the same parent grouping may contain: a company conducting insurance activities, which holds and invest premiums for citizens; a company providing asset management services for other institutional investors; and the parent grouping’s own corporate pension fund. Similar comments apply to UBS, which operates private and corporate banking, institutional asset management and also has its own corporate pension fund for its past and current employees. While our system separates out the holdings of each of these sub-group entities, they are aggregated together for the purposes of analyzing the 15 largest asset manager groups.
This research computes the change in effective ownership of fossil fuel reserves (coal, oil and gas) by shareholders in the time period 31/03/2016 to 30/06/2018 (covering their activities following the Paris Agreement). Measuring effective ownership of aggregate reserves is useful as it provides a metric for physical assets in the portfolio independent of share price movement. The presence of thermal coal in a portfolio will clearly be of interest to the coal divestment community, for example. With respect to effective ownership of oil/gas reserves, we consider 2P reserves (proven + probable). We temper the change metric for fossil fuels owned with outflows and inflows into the portfolio during this period. For listed funds this is available from financial data sources, and for asset managers and asset manager groups we obtain this from their financial filings). We express the change in thermal coal/oil/gas in terms of physical units (tons/BOE), as this is independent of share price variation and represents, in combination with the inflow/outflow factor, actual shifts in exposure to these asset classes.
We represent the percentage inflows/outflows into the portfolio over the two-year period as c, and the physical reserves at the start and end of two years by s and e, respectively. If the reserves held by a fund had changed in exact proportion to its size over the two-year period, then the reserves at the end would be e_0=s × (1+c). Our change factor f is defined as the relative deviation of the actual reserves e from e_0: f=(e-e_0)/e_0. This can be expressed as either a positive percentage for an increase or a negative percentage for a decrease.
Where we have information on the total Assets under Management (AUM) in a portfolio and the tons of thermal coal held by the companies in the portfolio, for comparison purposes we define a metric, "Thermal Coal Intensity", as the tonnage of thermal coal held per $mn AUM.