#Climate risk: “I would not have invested large sums in the Barents Sea,” says Thina Saltvedt

Author: Anne Jortveit

– Politicians do not seem to emphasize the reputation risk posed by oil drilling in the Barents Sea – it’s creepy, says Nordea’s chief analyst Thina Saltvedt.

Thina Margrethe Saltvedt fears that Norway can face major unsound investments in the Barents Sea. Nordea’s chief analyst for macroeconomics and oil believes politicians in their eagerness to recreate the old glory days of oil underestimate both market, climate and reputation risks.

With the support of the “Finansmarkedsfondet”, the Norwegian Climate Foundation is implementing the Climate as a financial risk Project. In the #Climate Risk interviews, we invite relevant people to reflect on the economic risk associated with energy conversion and climate change. Today, we interviewed Thina Margrethe Saltvedt, chief analyst at Nordea.

Energy and Climate: – Do you have the impression that climate risk is taken into account when making decisions in business?

Thina M. Saltvedt: – Yes, there is an increasing degree of understanding for this. Several companies begin to demand that climate risk is taken into account when investment and credit decisions are to be taken and when business strategies are to be designed. In particular, I notice this with investors, they are beginning to put much stricter requirements to clarify carbon footprint. And not least, this is noticeable in the insurance industry, which must include climate risk in insurance premiums. This is not as clear in politics.

The State of  Norway should be fully diversified by dropping the fossil investments of the oil fund,” said Storebrand CEO Odd Arild Grefstad in an interview in the climate change report Climate as a financial risk. Do you agree or disagree with Grefstad?

There is an increasing climate risk in today’s portfolio. Coal is on its way out and the financial climate risk of oil and gas is clearly increasing. There is uncertainty about the profitability of many fossil projects, market risk is increasing because oil and gas prices have fallen sharply and because the cost of producing green energy like wind and sun is falling rapidly. In the future, oil and gas can thus compete with cleaner energy sources. The higher the carbon footprint, the higher the climate risk, the capital will gradually turn towards green alternatives because the return is expected to improve here in the long run.”The better the climate risk will be clarified or priced, the faster investors will be able to make decisions that will promote green sustainable solutions. This will help to change the investment culture and behavior of market participants so that capital flows faster towards sustainable solutions.

Greater risk to refuse renewable in The Government Pension Fund Global

In order to reduce the state’s climate risk, the Oil Fund should invest in unlisted infrastructure and renewable energy?

– The argument from the government is a bit inconsistent. The government will not withdraw the oil fund from fossil energy, for example, on the grounds that it wants energy in the investment sector. Nevertheless, one says no to open for investments in unlisted infrastructure and renewable energy. This does not make sense. Energy is more than oil and gas.

In order to reduce the state’s climate risk, the Oil Fund should invest in unlisted infrastructure and renewable energy?- The argument from the government is a bit inconsistent. The government will not withdraw the oil fund from fossil energy, for example, on the grounds that it wants energy in the investment sector. Nevertheless, one says no to open for investments in unlisted infrastructure and renewable energy. This does not make sense. Energy is more than oil and gas.

Nordea’s chief analyst Thina Saltvedt believes Norway is in danger of making major oil investments that are not profitable.

The Government wants to have a good spread on investment, it then seems strange to keep green energy out of the portfolio. The oil fund should start with this now. Managers need time to get to know how this market works and what pitfalls to look out for. It is not a question of investing all 7000 billion in green energy, but to start small.

“When we are discussing the opening of new exploration areas to the north, these are projects that can start producing oil and gas no earlier than 2030. How do you assess the financial risk in such projects in light of the climate issue? 

Norway is at risk of investing in projects that are not profitable. I think oil demand will peak before 2030. Due to the great industrial and technological revolution, we are in now, other energy sources will gradually outperform the fossil. The Paris agreement increased focus on climate, and rapidly declining production costs for solar, wind and battery technology help to accelerate this change. There is tough competition as to whom will still supply oil in a world where oil demand will decrease, and Norway does not produce the cheapest oil in the world.

– In addition, new areas in the Barents Sea lack the infrastructure to transport the oil to the market. It may be expensive to get this in place. In order for more of these projects to become competitive in the future, costs must be reduced. Production must be streamlined, standardized and automated. An example of changing the conditions for this is Johan Castberg. The project was first discussed as a solution where the oil would be landed at a terminal at Veidnes in Finnmark. The landing would, among other things, create more jobs in this area than a floating solution. However, in order to cut costs, a floating solution has now been chosen, while the land terminal project is on ice. It will give fewer jobs than what was suggested when the project was first mentioned.

– Petroleum activities in areas that are particularly environmentally sensitive lead to an increasing degree of reputation risk. Politicians and oil companies do not currently emphasize the reputation risk they are facing in terms of oil drilling in the Barents Sea. But it can change as the opinion of the people is putting an increasing emphasis on this.

Credit assessments and climate risk

– How do you think the increased international focus on financial climate risk can affect the petroleum industry?

– The EU and Task Force on Climate-related Financial Disclosures have made recommendations on how climate risks should increasingly be clarified and emphasized for different business models, investment options and financing solutions – that is, sustainable funding. This will have consequences for the petroleum industry as well. Both the physical climate risk, but also the risk of unforeseen changes in the political and legal framework conditions, market or reputation risk in the conversion of a low-carbon world, may affect profitability and credit rating and also the price of and access to new funding.

– How will an increased focus on financial climate risk affect investors and lenders?

– An increasing emphasis on climate risk for different investment options or credit rating models will affect the direction in which cash flows flow. For example, a project or company with high climate risk may have to pay more to get funding in the future versus one with lower climate risk. The lender will pay more to lend money to a company with high climate risk because the risk of climate-related losses is higher. We have just seen the start of this.

– Credit rating agencies are working on this now. The same does many banks and financial institutions. Several investors will require knowing what climate risk companies they invest their money in have. In Norway, we would like to abide by the regulations or recommendations they follow in the EU in order to get the same competitive conditions, to avoid a flight of capital. Among other things, the EU and Task Force on Climate-related Financial Disclosures will make clearer recommendations in this field. I recommend the Bank of England’s Quarterly Bulletin 2017 Q2, it is about this.

–  Furthermore, we cannot ignore the fact that we will gradually begin to calculate the cost of the climate change we create – the negative consequences for society and the economy. Obviously, it is difficult to measure, but it could provide a more comprehensive picture of the climate risk of the various projects.

 –        Would you be willing to put your own funds in the petroleum business up north?

–        I would not have invested large sums on the Barents Sea.

–        If you were prime minister for a year, would you have done anything to mitigate financial climate risk for the state of Norway, and if
so what?

–  I would have worked closely with the finance minister and climate minister and made sure that the Ministry of Finance introduced the recommendations of the Task Force for Climate-Related Financial Disclosures (TCFD) and the EU’s High-Level Expert Group on Sustainable Finance. TCFD and the EU Expert Group explain how companies can report on climate-related risk systematically. I would also include the financial institutions, the Central Bank and FSA in this work.

Countries also have moral responsibility

–        Say you were on the board of an oil company, can you base the investment decision that future demand for fossil energy is
          getting so high that the world certainly does not reach the two-degree target? 

–        The oil companies introduce increased CO2 prices and stress tests for different demand scenarios. But to what extent do they consider climate risk and reputation risk in stress test scenarios? So far, the oil companies do not appear to have taken into account these types of risks and, of course, it can provide completely different prospects for profitability. In addition, I’m probably more negative for the alleged growth in oil demand in the future than many in the oil sector. As mentioned, I think it will reach a peak before 2030 – both as a result of new technology, especially in the transport sector and also increased climate focus.

–  Can Norway as an oil nation end up in a moral dilemma here?

–  We have both a responsibility to help deliver energy to the world, but also a moral responsibility for solving climate problems. This responsibility has been clarified in the UN’s sustainability goals. Countries that have produced and exported oil have a special duty to clean up the problems we have contributed to creating. We can not just be eating cake but leave to others to clean up.

– UK central bank chief Mark Carney has warned that those who have made a lot of money to extract fossil energy can be held financially responsible by countries affected by major losses and damage due to climate change – such as drought or sea level rise. Do you believe Statoil or Norway with our oil fund is in danger of being sued?

–  There may be several who will be sued in the future. Look at the tobacco industry, if you are aware of the damage your product causes without informing of this risk, it is clear that you can be sued. Now it’s really going to be up to people what the risk is associated with climate change. Then there are those who

–  Then there are those who claim that Norway has so pure oil that we must, for moral reasons, be one of the countries that will supply the world with fossil energy. The term climate-friendly oil is contradictory and should not be used. This is a little trustworthy attempt to launder a black industry, the phrase makes no sense.

In politics, things seems to halter in 2017

– Which party / which government option has the best policy to mitigate climate risk and get the country through the energy conversion in the best possible way?

–  Politicians are talking a lot about climate and conversion, but I think there is little action. In October and November – when the election is over, I expect our elected representatives to make the big decisions and the important grips that ensure the pace of conversion. Politicians are more careful to make such decisions now in fear of negative publicity that may have consequences for election results.

– What do you think the storybooks will write about Norway’s efforts in the climate and energy area in 2017?

– I think Norway will be honored for the work of saving rainforests, which we have been good at. Then we have approved a new climate law that will legislate climate targets for Norway. We have gained increased focus on marine deprivation and the need for a regulatory framework for greener heavy transport and shipping. In addition, the climate and environment minister has signed a climate agreement with California. Then I think historians will say it all stopped a bit in 2017 after we had a big commitment when the Paris agreement was signed. The pressure from Paris has been taken over by business – that is what drives the conversion at the moment. But we also need to get more political pressure in the future.

– Perhaps 2017 will also be the year when more people woke up. We remember the horrific pictures of the whale that was full of plastic. We also saw several signs that climate change is here now; floods, clashes and landslides.

– When is the last clean fossil car sold in Norway sold?

–  The government parties have agreed with the Left and the KrF to phase out petrol and diesel cars after 2025, which they will be discussed during the National Transport Plan in the Norwegian Parliament next year. I suppose that matter will go through with wide support in the parliament.

– Where do you get news and knowledge about energy conversion and climate risk?

– To get relevant information about this for the financial sector, I read what comes from the Financial Stability Board. Bloomberg New Energy Finance is also useful. Otherwise, I’m going through the reports from Carbon Disclosure Projects, the EU and the Bank of England, as well as reports that say something about the development and profitability of different companies. I also read Norwegian reports, including those for the  Norwegian Climate Foundation. Then I like to trawl large amounts of research articles and articles on technological developments, Ted Talks and newspapers like Financial Times and The Economist, I get many market reports of high quality. Finally, I would mention World Economic Forums reports that promise many interesting ideas and thoughts.