Access to energy is one of the most basic foundation stones of living standards around the globe. Access to liquid fuels, which are largely used to power modern transportation, and electricity or gas, which power almost everything else, is something that developed nations enjoy and is one of the first priorities of developing nations. The rapid growth of several developing economies—notably China, India and Brazil—is driving rapidly-rising demand for liquid fuels for transportation as well as electricity.  

The majority of the raw material for both transportation energy and electric power generation comes from fossil fuels, and that is likely to remain the case for some time. In the longer run, it is necessary to transition from fossil fuels to more renewable sources of energy for both. Investment in renewable energy is often aided by government stimuli, but also by increasing prices of fossil fuels: the higher the price of carbon-based fuels, the more economically attractive alternative energy becomes. But as we recognize that the transition will take several decades, it is wise, in the meantime, to make the fossil-fuel enterprise as sustainable as possible and avoid sources of risk that are often unrecognized by markets or difficult to quantify.

Consider, for instance, the role of energy-related disasters in the global news streams over the past two years. Disasters are often termed black swans in finance, or outlier events that don’t happen often, but when they do, their impact is significant. Between 2010 and 2011, we had three in the energy industry, in different segments (coal, oil and nuclear), and in all cases the companies' stock prices suffered following the news:

  • In April 2010, an explosion at Massey Energy’s Upper Big Branch Mine killed 29 workers, the worst mine disaster in the United States in 40 years.
  • Also in April 2010, BP’s Deepwater Horizon well exploded in the Gulf of Mexico, killing 11 people and gushing approximately 4.9 million barrels of crude oil into the Gulf of Mexico.
  • In March 2011, Japan’s Fukushima Daiichi nuclear plant was damaged by the enormous Tohoku earthquake and tsunami, and three of the six boiling water reactors on the site eventually experienced full meltdowns. Residents within 25 miles of the reactor complex were evacuated, and have not yet been permitted to reenter the evacuation zone.

These examples have several common threads. They all affected part of the world’s major sources of fuel and electricity: coal (which is a major fuel for electricity generation), oil, and nuclear power. Moreover, the companies involved all had multiple instances of the failure of management to follow mandated or voluntary procedures to assure operating safety. Massey Energy’s Big Branch Mine had been cited for over 3,000 violations by the Mine Safety and Health Administration.1 BP also had a fatal explosion and fire in 2005, at a refinery in Texas City, for which OSHA fined the company $21 million (a record level at the time) after the explosion, and in 2010, it was fined for another $50.6 million for failures to make required safety upgrades.2 TEPCO also had a troubled history of violations of nuclear protocols and safety, falsifying the findings of required inspections and covering up serious flaws since at least 1986.3

All three accidents also prompted pledges, and in some cases commitments, to fix things, the fixes carry their own risks.  For example, following the Fukushima disaster, Germany pledged to shut its nuclear plants, and that in turn led to rising greenhouse gas and air pollution emissions in Germany.4 

All fossil fuels carry the risk of exacerbating climate change, and burning more than one-third of current proven reserves of fossil fuels would commit the world to warming exceeding 2°C, the threshold many scientists believe defines the onset of catastrophic climate change.  The combustion of fossil fuels—coal, oil and gas—for electricity accounts for over 40% of global emissions of greenhouse gases, while transportation (which primarily uses combustion of fossil fuels) accounts for another 22%.5 As the climate continues to warm, these emissions may be increasingly targeted by regulators for reductions, as is the case now in countries that have ratified the Kyoto Protocol.

There are other risks as well. Gas pipelines can explode, gas drilling using a technique called hydraulic fracturing may contaminate ground and surface waters, and demands a significant amount of surface water to accomplish; energy assets in less stable countries may be vulnerable to conflict or nationalization; there is no long-term safe storage solution for spent nuclear fuel.

Investors can’t necessarily avoid risk, but we do need to understand it. That, in turn, depends on companies making such risks clear to their investors. As a result, many of our actions are aimed at encouraging companies to make the risks of operations clearer to investors. Below are several examples of Pax’s advocacy in support of cleaner energy and better disclosure.

  • Pax is a signatory to the Carbon Disclosure Project (CDP), including the new Carbon Action program; the Forest Footprint Disclosure Project; and the Investor Network on Climate Risk. Pax participated in a structured engagement through the Principles for Responsible Investment on the CDP Leadership Initiative (CDPLI).
  • Pax was a signatory to a letter prepared by NEI Investments of Canada to the co-chairs of the Alberta Environmental Monitoring Panel commending the panel for designing a good environmental monitoring system for oil company operations in the Alberta Oil Sands, and urging the Panel to follow up with a robust monitoring system for such operations.
  • Pax was, as it has been for several years, a signatory to the Global Investor Statement on Climate Change, an initiative coordinated by the UN Environment Programme Finance Initiatives, the Investor Network on Climate Risk (INCR), and the Institutional Investor Group on Climate Change. The statement urged national policymakers to establish and enforce policies limiting emissions of greenhouse gases. Pax was signatory to two letters to state legislators, coordinated by INCR, one supporting a regional Clean Fuel Standard for New England and the Mid-Atlantic States, and a similar letter for California. 
  • Pax signed on to a public statement, coordinated by the Investor Environmental Health Network and Boston Common Asset Management, supporting the establishment of environmental key performance indicators for oil and gas companies using hydraulic fracturing techniques to produce natural gas. The use of this technique has grown dramatically in the United States as a means to produce natural gas from so-called tight shale formations in which conventional gas drilling is impossible, and presents several unique risks, including drinking water contamination and increased greenhouse gas emissions.
  • Pax was a signatory to a letter, coordinated by INCR, sent to members of Congress urging them to support EPA’s efforts to propose and implement new, stronger implementation rules for electric utilities under the Clean Air Act. The letter focused on regulation of mercury and air toxics emissions, and urged Congress to support EPA’s efforts to try to reduce these emissions from utilities.

This advocacy is undertaken to improve the state of practice and disclosure for all companies. We also seek to invest in companies whose practice and disclosure is better than that of their peer groups on all ESG issues, including the key issues of safety and environmental impact for the energy and utilities sectors in particular.

While there is no reasonable amount of advocacy or research that would completely guard against investing in companies that will be victims of the next energy black swan, we do believe that the research and advocacy we do helps to minimize that risk.


1 Brad Johnson, Deadly Record: Massey’s Min in Montcoal Has Been Cited For Over 3,000 violations, Over $2.2 Million In Fines, April 6, 2010.

2 Tom Fowler and Monica Hatcher, “BP accepts $50.6M fine, but ’05 blast still dogs company,” Houston Chronicle, August 13, 2010.

3 Dr. Najmedin Meshkati, Tokaimura Accident’s Third Anniversary and TEPCO’s Scandal: Unfinished Work for Improving Nuclear Safety Culture in Japan and Restoring Public Confidence in the Nuclear Industry, September 24, 2002.

4 Stefan Nicola, “Merkel’s Green Shift Backfires as German Pollution Jumps,”  Bloomberg Sustainability, July 29, 2013.

5 International Energy Agency, CO2 Emissions from Fuel Combustion, 2010, Pp, 9-10.