FORTUNE — If human-caused climate change is accepted as a certainty — it is, by 95% of scientists (a higher percentage, by the way, than agree that smoking causes cancer) — what are the ramifications for business? If you are in the keeping-back-the-sea biz, rising seas will likely be a boon. If you seek out and extract carbon from the earth (oil or coal, mostly) to be burned as energy and released into the atmosphere, climate change might be a very grave problem indeed.
The potential problem for oil, gas, and energy companies rests on the “unburnable carbon” thesis, which elegantly articulates the rock and hard place the industry is hurtling toward. It states that the amount of carbon embedded in the reserves of the listed oil and coal mining companies is bigger than the amount we can safely emit to avoid dangerous climate change (a 2 degree C rise in temperature). As governments begin regulating to stave off the rise in temperature, much of these reserves will become unburnable — that’s the thesis, anyway, as argued by Carbon Tracker, an NGO. All this wouldn’t be a huge deal if it weren’t for the fact that 70 investors, representing the interests of millions of customers — from CALPERS to Rockefeller & Co. to the Scottish Widows Investment Partnership — worth a collective $3 trillion, believe in the unburnable carbon thesis, and last month wrote a letter to 45 of the biggest oil, gas, coal, and utility companies in the world (here’s the full list), calling on them to “reserve exposure to the risks associated with current and probable future policies for reducing GHG [green house gas] emissions … There is now a widespread view that it is not in the best interest of investors for companies to expend further capital on low-return projects,” the letter continues. “Government policies to reduce GHG emissions would be likely to further reduce the returns of these projects.”
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Oil and coal are still wildly efficient and abundant energy sources, but the associated costs of both pulling carbon out of the ground and burning it are way, way up. This, coupled with a decreasing demand in much of the world — cars are more efficient, alternative fuels are getting better, and there are more of them — is a potential recipe for disaster if oil and gas companies continue to ignore the effects of a market changing along with the climate. Even today, prices have dropped in the U.S. due to excess inventory. This argument isn’t from Carbon Tracker but Craig Mackenzie, one of those 70 signers, from an article he published in Responsible Investor. Mackenzie is head of sustainability at the Scottish Widows Investment Partnership, one of Europe’s largest fund managers (worth about $236 billion). Jack Ehnes, CEO of the California State Teachers’ Retirement System ($172 billion under management) echoed Mackenzie’s argument today in a press call about the letter, which was coordinated and sent out by Ceres, a nonprofit that directs the Investor Network on Climate Risk. “As long-term investors, we see the world moving toward a low-carbon future in which fossil fuel reserves that companies continue to develop may actually become a liability, which could take a toll on shareholder value,” Ehnes said.
A letter may be just a letter. None of the investors have threatened to pull their money out, that’s not their aim. They are not activists, but realists. The purpose of the letter was to get the energy industry to be the same.
