STRANDED ASSETS

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Stranded assets are investments that are not able to meet a viable economic return and which are likely to see their economic life curtailed due to a combination of technology, regulatory and/or market changes.

In December 2015 almost 200 nations agreed to limit global warming to well below 2°C, with an aim to stay below 1.5°C. Clearly, the deal signals the beginning of the end for fossil fuels. Science tells us if we are to stay below 2°C, around 80% of currently-held fossil fuel reserves can’t be burned. Check out our unburnable carbon page to learn more.

As the world moves towards a low carbon economy, experts have warned of a ‘carbon bubble‘ caused by fossil fuel companies and their assets being overvalued. Deutsche Bank research has warned ‘peak carbon,’ rather than peak resources, could drive the end of the fossil fuel industry as we know it.

The International Energy Agency has warned that, if we are to meet Paris’ “well below 2°C” target, 1715GW of fossil fuel power generating infrastructure must be shut down before its expected lifetime. According to Carbon Brief’s analysis of the IEA figures, “This is equivalent to the current fleets of China, the US, Japan, Germany and Poland. The plants closing early would lose $3.7tn in revenue to 2060 for the electricity they would otherwise have generated.”

MSCI statistics tell us listed coal companies have underperformed compared to the wider market in each of the last five years. According to the Guardian’s Alan Rusbridger and Professor Lord Stern of the London School of Economics, the financial risks associated with potentially stranded fossil fuel assets are prompting some institutions to decisions to join the growing divestment movement.

“If the 2°C target is to be taken seriously, then current and future assets will have to be written off before the end of their economically useful life (become stranded assets)”
Institute for New Economic Thinking, Oxford University
“Smart investors can see that investing in companies that rely solely or heavily on constantly replenishing reserves of fossil fuels is becoming a very risky decision”
Professor Lord Stern, London School of Economics

Financial risk

With the Paris Agreement having come into effect, it has been said that the financial risks posed by a limited carbon budget must now be taken into account by big business.

Former deputy head of the Bank of England’s Prudential Regulatory Authority, Paul Fisher, has pointed to the example of Peabody in the US and RWE in Germany as companies severely impacted by climate change policy.

Fisher explains: “[Climate change] is a financial risk if you’ve got a long-term asset portfolio. Forget the ideology, do the risk analysis, otherwise you’re not meeting your responsibilities… It’s coming, and ignoring it or pretending it isn’t there is not going to help.”

It has been pointed out that the risk flows from carbon-intensive business to the investors who hold shares in those companies. This includes our superannuation funds, who own around 20% of companies listed on the Australian stock market.

Australian lawyers have also recognised companies and their directors have a legal duty to take into account foreseeable climate risks to their business.

“Climate change is … becoming a material risk for more and more firms.”
Paul Fisher, Former deputy head of the Bank of England’s Prudential Regulation Authority
Potential stranded assets in Australia

Check out our post tracking the ten dodgiest fossil fuel deals in Australia, many of which are at risk of becoming stranded assets.

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