Sometimes there are certain assets in investments that lose their value before the end of their economic life. Such assets are stranded assets. As per the stranded assets meaning, such assets have become obsolete or significantly devalued before the end of their expected economic life.
But what is a stranded asset’s value and why is it going down?
You can attribute their loss of value to regulatory rulings. This means no one can exploit them. This means the changing trends in the market render them redundant or obsolete due to the arrival of superior technology.
Stranded Assets Definition
The term “stranded assets” or climate-related asset stranding is present mostly in the context of fossil fuel reserves held by energy companies, particularly those listed on the stock market. The relevance of this term arises from the need to meet decarbonisation targets set forth by the Paris Agreement, which aims to limit global warming.
The agreement advocates for global carbon neutrality by 2050, necessitating measures at the national level to phase out fossil fuel usage and transition away from internal combustion engine vehicles.
The term “stranded-assets” or climate-related asset stranding is present basically in the context of fossil gasoline reserves held by using energy agencies, specially those listed at the stock market. The relevance of this term arises from the need to meet decarbonization objectives set forth with the aid of the Paris Agreement, which targets to restrict international warming.
The agreement advocates for worldwide carbon neutrality by 2050, necessitating measures on the country-wide stage to phase out fossil gas utilisation and transition away from internal combustion engine cars.
Impact on Energy and Utility Companies
In the pursuit of adhering to the Paris Agreement, energy and utility companies face potential challenges with climate-related asset stranding. Investments made in fossil fuel reserves that cannot be utilised due to climate goals pose a problem.
The write-off of such stranded assets can result in financial implications, impacting the profit and loss account and, consequently, the share price. Notably, the issue primarily affects assets directly invested in exploration, production, or storage, while coal reserves primarily held by governments do not pose the same concerns for investors.
Broad Applicability of Climate-Related Asset Stranding
Stranded-assets are not limited to the energy sector and can encompass various products rendered redundant for diverse reasons. An illustrative example is the Boeing 747 ‘jumbo jets,’ which have become climate-related asset stranding for many airlines due to the industry’s shift towards more fuel-efficient twin-engine airliners. These unused 747s face challenges in resale and are often written off.
Digitalisation and Redundancy
Digitalisation is another factor contributing to the redundancy of valuable assets. An ironic example is the impact on currency production amid the coronavirus crisis. Increased reliance on contactless transactions has structurally reduced the demand for banknotes, leaving currency printing presses idle and resulting in a surplus of unused assets.
The concept of stranded assets extends beyond the energy sector, encompassing various industries and products affected by evolving global trends and priorities. Investors and companies need to navigate these shifts strategically to mitigate risks and capitalise on emerging opportunities.
But in the realm of sustainable investments, what makes any asset “stranded”? Let’s find out.
3 Causes of a Stranded Asset
Stranded-assets existed before integrating the risks of climate change. Some of these assets become stranded before the arrival of the new disruptive technology.
Climate change has led to new situations that can cause assets to lose their value a lot earlier than the initial projection. There are some assets, for instance, that will not be compatible with limiting global warming to 2℃.
Multiple factors can cause an asset to be stranded:
Climate change has led to an unprecedented amount of natural disasters in the last few years. This leads to physical stranding which refers to assets, such as infrastructure or resources, becoming unusable or economically nonviable due to direct impacts of climate change, like extreme weather events or rising sea levels, rendering them obsolete and devalued.
Stranding Due to Changes in Regulation
Climate change pushes world organisations and states to implement new laws and regulations against global warming. Due to such regulations, some assets become unusable and stranded.
With regulation changes, some coal mines, for instance, become stranded as coal exploitation is limited, or banned.
Economic stranding may occur due to regulation changes like change in production costs that makes an asset unusable. A green tax on petrol, for instance, could make assets unusable or less profitable.
In the housing sector, regulation changes concerned with climate change could have detrimental effects. Increasing demand for “green” buildings, emphasising insulation and energy efficiency, results in higher market prices for environmentally friendly structures. Consequently, less eco-friendly buildings become a more budget-friendly alternative for prospective buyers.
The good thing about all these types of assets is that you can assess them beforehand. Here are some assessment tips that could help you avoid poor investment choices and risks with such stranded-assets.
Measuring Stranding Risk and Avoiding Poor Investment Choices
Proposing a comprehensive bottom-up approach involves five steps of varying complexity:
- Acquire project data.
- Identify current and future risks and impacts.
- Establish scenarios to observe evolving risks and impacts.
- Evaluate how to address these risks and impacts.
- Integrate these factors into credit risk, valuation, and financial models as appropriate.
This method empowers companies to comprehend and address climate-related risks effectively. While sharing fundamental risk exposure with competitors, having a clear plan and strategy may result in lower overall risk or strategic divestment.
FAQs: Stranded Assets Risks and the Climate-Resilient Solutions of Sustvest
Why do stranded assets pose risks?
Assets that have no value or are obsolete due to external changes like regulatory shifts or technological advancements are stranded-assets. Such assets will not meet future regulatory efficiency standards.
How does Sustvest assess and mitigate the risks of such assets in its climate-resilient investment approach?
Explore Sustvest’s strategies in comprehensively assessing and mitigating risks associated with stranded-assets. This could include their methods for evaluating environmental impact, diversification strategies, and the integration of environmental, Social, and Governance (ESG) factors.
How does the transition to renewable energy impact the valuation and potential stranding of assets in traditional energy sectors?
Examine the effects оf the global transition to renewable energy on traditional energy assets. Investigate how changing market dynamics and regulatory landscapes may lead to stranding, and what factors investors should consider when navigating this transition to optimise their renewable energy investments.
How can investors mitigate the risks of stranded assets in renewable energy investments?
Explore the specific challenges and risks associated with stranded-assets in renewable energy, considering factors such as technological advancements, regulatory changes, and market dynamics. Additionally, inquire about strategies investors can employ to minimise the impact of these risks.
In navigating the complex landscape of climate-related risks and stranded assets, Sustvest‘s climate-resilient investment approach stands as a strategic model. Understanding the risks associated with stranded-assets, the company employs comprehensive strategies, including environmental impact assessment and diversification, to mitigate potential financial implications.