Al Gore has suggested that “stranded carbon assets” such as coal mines, fossil fuel power stations and petrol-fuelled vehicle plants may represent at least $7tn on the books of publicly listed companies (The Wall Street Journal, 2013).
But what is a stranded asset, and what does it mean for organisations…
A stranded asset is a financial term used to describe an asset that had become obsolete, or non-performant, but must still be recorded on the balance sheet as a loss of profit. This can describe assets such as factories which became unproductive due to global outsourcing, or power plants, which were unable to support their capital costs due to reduced market prices.
Notably, the term ‘stranded asset’ has been increasingly used in relation to environmental, social or ethical risks, in particular giving rise to the notion of a stranded ‘carbon’ asset (University of Oxford’s Smith School of Enterprise and the Environment, 2013). For instance, if global warming is to be limited to 2 degrees, this means some fossil fuels will have to stay in the ground, and these assets will never be realised. Similarly, public opinion and the growing divestment campaign threatens the future exploration of shale gas reserves across Europe. Finally, and somewhat ironically, the melting of the permafrost – itself triggered by changing climatic conditions – may mean that Alaskan and Russian extractive infrastructure no longer have a solid surface to work from.
However, if we consider what the world will look like in 2025, and the environment, social and ethical trends which will shape this landscape, a host of other stranded assets can be discerned besides ‘carbon assets’. For example, improved regulation of labour standards in emerging economies, prompted by tragedies such as that in the Bangladesh garment factory in 2013 – and consumer demand for traceability – could result in certain factories and supply chains becoming socially unacceptable and obsolete. The physical effects of climate change in the form of floods, droughts and storms may endanger assets including real estate, agricultural land and infrastructure and cause their value to plummet (as seen in the UK and the Somerset levels). Meanwhile health concerns, community opposition, evolving social norms and technology developments could all individually or collectively serve to undermine other assets.
So what does this mean?
The potential for future trends to create stranded assets represents a significant risk for all corporations, but such is their magnitude – in addition to simply stranding assets – these mega-trends may threaten the fundamental long-term viability of entire sectors ranging from oil and gas to pharmaceuticals, with the potential for ‘stranded businesses’ and indeed stranded industries’.
In the short term, with regulatory change imminent, there is urgency for companies, investors and regulators to identify the carbon risks in their portfolios and publicly disclose them.
In the longer term, greater attention must be directed to the environmental and societal factors which threaten to leave assets, businesses and industries stranded – a relic of a previous time and a previous world.
University of Oxford’s Smith School of Enterprise and the Environment (2013): Stranded assets and the fossil fuel divestment campaign: what does divestment mean for the valuation of fossil fuel assets?