Carbon Tracker introduced the concept of stranded assets to get people thinking about the implications of not adjusting investment in line with the emissions trajectories required to limit global warming.
Stranded assets are now generally accepted to be those assets that at some time prior to the end of their economic life (as assumed at the investment decision point), are no longer able to earn an economic return (i.e. meet the company’s internal rate of return), as a result of changes associated with the transition to a low-carbon economy (lower than anticipated demand / prices). Or, in simple terms, assets that turn out to be worth less than expected as a result of changes associated with the energy transition.
The stranded assets concept has been interpreted as encompassing a range of different factors, including:
- Economic stranding – due to a change in relative costs / prices.
- Physical stranding – due to distance / flood / drought.
- Regulatory stranding – due to a change in policy of legislation.
For existing assets, our research can highlight those assets which are most at risk of becoming stranded through the energy transition, as society looks to restrict global warming to well below 2°C, as under the Paris Agreement. There are already examples of coal mines, coal and gas power plants, and other hydrocarbon reserves which have become stranded by the low carbon transition.
Examples of stranded assets in the oil and gas industry:
- Resources – oil and gas currently in the ground awaiting production, including reserves.
- Exploration and development assets, e.g. drilling rigs / seismic vessels.
- Production and processing Facilities, e.g. processing terminals.
- Distribution infrastructure, e.g. pipelines, tankers.
For potential new investments, our research aims to prevent stranded assets arising by identifying where capital expenditure may be allocated to investments which may not yield the expected returns as the world decarbonises. Our focus is therefore on advancing the energy transition through the stewardship of capital, with the intention of preventing it being wasted.
Investors have recognised the value of companies considering a range of scenarios in their business planning, including a scenario of 2°C or lower, by supporting initiatives and resolutions which ask companies to report on the implications of this future for their business.
Financial regulators have also endorsed the importance of scenario analysis for assessing climate risk through the Financial Stability Board Task Force on Climate-related Financial Disclosures. Mark Carney, the FSB chair stated that a carbon budget consistent with a 2°C target “would render the vast majority of reserves ‘stranded’ — oil, gas and coal that will be literally unburnable without expensive carbon capture technology, which itself alters fossil fuel economics”.
The stranded asset concept has initiated a new programme at the Smith School of Oxford University which considers stranded assets across a range of sectors from an academic perspective. From a financial perspective, accountants have measures to deal with the impairment of assets (e.g. IAS 16) which seek to ensure that an entity’s assets are not carried at more than their recoverable amount.