The global push for decarbonisation, accelerated by climate policies and market changes, is reshaping the investment landscape. Among the more pressing risks is the issue of stranded assets.
Stranded assets - resources and infrastructure tied to carbon-intensive industries that may lose economic value prematurely is increasingly in the spotlight. The potential economic loss here is enormous, and since COP29 also highlighted the issue, we decided to revisit the debate and look into the drivers, scale, and implications of stranded assets for professional investors, and offer some insights into strategies to navigate this growing and under prioritised global issue.
Stranded assets are investments that become economically unviable before the end of their intended economic life. This phenomenon is primarily driven by the transition to a net-zero economy, requiring significant reductions in greenhouse gas emissions. Heavy emitting assets tied to fossil fuels, such as coal mines, oil rigs and pipelines, are especially vulnerable.
In just two years, the potential implications of stranded assets have escalated fast. An MIT study from 2022 and the “Stranded human and produced capital in a net-zero transition study” (2024) both reveal a significant escalation in scale and scope.
In 2022, MIT estimated that stranded fossil fuel and coal power assets could result in global losses of $21.5–$30.6 trillion under varying climate policy scenarios, focusing on risks to fossil energy producers and investors. By contrast, the 2024 study expands this scope dramatically, projecting up to 37% ofglobal capital - $557 trillion- could be at risk if fossil fuel investments persist until 2030, achieving net-zero in 2050, five times the $117 trillion risk estimated had investments ceased in 2020. For context, the 2007-08 global financial crisis “only” wiped out USD 8 trillion in value from the global stock markets, and cost the global economy USD 2 trillion in lost economic growth, representing a 4% drop in global output.
The ballooning financial risk of stranded assets reflects the inclusion of broader systemic impacts in the 2024 analysis, such as human and industrial capital dependencies, and highlights how delays in transitioning exacerbate economic risks. But whatever you decide to include in your analysis, the conclusion from these studies is clear: there is a growing urgency for comprehensive action to mitigate stranded asset risks on a global scale.
Stranded assets were one of the topics during COP29, The European Parliament’s motion for a resolution concerning the 2024 UN Climate ChangeConference (COP29) in Baku, Azerbaijan, lends insight into the global climate agenda. The European Parliament called for accelerating the transition from fossil fuels to renewables, warning against carbon lock-ins and stranded assets. It urged the EU to align policies with scientific recommendations to avoid economic risks tied to fossil fuels.
Among its key recommendations are enhanced emission reduction targets, robust climate finance mechanisms, and comprehensive adaptation strategies to bolster resilience against climate impacts. Notably, the resolution stresses the importance of human rights considerations, particularly given the geopolitical context of the host nation.
There are a number of different phenomena that drive the risk of stranding trillions in assets. The following are pointed out in "Stranded Assets: Research Gaps andImplications for Climate Policy":
Governments worldwide are implementing ambitious climate policies to meet the targets of the Paris Agreement and reduce the risk of catastrophic climate change. For instance, achieving these goals necessitates leaving 80% of known coal reserves unburned and halting the development of new fossil fuel assets, which misaligned with how global capital markets are currently allocating. The tightening of regulations, such as emissions caps and carbon pricing mechanisms, directly impacts the viability of carbon-intensive investments.
Advancements in renewable energy technologies, such as solar and wind power, have significantly reduced the cost of electricity from renewable sources, making them competitive with and cheaper than fossil fuels.As a result, demand for traditional energy sources is declining, straining the profitability of associated infrastructure.
Environmental, social, and governance (ESG) considerations are reshaping investment strategies. Institutional investors increasingly recognise carbon-intensive assets as liabilities due to their long-term risks. The study also indicates that carbon emissions are becoming a material factor in asset pricing, influencing portfolio decisions.
The potential scale of stranded assets extends far beyond fossil fuel reserves. The following sectors as particularly vulnerable according to "Stranded human and produced capital in a net-zero transition" 2024:
.
Stranded assets have profound implications for financial markets and institutions, including:
Financial losses
Banks and insurers that underwrite fossil fuel assets risk significant write-downs as these investments loose value. The systemic nature of these risks could threaten financial stability, especially if policy changes are abrupt according to a study by Chicago University.
Workforce disruption
Investments tied to carbon-intensive industries risk displacing millions of workers. Regions heavily reliant on fossil fuel economies could experience post-industrial decline if retraining and economic diversification are not prioritised.
Investment devaluation
Without proactive management, the transition to a net-zero economy could erode the value of equity and debt investments with significant exposure to fossil fuels, undermining long-term returns.
Mitigation strategies for investors
Professional investors can take several steps to address the risks associated with stranded assets:
Diversify portfolios
Reallocate investments from carbon-intensive sectors to renewable energy, green infrastructure, and low-carbon technologies. Such shifts align portfolios with the growing demand for sustainable assets, while maintaining exposure to e.g. utility or energy markets.
Conduct scenario analysis
Utilise tools like transition or scenario risk analysis to model the financial impacts of different decarbonisation pathways on asset values. This can help investors identify vulnerabilities and adjust strategies accordingly.
Advocate for better disclosure
Encourage companies to adopt transparent reporting practices on climate risks, including their alignment with net-zero targets and potential exposure to stranded assets.
Support a just transition
Work with policymakers and industry stakeholders to ensure that affected workers and regions receive adequate support during the transition. Initiatives like retraining programmes and investments in green jobs can help mitigate social and economic disruptions.
Investors seeking to avoid stranded assets should adopt climate change investing strategies that integrate risks and opportunities associated with the shift to a low-carbon economy. The recent article by CFA "Why climate change investing is here to stay" highlights the following considerations for investor strategies:
Understanding stranded assets and transition risks
Stranded assets experience steep valuation losses due to changing regulations, consumer preferences, or market dynamics, especially as the global economy transitions to cleaner energy sources. These risks are particularly acute for fossil fuel and emissions-intensive assets. Transition risks, such as policy shifts, stricter regulations, and changing consumer demands, can disrupt business models, presenting both challenges and opportunities for investors.
Moving beyond divestment
While divesting from fossil fuels and high-emitting assets reduces exposure to stranded asset risks, it may not always lead to better climate outcomes.Divestment could simply transfer ownership to investors less committed to decarbonisation. Instead, transition investing offers a proactive alternative by targeting activities that facilitate the decarbonisation of hard-to-abate sectors like steel, chemicals, aviation, and shipping, while acknowledging that some industries like upstream oil and gas will struggle to meaningfully transition their business models.
Carbon pricing as a catalyst for change
The expected rise in carbon taxes and higher carbon prices will make emitting greenhouse gases more expensive, incentivising companies to innovate and adopt emerging climate technologies. This evolving regulatory landscape creates opportunities for investors to capitalise on climate solutions and supporting industries aligned with a sustainable transition.
Delaying action on stranded assets only compounds the risks. The study from Exeter and Lancaster Universities from 2024 highlight that postponing the transition to net-zero from2020 to 2030 increases the capital at risk by nearly five times. Waiting not only exacerbates financial losses but also heightens the likelihood of systemic instability and social disruption.
Stranded assets represent a critical challenge for professional investors in a decarbonising world. Whether change comes through tighter regulation or changing consumer preferences towards clean and more modern solutions, proactive strategies are essential to mitigate risks, safeguard returns, and contribute to a sustainable economic transition. By aligning investment decisions with climate goals, embracing innovative solutions, and supporting a just transition, investors can not only protect their portfolios but also drive meaningful environmental and social outcomes.
Publication Details
Author: Sarah Millerton
Date: December 17 2024
Stranded assets - resources and infrastructure tied to carbon-intensive industries that may lose economic value prematurely is increasingly in the spotlight. The potential economic loss here is enormous, and since COP29 also highlighted the issue, we decided to revisit the debate and look into the drivers, scale, and implications of stranded assets for professional investors, and offer some insights into strategies to navigate this growing and under prioritised global issue.
Stranded assets are investments that become economically unviable before the end of their intended economic life. This phenomenon is primarily driven by the transition to a net-zero economy, requiring significant reductions in greenhouse gas emissions. Heavy emitting assets tied to fossil fuels, such as coal mines, oil rigs and pipelines, are especially vulnerable.
In just two years, the potential implications of stranded assets have escalated fast. An MIT study from 2022 and the “Stranded human and produced capital in a net-zero transition study” (2024) both reveal a significant escalation in scale and scope.
In 2022, MIT estimated that stranded fossil fuel and coal power assets could result in global losses of $21.5–$30.6 trillion under varying climate policy scenarios, focusing on risks to fossil energy producers and investors. By contrast, the 2024 study expands this scope dramatically, projecting up to 37% ofglobal capital - $557 trillion- could be at risk if fossil fuel investments persist until 2030, achieving net-zero in 2050, five times the $117 trillion risk estimated had investments ceased in 2020. For context, the 2007-08 global financial crisis “only” wiped out USD 8 trillion in value from the global stock markets, and cost the global economy USD 2 trillion in lost economic growth, representing a 4% drop in global output.
The ballooning financial risk of stranded assets reflects the inclusion of broader systemic impacts in the 2024 analysis, such as human and industrial capital dependencies, and highlights how delays in transitioning exacerbate economic risks. But whatever you decide to include in your analysis, the conclusion from these studies is clear: there is a growing urgency for comprehensive action to mitigate stranded asset risks on a global scale.
Stranded assets were one of the topics during COP29, The European Parliament’s motion for a resolution concerning the 2024 UN Climate ChangeConference (COP29) in Baku, Azerbaijan, lends insight into the global climate agenda. The European Parliament called for accelerating the transition from fossil fuels to renewables, warning against carbon lock-ins and stranded assets. It urged the EU to align policies with scientific recommendations to avoid economic risks tied to fossil fuels.
Among its key recommendations are enhanced emission reduction targets, robust climate finance mechanisms, and comprehensive adaptation strategies to bolster resilience against climate impacts. Notably, the resolution stresses the importance of human rights considerations, particularly given the geopolitical context of the host nation.
There are a number of different phenomena that drive the risk of stranding trillions in assets. The following are pointed out in "Stranded Assets: Research Gaps andImplications for Climate Policy":
Governments worldwide are implementing ambitious climate policies to meet the targets of the Paris Agreement and reduce the risk of catastrophic climate change. For instance, achieving these goals necessitates leaving 80% of known coal reserves unburned and halting the development of new fossil fuel assets, which misaligned with how global capital markets are currently allocating. The tightening of regulations, such as emissions caps and carbon pricing mechanisms, directly impacts the viability of carbon-intensive investments.
Advancements in renewable energy technologies, such as solar and wind power, have significantly reduced the cost of electricity from renewable sources, making them competitive with and cheaper than fossil fuels.As a result, demand for traditional energy sources is declining, straining the profitability of associated infrastructure.
Environmental, social, and governance (ESG) considerations are reshaping investment strategies. Institutional investors increasingly recognise carbon-intensive assets as liabilities due to their long-term risks. The study also indicates that carbon emissions are becoming a material factor in asset pricing, influencing portfolio decisions.
The potential scale of stranded assets extends far beyond fossil fuel reserves. The following sectors as particularly vulnerable according to "Stranded human and produced capital in a net-zero transition" 2024:
.
Stranded assets have profound implications for financial markets and institutions, including:
Financial losses
Banks and insurers that underwrite fossil fuel assets risk significant write-downs as these investments loose value. The systemic nature of these risks could threaten financial stability, especially if policy changes are abrupt according to a study by Chicago University.
Workforce disruption
Investments tied to carbon-intensive industries risk displacing millions of workers. Regions heavily reliant on fossil fuel economies could experience post-industrial decline if retraining and economic diversification are not prioritised.
Investment devaluation
Without proactive management, the transition to a net-zero economy could erode the value of equity and debt investments with significant exposure to fossil fuels, undermining long-term returns.
Mitigation strategies for investors
Professional investors can take several steps to address the risks associated with stranded assets:
Diversify portfolios
Reallocate investments from carbon-intensive sectors to renewable energy, green infrastructure, and low-carbon technologies. Such shifts align portfolios with the growing demand for sustainable assets, while maintaining exposure to e.g. utility or energy markets.
Conduct scenario analysis
Utilise tools like transition or scenario risk analysis to model the financial impacts of different decarbonisation pathways on asset values. This can help investors identify vulnerabilities and adjust strategies accordingly.
Advocate for better disclosure
Encourage companies to adopt transparent reporting practices on climate risks, including their alignment with net-zero targets and potential exposure to stranded assets.
Support a just transition
Work with policymakers and industry stakeholders to ensure that affected workers and regions receive adequate support during the transition. Initiatives like retraining programmes and investments in green jobs can help mitigate social and economic disruptions.
Investors seeking to avoid stranded assets should adopt climate change investing strategies that integrate risks and opportunities associated with the shift to a low-carbon economy. The recent article by CFA "Why climate change investing is here to stay" highlights the following considerations for investor strategies:
Understanding stranded assets and transition risks
Stranded assets experience steep valuation losses due to changing regulations, consumer preferences, or market dynamics, especially as the global economy transitions to cleaner energy sources. These risks are particularly acute for fossil fuel and emissions-intensive assets. Transition risks, such as policy shifts, stricter regulations, and changing consumer demands, can disrupt business models, presenting both challenges and opportunities for investors.
Moving beyond divestment
While divesting from fossil fuels and high-emitting assets reduces exposure to stranded asset risks, it may not always lead to better climate outcomes.Divestment could simply transfer ownership to investors less committed to decarbonisation. Instead, transition investing offers a proactive alternative by targeting activities that facilitate the decarbonisation of hard-to-abate sectors like steel, chemicals, aviation, and shipping, while acknowledging that some industries like upstream oil and gas will struggle to meaningfully transition their business models.
Carbon pricing as a catalyst for change
The expected rise in carbon taxes and higher carbon prices will make emitting greenhouse gases more expensive, incentivising companies to innovate and adopt emerging climate technologies. This evolving regulatory landscape creates opportunities for investors to capitalise on climate solutions and supporting industries aligned with a sustainable transition.
Delaying action on stranded assets only compounds the risks. The study from Exeter and Lancaster Universities from 2024 highlight that postponing the transition to net-zero from2020 to 2030 increases the capital at risk by nearly five times. Waiting not only exacerbates financial losses but also heightens the likelihood of systemic instability and social disruption.
Stranded assets represent a critical challenge for professional investors in a decarbonising world. Whether change comes through tighter regulation or changing consumer preferences towards clean and more modern solutions, proactive strategies are essential to mitigate risks, safeguard returns, and contribute to a sustainable economic transition. By aligning investment decisions with climate goals, embracing innovative solutions, and supporting a just transition, investors can not only protect their portfolios but also drive meaningful environmental and social outcomes.
Publication Details
Author: Sarah Millerton
Date: December 17 2024
