Stranded Assets: the transition to a low carbon economy


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Stranded assets are defined as assets that have suffered from unanticipated or premature write-downs, devaluation or conversion to liabilities. In recent years, the issue of stranded assets caused by environmental factors, such as climate change and society’s attitudes towards it, has become increasingly high profile.

While asset-stranding is a natural feature of any market economy, it is more significant when related to environmental factors because of the scale of stranding that could take place. Changes to the physical environment driven by climate change, and society’s response to these changes, could potentially strand entire regions and global industries within a short timeframe, leading to direct and indirect impacts on investment strategies and liabilities.

Asset stranding is already taking place in some industries. For example, the increase in renewable energy generation, worsening air pollution, and decreasing water availability caused by climate change, coupled with widespread social pressure to reduce China’s demand for thermal coal, have negatively impacted coal-mining assets in Australia.

Stranded assets became particularly relevant to insurers when Mark Carney, the Governor of the Bank of England and head of the PRA, the insurance regulator, spoke about the topic at the 2015 Lloyd’s City Dinner, and stressed how important it was that the insurance industry takes account of stranded asset risk when developing its investment strategies and considering future liabilities.

“The UK insurance sector manages almost £2 trillion in assets to match liabilities that often span decades,” Carney said. “While a given physical manifestation of climate change – a flood or storm – may not directly affect a corporate bond’s value, policy action to promote the transition towards a low-carbon economy could spark a fundamental reassessment.

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