Module 2: Transition Risks
Stranded Assets
The term “stranded assets” is used to describe assets that lose their value due to changes in the market and/or regulatory environment. The term is often used to describe the transition risk to carbon policy relevant sectors that may not be able to use their assets to produce revenue and are therefore required to write down the value of their assets in their financial books. Some examples might include:
- an oil and gas company forced to leave a portion of its reserves unexploited;
- a pipeline company whose pipeline is underutilized due to falling demand (and therefore producing less revenue);
- a car manufacturer whose factories and equipment are all designed to produce combustion engines while demand for gas-powered vehicles falls.
Writing down the value of stranded assets can have a significant impact on a business’s bottom line. In the following video, we take a look at how stranded assets in an oil and gas company can undermine the company’s financial position (including its share price), leading to falling share prices and investors’ (including large, institutional investors’) loss of wealth.
Video attribution: “Stranded assets” by Todd Thexton, Financial Impact of Climate Change, Adaptation Learning Network is licensed under CC BY 4.0.
These transition costs can be substantial. And, in their wake, inevitably some companies in policy relevant sectors will succumb, resulting in significant knock-on effects for employees, creditors, and whole communities. Some of these costs will be inevitable if we are to achieve our target of holding global warming below 2-degrees Celsius.
However, the level of disruption and instability that these transitions can potentially create can be managed through orderly policy-making with adequate signalling of future policy levels.