A stranded asset is an economic resource, such as a fossil fuel reserve or power plant, that suffers a premature and unexpected devaluation or becomes a liability. This loss of value is typically driven by market shifts or regulatory changes, particularly those associated with the transition to a low-carbon economy.
A stranded asset is any resource that has lost economic value well ahead of its expected lifespan due to external changes. In the context of climate finance, this term is crucial as it represents one of the most significant financial risks of the 21st century. It primarily affects carbon-intensive industries and their investors, where assets once considered valuable become obsolete or unprofitable due to the global push for decarbonization. Understanding this risk is fundamental for investors aiming to build resilient portfolios aligned with climate goals.
The "stranding" of an asset is not a single event but a process driven by several interconnected factors. These drivers of risk are essential for investors to monitor:
- Regulatory and Policy Changes: The implementation of climate policies like carbon pricing, emissions caps (such as the EU ETS), or bans on certain technologies can directly increase the operating costs of carbon-intensive assets, rendering them uneconomical.
- Market and Technology Shifts: The falling cost of renewable energy (solar, wind) and the rise of disruptive technologies like electric vehicles can outcompete traditional, fossil-fuel-based alternatives, eroding their market share and profitability.
- Changing Social Norms and Litigation: Growing public awareness of climate change can lead to consumer boycotts, divestment campaigns, and an increase in climate-related lawsuits against corporations, creating significant reputational and financial liabilities.
- Physical Climate Risk: Physical events like floods, droughts, or sea-level rise, intensified by climate change, can directly damage or destroy assets, leading to their stranding.
Concrete Examples
- A Coal-Fired Power Plant: A utility company builds a coal power plant with an expected operational life of 40 years. However, after just 15 years, the government introduces a stringent carbon price through a mechanism like the EU Emissions Trading System. The cost of buying carbon allowances (Learn more about the EU Emissions Trading System (EU ETS)) makes the plant more expensive to operate than a new solar farm. The plant is shut down decades early, and the capital invested in it becomes a stranded asset.
- Undeveloped Oil and Gas Reserves: An energy company holds billions of dollars' worth of proven oil and gas reserves on its balance sheet. As the world accelerates its transition to meet the Paris Agreement goals, demand for fossil fuels plummets. A significant portion of these reserves can no longer be extracted and sold profitably, effectively "stranding" them underground and forcing the company to write down their value. This concept is often referred to as the "carbon bubble" [source: Carbon Tracker Initiative].