What are stranded assets?
Stranded assets are those that lose value or turn into liabilities before the end of their expected economic life. Asset-stranding is a natural feature of any economy but it is more significant in reaction to environmental factors. Entire regions or industries could become stranded within a short timeframe due to the scale and pace of anticipated change. Asset stranding is already taking place in some industries due to society’s reaction to climate change.
What are the risks associated with assets becoming stranded?
Physical, societal and transitional pressures are increasing the risk of stranded assets. Fast moving risks (changes that happen quickly) are harder to manage. Slow moving risks are easier to observe and anticipate.
Physical risks: climate change and its associated volatile weather patterns, sea level rise and the availability of natural resources.
Societal risks: government regulations, technological advances, consumer trends & expectations and statutory interpretation & litigation (there is increasing legal precedent that corporations are responsible for the mitigation of adverse effects)
Transitional risks: as assets become unusable or less valuable due to the transition to a low-carbon economy.
Where might assets become stranded?
Assets are becoming stranded at various positions within their lifecycle:
Upstream: the product itself becomes unattractive to consumers and is unable to go to market.
Downstream: transition factors (either as regulatory or voluntary changes), render the product unused and discarded.
Residential: mandatory energy efficiency improvements reduce the value of the least efficient housing stock & increase the value of the most efficient stock.
Commercial: the impacts of climate change must be disclosed or the property manager is found negligent, leaving assets abandoned.
Distribution: pressure to reduce carbon emissions decreases the value of older, smaller, less efficient ships and others are losing stock to local suppliers.
What effects will stranded assets have?
In our global economy, the entire product lifecycle is exposed to climate risk — from supply of raw materials, to delivery methods, to physical waste diversion. Whether you are a part of a large or small, private or public company, it is becoming ever more imperative to understand your risks and implement sound governance to ensure the longevity of your business.
