Let’s talk: sustainability, Issue 4

“Stranded assets”: from fact to fiction

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For the global sustainability community, the most effective catalyst of change has long been seen as the informed self-interest of the mainstream financial community: if banks and investors could be convinced of the proximity of environmental risk or societal impacts, then it has been assumed that capital diverted from ‘unsustainable’ practices would render all other interventions unnecessary.

In practice though, the sustainability community has found the financial sector a hard nut to crack. Although recent years have seen a substantial increase in the integration of environmental, social and governance (‘ESG’) data forming part of investment analysis, the continued emphasis on short-term results and incentives has pushed longer-term environmental risks, such as climate change, outside of the boundary of risks contemplated by mainstream analysts. That is, until recently. 2014 saw a remarkable increase in the analysis of environmental and associated geo-political risks in the wider financial community, the primary focus of which was on the suddenly credible prospect of ‘stranded assets’ in the fossil fuel sector.

History behind the ‘stranded assets’ debate

The concept of environmentally stranded assets originated in NGO campaigns against the major fossil fuel companies that sought to demonstrate that there are more proven reserves on the balance sheets of the world’s fossil fuel majors than could possibly be monetised if the world was to avoid catastrophic climate change. Given that most of the world’s governments share a stated intention to avoid catastrophic climate change, the hypothesis was that a large number of coal, oil and gas assets must eventually be stranded through political intervention. These campaigns called for greater disclosures from the fossil fuel industry to attempt to force it to either acknowledge the existence of effectively stranded assets, or the non-existence of an effective climate change strategy. While these campaigns captured a few headlines they did not initially inspire much concern within the financial mainstream.

We have seen a raft of mainstream investors publically contemplate the longevity of fossil fuel-related assets with obvious and far-reaching implications for major exporting nations such as Australia. What is most striking about some analysis is that any political intervention to limit, say coal-related emissions (in particular by the world’s largest coal consumer, China) is being portrayed as only one frontier in a battle that might well be lost to new forms of energy generation with or without political assistance. Furthermore, the diversity of issues and perspectives regarding the rate of change in the global energy sector has permitted a degree of data ‘cherry picking’ on both sides of the debate which can make it difficult to objectively evaluate exposure at the company level.

In this special edition of Let’s talk: sustainability we seek to distinguish ‘fact from fiction’ regarding stranded assets. It is not intended to draw a conclusive line under the debate, which we expect to become more rigorous over the coming years. In part, as discussion relies to a great degree on the accuracy of forecasted political intervention, and changes in global energy demand and economic conditions. Instead, it examines four variables driving concerns that do have the capacity for significant disruption, were one or more to converge in the unexpectedly short-term. These being:

  • Disruptive technologies
    We take a look at some x-factor technologies, including industrial-scale energy storage and carbon capture and storage, to get a sense of how proximate these potential game-changers might actually be.
  • The price competitiveness and uptake of renewable electricity generation
    We consider whether the progress of renewable forms of generation will continue in spite of any potential stagnation of global climate policy, and what impact this may have.
  • Debt and project finance  
    We discuss the challenges facing debt funding in light of the significant tightening of international and national carbon policies.
  • Global and domestic climate policy
    We consider what, if any, political consensus towards substantive multilateral climate intervention might be expected of the Paris Climate Summit in December this year; or whether the unilateral interventions of China and the US could affect more material change.