Stranded Assets

From Open Risk Manual

Definition

Stranded Assets is an informal term that refers to assets that have suffered from unanticipated or premature Write-Off or revaluation. Stranded Assets are one of the main contributors to Sustainable Finance Risks

Risk Profile

Stranded assets can be generated via a number of economic, technological, cultural or political processes (which may be overlapping). In terms of the Risk Taxonomy stranded assets are associated primarily with the following risk categories

  • Business Model Risk:
    • the risk that the value proposition of the firm via its products or services is no longer considered attractive by its clients
    • the risk that competitors of a firm will develop alternative business models for delivering similar or equivalent products or services. Whether such a development produces material risk of stranded assets depends on whether the business model is asset intensive.
  • Political Risk: the impace new government regulations (e.g. new health policies, pollution regulation)
  • Legal Risk (e.g. tobacco, carbon liability) and changing statutory interpretations (e.g. fiduciary duty, disclosure requirements)

Valuation Challenges

In financial terms, not only is the payback time of the asset curtailed, acceleration of decommissioning liabilities also increases their net present cost. When decisions result from changes to government legislation, liabilities exceeding decommissioning provisions accumulated over the asset's useful life may need to be shouldered by the tax payer, as opposed to the owner/operator.

Risk Management Implications

  • The creation of sizeable stranded assets may affect the viability of entire sectors leading to business closures and/or Bankruptcy
  • Stranded Assets cause potentially Systemic Risk to the degree that entities within financial services might be material exposed to the associated write-offs

Examples

Fossil Fuels

The term Stranded Asset is most frequently used in connection with fossil fuel resources such as

  • Coal, Gas and Petroleum Reserves
  • Technology around the extraction of such resources

Causes

  • environmental challenges (e.g. climate change, environmental degradation)
  • resource depletion
  • falling renewable / clean energy costs
  • evolving social norms and consumer behaviour towards the value of the physical environment


In the context of Climate-Related Risk, stranded assets are and expression Climate-Related_Risk_Taxonomy#Transition_Risk Transition Risk

Nuclear Power Plants

Decommissioning of nuclear power stations ahead of their useful lifecycle (e.g. as decided by the German government)

Causes

Changing public attitudes after the Fukushima Daiichi nuclear disaster in Japan

Electric Power Generation

An existing electric power utility makes substantial investments in infrastructure that generates electricity using a variety of methods (e.g. burning coal). Stranded Costs represent such infrastructure investments that may become redundant after substantial changes in regulatory or market conditions.

Digital Technology

Technology change may cause other stranded assets, for example the Intellectual Property, associated Research and Development and Production investments,

See also

Contributors to this article

» Wiki admin