Stranded Assets
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,
