Global warming has been a major concern particularly over the last three decades. In 2010, governments confirmed in the Cancun Agreement that emissions should be reduced to avoid a rise in global average temperature of more than 2°C above pre-industrial levels, with the possibility of revising this down to 1.5°C. Many companies currently invest in assets which are unburnable. These assets are branded ‘stranded assets’. In essence, they are assets which are worth less on the market than it is on its balance sheet due to the fact that is has become obsolete in advance of a complete depreciation. They can be caused by a range of environment-related risks and these risks are poorly understood and regularly mis-priced, which has resulted in a significant over-exposure to environmentally unsustainable assets throughout our financial and economic systems.
So why do companies continue to invest in these assets? This is partly through a lack of knowledge about the market risks and partly due to the lack of understanding about the systemic connection between water, food, energy and the climate and what this means for the future feeding of the world. Investors are required to gain more understanding that the assets they hold, be they land, agriculture, energy or infrastructure will most certainly be re-valued of the physical consequences of climate change and the public policy response to it, but also because consumer demand for more efficient and resilient alternatives will increase. This gives rise to assets being written off and hence deemed ‘stranded assets’. Global fossil fuel companies are sitting on billions of dollars of stranded assets, the oil and coal reserves they own which they may never get to mine. The value of such companies does not reflect the reality of the situation. The call is therefore for these companies to change their business models and become aware of the alternatives or the future.
So why does all this matter? Stranded assets carry a major debt burden. Writing down assets of major companies impact the economy by increasing the cost of achieving sustainable and resilient economies, for firms, governments, and society in general. When large write-offs occur, companies’ profits are reduced as are share prices as these large corporations are deemed less profitable. As a consequence of reduced investment, companies may seek to borrow funds to maintain existing demand. This may result in price increases in the longer run and with the costs of funding initiatives into renewable alternatives, much of the cost would be borne by the consumer and with a rising global population couples with rising commodity prices, the urgency of this topic has increased. Other costs in stranded assets include the existing investment in infrastructure for the incumbent utility that may become redundant in a competitive environment.
Companies currently holding stranded assets are faced with many challenges. There are the environmental challenges with respect to climate change, changing resource landscapes such as the abundance of shale gas, new government regulations, falling technology costs and social norms such as fossil fuel campaigns. Changes would have to be made by companies in order to meet the changing environment with education being the prime prerogative.
Dr. Victor Chukwuemeka
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