Stranded Assets in the Context of Sustainability

On our first day of the “Sustainability and Competitive Advantage” professor Jeremy Williams asked each of us to answer two questions as we introduce ourselves. One of which was “What does sustainability mean to you in your personal life?”.

As I answered the questions I shared an observation from my experience working in the financial industry, where there is a shift in consumer preference around investment products. We are seeing that more and more customers are pulling out of tradition investment products and choosing to purchase more “Green” and more “Sustainable” investments. After I finished providing my answer, professor Williams asked me if I had heard of “Stranded Assets” and how they correlates to what I observed. This is the topic of my discussion here today.

 First, let’s start by defining what stranded assets are and then let’s take a close look at the implications it brings. Stranded assets are “assets that have suffered from unanticipated or premature write-downs, devaluations or conversion to liabilities”[1].

In the context of sustainability, fossil fuels have been devaluating and are in turn becoming stranded assets. This is becoming more and more prevalent with the intense focus on preventing the global temperature from going up by 2°C and consequently causing some devastating and irreversible damage to the planet. In order to achieve that, the International Energy Agency (IEA) has established that “Carbon Budget” cannot exceed one-third of existing fossil fuel reserves by 2050. The two-thirds of none-monetized fossil fuel reserves will cause such assets to dramatically devaluate and as a result any stocks of oil companies will plummet.

The video below was posted by the Carbon Tracker Initiative’s (CTI’s) latest global report “Unburnable Carbon 2013: Wasted capital and stranded assets”. It provides a brief summary of the implications of stranded assets.

New research on “Climate Change and the Environment” by CTI and the Grantham Research Institute calls for re-evaluation of energy business models against carbon budgets, in order to prevent a carbon bubble in the next decade of about $6 trillion.

Also, in discussion with my teammates on the topic, we came across an interesting article published by the Wall Street Journal, and that I share here entitled: “The Coming Carbon Asset Bubble – Fossil-fuel investments are destined to lose their economic value. Investors need to adjust now

In my opinion, yes, we do see a shift in consumer behaviour towards green investment initiatives; however, unfortunately that only represents a small minority of the general investor population. Additionally, the lack of knowledge and awareness that currently exists in the world of heavy-weight investors, or with the lack of their interest in the consequences the carbon bubble may have on the planet, I feel that fossil fuel consumption will continue to rise, their assets will continue to valuate, and will not become stranded assets.

What are your thoughts on what will happen to fossil fuels? Will it be rendered as stranded assets? and what are your thoughts on what investors are calling for?

[1] “Stranded Assets Programme”. Smith School of Enterprise and the Environment. 25 March 2014.


Banking professional and MBA candidate.

Posted in energy, pollution
One comment on “Stranded Assets in the Context of Sustainability
  1. marcmikhael says:

    Very interesting concept. It’s true that new policies may transform fossil fuels into stranded assets. I would argue that technology has a much greater chance of displacing fossil fuels in the short term. But I do agree with your take, Abe. Given the troubling state of the world, I anticipate that the value of fossil fuels will continue to rise in the short term. However, once technology disrupts the market, we will see prices reversing. In terms of investments, however, I have a feeling that many of the oil companies of today will become the clean energy companies of tomorrow–many of these companies are adept at assessing the risks and diversifying investments. I think investments in energy companies should be limited to those companies that understand that oil bubble will burst sooner or later.

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