Stranded Assets

CTI introduced the concept of stranded assets to get people thinking about the implications of not adjusting investment in line with the emissions trajectories required to limit global warming. There have been a number of interpretations, including:

  • Regulatory stranding – due to a change in policy of legislation
  • Economic stranding – due to a change in relative costs / prices
  • Physical stranding – due to distance / flood / drought

 

The concept has warranted a new programme at the Smith School of Oxford Univeristy which considers stranded assets across a range of sectors from an academic perspective. From a financial perspective, accountants have measures to deal with the impairment of assets (eg IAS 16) which seeks to ensure that an entity’s assets are not carried at more than their recoverable amount.

 

Our research aims to prevent stranded assets by identifying where capital expenditure may be allocated to investments which may not yield the expected returns in a low demand, low price scenario. This is why we are focusing on the stewardship of capital to prevent it being wasted. This has already been taken up by investors, for example CERES have co-ordinated the efforts of their investor members to engage with companies. This has prompted responses from companies; including a paper published by Exxon Mobil as part of an agreement to withdraw a shareholder resolution.

 

CTI says: Stranded assets are fuel energy and generation resources which, at some time prior to the end of their economic life (as assumed at the investment decision point), are no longer able to earn an economic return (i.e. meet the company’s internal rate of return), as a result of changes in the market and regulatory environment associated with the transition to a low-carbon economy.

 

Useful links

CERES / CTI Carbon Asset Risk initiative

Exxon Mobil response

Smith School at Oxford University