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Week in Impact: The looming cost of stranded assets

Does BlackRock's watershed CEO letter suggest the finance industry is finally taking climate risk seriously?

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🛢️ Oil & gas majors are poised to lose $900bn—or one-third of their current value—in the transition to a low-carbon economy, according to the FT's Lex.

🏦 US Federal Reserve Chair Jay Powell announced the central bank may soon join the 50-strong global Network for Greening the Financial System.

🏭 Just 19% of the largest industrial companies are cutting emissions in line with the Paris agreement targets, says the Transition Pathway Initiative.

⛪ Meanwhile, the £2.8bn Church of England Pension Board invested £600m in a new index comprising companies that meet the Paris agreement targets.

🗞️ Is ESG the reason for the widening disparity between growth and value investing? Robin Wigglesworth argues the trend is influencing stock prices.

The looming cost of stranded assets

Not too long ago, stranded assets were a hypothetical and abstract concept: the distant possibility that climate change could render oil, gas and coal extraction unfeasible, decimating the value of fossil fuel companies and wiping millions (or billions) off investments.

That has started to change. Ex-Bank of England Governor and, as of this month, UN Special Envoy for Climate Action and Finance Mark Carney recently warned the financial sector hasn’t woken up to the looming crisis and was “not moving fast enough” to divest from fossil fuels. Of course, Carney has been at the forefront of efforts to ‘green’ the financial system since his landmark 2015 speech. (He was yesterday awarded Governor of the Year, in part because he was one of the first central bankers to recognise the financial risks of extreme weather and the transition to a low-carbon economy.)

Others are catching up. In the last week alone, Denmark’s ATP, one of Europe’s biggest pension funds with $133bn of assets, pledged to halt fossil fuel investments, while US Federal Reserve Chair Jay Powell indicated the central bank is poised to join the Network for Greening the Financial System (NGFS): a 50-strong group of global central banks set up to meet the Paris agreement targets.

Is that sort of action enough? Not necessarily, according to the New Economics Foundation. In a report published today, author Arthur van Lerven suggests central banks must purge an estimated $12bn in coal-related assets from their balance sheets. It’s not just about supporting the transition to a low-carbon economy, but also about avoiding its inherent risks. With 80% of EU power plants unprofitable and utilities facing losses of €6.6 billion in 2019 alone, “a rapid phase-out of coal is critical to account for the financial risks of coal investments and the potential of ​stranded assets.”

It's an incredibly fine balance. As van Lerven points out, central banks could actually trigger transition risk were they to simply divest from coal tomorrow. They must act slowly. Too slowly, however, and policymakers risk catalysing a “forceful, abrupt, and disorderly” policy response from 2025 with devastating consequences for fossil-fuel companies, according to another recent report from think-tank Carbon Tracker.

That, by the way, is devastation to the tune of a staggering $900bn. The FT finds one-third of the current value of oil and gas companies will evaporate if governments act more aggressively to restrict the rise in temperatures to 1.5C. It might seem like a small price to pay in the context of the climate emergency, but recall that a loss of a 'mere' $250bn triggered the 2008 financial crash.

As one of the “biggest ever shifts in capital allocation,” writing off the effects of stranded assets will be felt across the world.