Skip navigation Scroll to top
Scroll to top

Should investors take 'stranded assets' seriously?

17 July 2020

The Brief_StrandedAssets_1200

Phoebe Stone, Head of Sustainable Investing

The investment community is becoming increasingly aware that our changing climate poses risks to businesses across almost every industry. Insurance companies have been pricing these types of risks for several years now, but the rest of the financial services industry is finally starting to catch up. One concept often referred to when conducting analysis of this type is that of 'stranded assets'.

Unburnable assets

Stranded assets are oil, gas and coal reserves on the balance sheets of large fossil fuel extractors, that may never be produced or burnt. This could be because doing so would contribute to exceeding national or internationally agreed environmental targets or, for commercial reasons, the assets are no longer desirable.

Last month, BP wrote off £17.5 billion of stranded assets, as the company acknowledged that the impact of the pandemic is likely to accelerate the transition to a lower-carbon economy and demands for cleaner sources of energy. The move comes in spite of the fact that, only two years ago, BP's chief executive Bob Dudley labelled investor concerns over stranded assets as 'misguided' at the 2018 Oil & Money Conference.

Should we expect more of this to come?

Whilst this is an extremely significant step, analysis indicates that adhering to the Paris Climate Change Agreement would render up to 68% of current fossil fuel reserves as unburnable. Furthermore, many believe limiting temperature increases by only 2°C will not be sufficient to limit climate damage. By targeting limits to increases in temperature to 1.5°C, 85% of fossil fuel reserves become unburnable. We are therefore likely to see more businesses acknowledge these stranded assets on their balance sheets. According to a report by Deloitte, US shale companies could write down up to $300 billion of assets this year alone.

It is undeniable that some energy companies will not be able to pivot the direction of their revenue streams fast enough to avoid being left with stranded assets. Investors must therefore take note of this external risk and be aware of its significant impact on both the energy industry and investment in these businesses.

The Brief_fossil_fuel_chart

Source: Rystad Energy, World Energy Council, IPCC, Global Carbon Project, LGT Vestra

Return to Insights

This communication is provided for information purposes only. The information presented herein provides a general update on market conditions and is not intended and should not be construed as an offer, invitation, solicitation or recommendation to buy or sell any specific investment or participate in any investment (or other) strategy. The subject of the communication is not a regulated investment. Past performance is not an indication of future performance and the value of investments and the income derived from them may fluctuate and you may not receive back the amount you originally invest. Although this document has been prepared on the basis of information we believe to be reliable, LGT Vestra LLP gives no representation or warranty in relation to the accuracy or completeness of the information presented herein. The information presented herein does not provide sufficient information on which to make an informed investment decision. No liability is accepted whatsoever by LGT Vestra LLP, employees and associated companies for any direct or consequential loss arising from this document.

LGT Vestra LLP is authorised and regulated by the Financial Conduct Authority.