Opinion Stranded assets As the climate emergency forces us all to rethink our operations, asset managers must start to plan for the possibility that their assets will no longer be usable in a net zero world, argues David Lyons A David Lyons l Gores 2006 film An Inconvenient Truth introduced the threats posed by climate change to a mainstream audience, leading to the political activism that culminated in the Paris Agreement, which aimed to restrict global warming to 1.5C. Now, not a day goes by without a LinkedIn post or press release about another asset management organisation announcing its latest steps to decarbonise by introducing new technologies or boasting about the steps it is taking to protect its assets from extreme weather events. However, perhaps the real inconvenient truth for asset managers is that, to meet the climate-change imperatives we face, many of the assets for which we are responsible will no longer be usable in a net zero world. The most obvious examples of this can be seen in the fossil-fuel industry. A 2021 paper found that, to limit warming to 1.5C, 60 per cent of oil and natural gas reserves, and 90 per cent of coal reserves, need to be kept in the ground, and the International Energy Agency stated that no new oil and gas fields should be created. Even if, like me, you think that the 1.5C target is unachievable, restricting warming to 2C would require $1.4tn of fossil-fuel projects to be cancelled, with the assets stranded and rendered worthless. By comparison, the financial crisis in 2007-08 was triggered by just $250-500bn of mispriced assets. Climate risk Even if, like me, you think that the 1.5C target is unachievable, restricting warming to 2C would require $1.4tn of fossilfuel projects to be cancelled, with the assets stranded and rendered worthless In some cases, stranding may be the result of direct legislative action (such as the ban on coal-power generation in the UK by 2024) or through legal action (as in the Dutch court case that ordered Shell to reduce its global greenhouse gas emissions by 45 per cent by 2030). However, stranding may also come about naturally through the actions of markets note the way in which the price of renewable energy has achieved parity with fossilfuelled sources with additional help in the form of carbon trading or carbon pricing. Beyond the $1.4tn figure noted above and taken from an academic report, it is difficult to identify the stranding risk affecting individual organisations. The Task Force on ClimateRelated Financial Disclosures (TCFD) has produced a standard for reporting on climate risk, and UK-based financial institutions and listed companies are required to report on their climaterelated risk. A quick search of annual reports from UK-listed oil supermajors, miners and banks finds a variety of information being made available, but generally with a focus on the overall risks they face rather than a quantified value of their at-risk assets. The Bank of England notes that financial institutions are in their infancy when it comes to scenario modelling, but that there is a significant risk of credit loss relating to sectors with high greenhouse gas emissions, and that these sectors may find access to credit more difficult as banks seek to mitigate risk. Away from the lofty heights of global finance, most Assets readers will be responsible for a smaller asset portfolio, away from the highest-risk sectors. What does the risk of asset stranding mean for them, and how should a responsible asset manager respond? Scenario modelling David Lyons is a Principal Consultant in Atkins asset management practice, working mostly with transportation and defence clients. He is also a member of the IAMs UK Midlands branch committee. This article, as with all Assets opinion columns, is a personal view. As the TCFD requires more large asset owners, operators and financers to calculate their risk exposure, so the data, methods and experience will become available to other asset managers. Asset managers should explore getting to grips with the different climate change scenarios that exist, especially given the publication of those combining greenhouse gas emissions with a view of associated policy decisions, such as in the Intergovernmental Panel on Climate Change Shared Socioeconomic Pathways. These will provide a basis for modelling the impact of different scenarios on their asset bases. If there is a risk of stranding, it is time to start to build this into whole-life cost models and consider the impact on decisions on new investments, maintenance, and end-of-life activities. It may be possible to modify assets to delay stranding or avoid it altogether. As with everything in asset management, this should be aligned to corporate strategy as organisations consider not only the risks of climate change, but also the opportunities from the energy transition, which may require a reallocation of capital and assets to new or growing revenue streams. It is now almost 10 years since the Paris Agreement was signed, yet many organisations are unprepared for the possibility of asset stranding. As with climate change, delaying action on stranding will only lead to additional cost and disruption. It is time for asset managers to take this threat seriously and act upon it.