So-called "stranded assets" resulting from environment-related risk factors, including the effects of physical climate change and societal and regulatory responses to climate change, have become increasingly prominent. The Inter-American Development Bank (IDB) has taken a look at this new phenomenon, and how it has affected The Bahamas and other countries in Latin America and the Caribbean (LAC). Some of the findings are particularly pertinent given the still unresolved oil exploration issue in The Bahamas.
In "Stranded Assets: A Climate Risk Challenge", authors Ben Caldecott, Elizabeth Harnett, Theodor Cojoianu, Irem Kok and Alexander Pfeiffer argue that despite the increasing prominence of these stranded assets as a topic of significant interest to academics, governments, financial institutions, and corporations, there has been little work specifically looking at this issue in Latin America and the Caribbean (LAC).
"This is a significant omission, given the region's exposure to environment-related risk factors, the presence of extensive fossil fuel resources that may become "unburnable" given carbon budget constraints, and the particular challenges and opportunities facing lower-income and emerging economies in LAC," said Caldecott and company.
The authors define stranded assets as "assets that have suffered from unanticipated or premature write-downs, devaluations, or conversion to liabilities."
They cite as "environment-related risks that can cause asset stranding" such things as environmental challenges like climate change or natural capital degradation; changing resource landscapes; new government regulations; falling clean technology costs like solar photovoltaic, onshore wind, electric vehicles; evolving social norms and consumer behavior such as fossil fuel divestment campaigns and certification schemes, and litigation and changing statutory interpretations.
The authors cite research on the topic of "unburnable carbon," which is strongly linked to the concept of stranded assets, has sparked one of the fastest-growing social movements in history - the fossil fuel free divestment campaign. According to Caldecott et al, the campaign may not have a direct impact on company share value, but indirect impacts are likely to occur as a result of what the authors term "uncertainty and stigmatization affecting staff recruitment and retention, brand value, and the ability of stigmatized firms to influence policy."
"The divestment campaign has also contributed to an increase in support for shareholder resolutions that require greater disclosure from large listed fossil fuel companies," they said.
As for why these assets matter, the authors assert that they are not just the result of climate change, and they involve sectors other than fossil fuels.
"Stranded assets are not considered a new phenomenon, but many interviewees expect that stranding will increase in the coming decades as a result of environmental and technological changes.
"Asked to rank the factors that will strand assets in the future, falling clean technology costs and physical environmental change were identified as the most likely," Caldecott and company said.
Noting that some assets will be stranded permanently, while others will only be temporarily affected by extreme weather or changing prices, the authors point out that fossil fuels were seen as the sector most likely to be affected by stranding.
"However, other sectors were also highlighted as being at risk. Infrastructure -- including transport, ports, and inefficient buildings -- agriculture, real estate, mining, and utilities were all highlighted as being potentially affected by asset stranding," they said.
One particularly striking finding was the report that recent estimates suggest 60 to 80 percent of publicly listed fossil fuel reserves must be considered "unburnable" if the world is to avoid disastrous climate change, potentially costing the fossil fuel industry $28 trillion in revenues over the next two decades.
They also reported that recent discussions of stranded assets are now moving beyond the "carbon bubble" and "unburnable carbon" and focusing more on how a wider range of environment-related political, economic, and social factors could affect asset values and stranded assets.
"Regardless of government policies, stranding can occur for a variety of reasons including the downward cost curve for renewables, pressure from investors, and pressure from students... Sovereign debt could be at risk for economies that are climate-sensitive either through direct physical climate risks such as storms or drought or through overexposure to the fossil fuel sector, that is countries with large stateowned resources companies," the authors said.
K. Quincy Parker, Guardian Business Editor
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