The study, carried out in partnership with the University of Oxford Smith School of Enterprise and the Environment, looked at the impact of climate change-related regulation and taxation policies and how they could create “stranded assets” - assets that are subject to a sudden or unexpected write-down or devaluation. The report found this to be especially relevant for insurers and reinsurers exposed to vulnerable carbon-based assets and liabilities in the energy, commercial property and shipping sectors.
The report, Stranded assets: The transition to a low-carbon economy, recommends that firms should stress-test portfolios to build a picture of potential exposure to stranded assets or consider the specific environmental characteristics of investments in their portfolios whilst playing an active role in the development of legislation and regulation around environmental policy.
Commenting on the report, Trevor Maynard, Head of Innovation at Lloyd’s, said: “As governments across the globe put in place frameworks to address the causes of climate change, insurers and reinsurers need to ensure they are not caught out on the wrong side of the debate. This study illustrates the importance of considering how climate change could impact the value of your assets, but more than that, it encourages the insurance industry to play a pro-active role in the development of policies and regulation with the knowledge and expertise that exists in this field.”
Ben Caldecott, Director of the Sustainable Finance Programme at the University of Oxford Smith School, said: “Insurers and reinsurers price environment-related risks in their insurance policies but don’t always apply these same principles to their investments. Doing so would help avoid stranded assets and ensure investments are appropriately protected in order to meet liabilities.”
To read the full report, visit: www.lloyds.com/strandedassets.
Notes for editors
For further information, and to arrange interviews with Trevor Maynard, contact Stewart Todd, Head of Strategic Communications: T: 020 7327 6745; E: Stewart.Todd@lloyds.com.
Stranded assets are defined as assets that have suffered from unanticipated or premature write-downs, devaluation or conversion to liabilities. In recent years, the issue of stranded assets caused by environmental factors, such as climate change and society’s attitudes towards it, has become increasingly high profile.
While asset-stranding is a natural feature of any market economy, it is more significant when related to environmental factors because of the scale of stranding that could take place. Changes to the physical environment driven by climate change, and society’s response to these changes, could potentially strand entire regions and global industries within a short timeframe, leading to direct and indirect impacts on investment strategies and liabilities.
Asset stranding is already taking place in some industries. For example, the increase in renewable energy generation, worsening air pollution, and decreasing water availability caused by climate change, coupled with widespread social pressure to reduce China’s demand for thermal coal, have negatively impacted coal-mining assets in Australia.
Stranded assets became particularly relevant to insurers when Mark Carney, the Governor of the Bank of England and head of the PRA, the insurance regulator, spoke about the topic at the 2015 Lloyd’s City Dinner, and stressed how important it was that the industry takes account of stranded asset risk when developing its investment strategies and future liabilities.
As part of this study, Lloyd’s and the Oxford Smith School convened a workshop that brought together a range of multi-disciplinary experts to identify the key issues affecting investment portfolios and insurance risks. The workshop identified sectors relevant to insurers that are, and could be, affected by asset-stranding. It challenged assumptions in the insurance industry and brought awareness of the impacts of asset stranding on both liabilities and assets.
The resulting eight scenarios are described in detail in this report, together with likely responses from both individual and institutional investors. The scenarios used are not exhaustive, allowing this report to illustrate the concepts through examples, rather than attempting to create a comprehensive compendium. In addition, Lloyd’s is not saying the scenarios will happen, just that there is a considered probability that they might.
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About the Sustainable Finance Programme
The Sustainable Finance Programme at the University of Oxford’s Smith School of Enterprise and the Environment was established in 2012 (originally as the Stranded Assets Programme) to understand how finance and investment intersects with the environment and sustainability. It seeks to understand the requirements, challenges, and opportunities associated with a reallocation of capital towards investments aligned with global environmental sustainability. It seeks to understand environment related risk and opportunity, both in different sectors and systemically; how such factors are emerging and how they positively or negatively affect asset values; how such factors might be interrelated or correlated; their materiality (in terms of scale, impact, timing, and likelihood); who will be affected; and what affected groups can do to pre-emptively manage risk.
1 Caldecott, B., Howarth, N. & Mcsharry, P. 2013. Stranded Assets in Agriculture: Protecting Value from Environment-Related Risks [online]. Available at: http://www.smithschool.ox.ac.uk/research-programmes/stranded-assets/Stranded%20Assets%20Agriculture%20Report%20Final.pdf