Stranded Assets (1.37 MB, pdf)

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.

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.

The report, part of Lloyd’s emerging risk report series, looks at actual and potential examples of how stranded assets caused by societal and technological responses to climate change could affect assets and liabilities in the insurance and reinsurance sector. The study aims to increase the understanding and awareness of these issues in the industry.

To do so, it analyses the following eight asset-stranding scenarios in various business sectors:

  • Upstream energy assets: oil and coal reserves become stranded due to international, top-down carbon budget constraints (i.e. “unburnable carbon”)
  • Upstream energy liabilities: third-party liability claims against companies (and their D&Os) responsible for climate change
  • Downstream energy assets: premature closure of coal power stations due to concerns about climate change and the fossil-fuel divestment campaign
  • Downstream energy liabilities: an increase in political risk events due to government energy policies induced by climate-change concerns
  • Downstream energy assets: residential solar PV and electricity storage (in part connected to electric vehicles) impairs centralised electricity generation market
  • Residential property assets: mandatory energy efficiency improvements reduce the value of the least efficient housing stock and increase the value of the most efficient housing stocks
  • Commercial property liabilities: property industry professionals and governments are sued for negligence for not disclosing, reporting or for being misleading on the climate change impacts for property investors
  • Shipping assets: pressure to reduce carbon emissions increases the value of newer, larger, more efficient ships and reduces the value of older, smaller, less efficient ships

The report sets out a number of key actions that companies including insurers, could take in their role as investors to identify and mitigate stranded asset risks