A "stranded asset" refers to an investment that loses value or becomes a liability prematurely (before the end of its expected useful life) due to unforeseen changes, such as shifts in technology, regulations, market conditions, or societal shifts.
Comprehensive overview:
- Definition:Stranded assets are investments that become obsolete, uneconomical, or non-productive before their expected lifespan, meaning they can no longer generate the anticipated economic returns or value.
- Causes:These changes can include:
- Technological advancements: A new technology can render an existing asset obsolete (e.g., camera film becoming obsolete due to digital photography).
- Regulatory changes: New regulations or policies can make an asset uneconomical or unsustainable (e.g., carbon pricing policies affecting fossil fuel assets).
- Market shifts: Changes in consumer demand or market conditions can lead to an asset becoming less valuable (e.g., the decline of malls due to online shopping).
- Climate change: Climate-related risks can make assets vulnerable to premature write-downs, devaluations, or conversions to liabilities (e.g., coal-fired power plants becoming stranded due to the shift to renewable energy).
- Examples:
- Fossil fuel assets: Coal, oil, and gas reserves, and fossil fuel power plants can become stranded as the world transitions to renewable energy sources.
- Real estate: Buildings that don't meet future energy efficiency standards or are in areas vulnerable to climate change impacts could become stranded.
- Other assets: Assets in industries facing technological disruption or regulatory changes can also become stranded.
- Consequences:
- Financial losses: Stranded assets can lead to significant financial losses for companies and investors.
- Economic disruption: The loss of value in stranded assets can have broader economic consequences, potentially impacting jobs and investment.
Increased risk for financial institutions: Banks and other financial institutions need to carefully assess and manage their exposure to stranded assets.