Stranded Asset
AdvancedA stranded asset is an asset that loses much of its value, or becomes a liability, before the end of its expected economic life, often because of changes in regulation, technology, markets or the environment.
The term is most often used in relation to climate change, particularly for fossil fuel reserves and infrastructure that may not be used if the world acts to limit global warming.
For example, if governments introduce strict limits on emissions, an oil company may be unable to extract and sell all its oil reserves, and some of its reserves and equipment could become stranded. A recently built coal power station might have to close decades earlier than planned.
Stranded assets can also arise from other causes, such as new technologies, changing consumer preferences or physical climate impacts. For example, properties in areas facing repeated flooding may lose value or become uninsurable.
The concept matters to investors because companies’ share prices and balance sheets may not reflect the risk that some of their assets will lose value. If stranded asset risks are recognised suddenly, it could lead to sharp falls in asset values. Investors use scenario analysis to assess their exposure, and some have reduced holdings in companies most at risk.
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