Stranded asset

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Stranded assets are "assets that have suffered from unanticipated or premature write-downs, devaluations or conversion to liabilities".[1] Stranded assets can be caused by a variety of factors and are a phenomenon inherent in the 'creative destruction' of economic growth, transformation and innovation, as such they pose risks to individuals and firms and may have systemic implications.[2] Coal and other hydrocarbon resources may have the potential to become stranded as the world engages in a fossil fuel phase out.

The term is important to financial risk management in order to avoid economic loss after an asset has been converted to a liability. Accountants have measures to deal with the impairment of assets (e.g. IAS 16) which seek to ensure that an entity’s assets are not carried at more than their recoverable amount.[3] In this context, stranded assets are also defined as an asset that has become obsolete or non-performing, but must be recorded on the balance sheet as a loss of profit.[4]

In the context of the environment[edit]

The term stranded assets has gained significant prominence in environmental and climate change discourses, where the focus has been on how environment-related factors (such as climate change policy[5]) could strand assets in different sectors.[2] According to the Stranded Assets Programme at the University of Oxford's Smith School of Enterprise and the Environment, some of the environment-related risk factors that could result in stranded assets are:[6]

  • environmental challenges (e.g. climate change, natural capital degradation)
  • changing resource landscapes including resource depletion (e.g. shale-gas abundance, phosphate scarcity)
  • new government regulations (e.g. carbon pricing, air pollution regulation, carbon bubble)
  • falling clean-technology costs (e.g. solar PV, onshore wind, electric vehicles)
  • evolving social norms (e.g. fossil fuel divestment campaign) and consumer behaviour (e.g. certification schemes)
  • litigation (e.g. carbon liability) and changing statutory interpretations (e.g. fiduciary duty, disclosure requirements)

In the context of upstream energy production, the IEA defines stranded assets as "those investments which are made but which, at some time prior to the end of their economic life (as assumed at the investment decision point), are no longer able to earn an economic return, as a result of changes in the market and regulatory environment."[7]

The carbon bubble is one popular example of how an environment-related risk factor could create stranded assets. Another example is pre-end of life decommissioning of nuclear power stations, decided by the German government and debated in Japan after the Fukushima Daiichi nuclear disaster. In financial terms, not only is the payback time of the asset curtailed, acceleration of decommissioning liabilities also increases their net present cost. When decisions result from changes to government legislation, liabilities exceeding decommissioning provisions accumulated over the asset's useful life may need to be shouldered by the tax payer, as opposed to the owner/operator.

In discussions of electric power generation deregulation, the related term stranded costs represents the existing investments in infrastructure for the incumbent utility that may become redundant in a competitive environment.

See also[edit]

References[edit]

  1. ^ "Stranded Assets Programme". Smith School of Enterprise and the Environment. 25 March 2014. Retrieved 11 April 2014. 
  2. ^ a b Background Briefing, UNEP Inquiry into the Design of a Sustainable Financial System. UNEP. 2014
  3. ^ "IAS 16". Deloitte. 9 July 2014. Retrieved 9 July 2014. 
  4. ^ "Stranded Asset". Business Dictionary. Retrieved 11 April 2014. 
  5. ^ "Unburnable Carbon". Carbon Tracker Initiative. 9 July 2014. Retrieved 9 July 2014. 
  6. ^ "Stranded Assets Programme". Smith School of Enterprise and the Environment. 25 March 2014. Retrieved 11 April 2014. 
  7. ^ WEO Special Report 2013, IEA IEA, 2013

External links[edit]