Stranded assets are an increasing risk for investors

Assets currently contributing to the market value of many fossil fuel companies could be worthless.

FacebooktwitterlinkedinmailFacebooktwitterlinkedinmail   by Louisiana Salge, 20th February 2020

In early February, the chief executive of BP, one of the largest historic greenhouse gas emitters on the planet, set a target to reduce its greenhouse gas emissions to net zero by 2050. While the timescale may not be ambitious enough, the announcement reflects the nervousness that is increasingly present in the energy sector.

Stranded assets

For BP to radically reduce emissions from both its operations and its fossil fuel-based products, a fundamental change to its corporate strategy and capital expenditure is needed. We are interested to see what BP will do about its existing pipeline of fossil fuel exploration projects, and the fossil fuel reserves that make up so much of the value on its balance sheet. In order to achieve the targets set out in the Paris climate agreement, the hard truth is that the majority of known fossil fuel reserves need to stay in the ground. Reserves on balance sheets that cannot be explored and monetised become ‘stranded assets’.

Despite big PR commitments to align with a carbon-constrained future (and anticipated climate change regulation) oil majors’ expenditure tells a different story. The top 10 energy companies are still planning more than $1 trillion of projects by 2030. It all shouts denial, while majority shareholders are kept calm with high dividends. In our view, investors should be aware of the inherent risk they are taking by investing in non-transitioning energy companies.

Write-downs

We have already seen some evidence of these risks materialising. The energy company Repsol SA has written down €4.8 billion in fossil fuel asset values, realising that their decarbonisation plan renders them much less attractive. Chevron has written down $10 billion in asset values as environmentally challenging shale has become less attractive. Even Schlumberger, the largest oil and gas servicer, has announced a $12 billion write-down.

While still limited in scope, these events indicate that climate action pressure by governments is materialising in company’s finances and has the potential to hit shareholders. And it’s not only traditional direct energy exposure that poses risks: that’s why we look at exposure across the entire fossil fuel value chain to future-proof our Positive Impact Portfolios.

Contact our impact investing team

Have a question about the EQ Positive Impact Portfolios? Please email enquiries@eqinvestors.co.uk or call 020 7488 7110, we’re always happy to hear from you.

 

About the author: Louisiana Salge

Louisiana joined EQ in October 2018 as an Impact Specialist after completing a masters in sustainable business at Imperial College London. Her MSc thesis was on impact reporting and her research has significantly enhanced our methodology for reporting on the Positive Impact Portfolios. She is responsible for our impact fund research, and further evolving EQ’s impact strategy.

Before studying for her masters, Louisiana graduated from UCL with a BSc in Geography and spent a year working for a Cleantech innovation research company.

Outside of her career, Louisiana loves travelling and discovering new places, cooking with friends and spending time outdoors.

Search the EQ Library

View articles by topic: