What are stranded assets, and why are they important?

Stranded assets happen when time catches up with something of value. 

When changes in the market mean the items cannot earn enough economic return to be viable, they are considered stranded. 

While the term can apply to any asset in any industry, it has gained prominence in recent years as stakeholders become more concerned with climate, ESG, and long-term viability. 

A vast river of change in this corporate landscape means multiple global assets have become, or risk becoming, stranded. Above all else, this will worry shareholders.

They are assets that have significantly devalued because the market around them has changed. 

Sometimes, the assets decrease in value so much that they effectively become liabilities for the company that owns them. 

In these cases, selling them for profit is nearly impossible, and costs of storage, processing, administering, etc., compound the loss.

There are multiple pathways to becoming stranded:

• Consumer sentiment could shift towards new products. 
• The economy could fluctuate, sending the value of an asset down relative to its cost price. This could create staggering losses, sometimes overnight. 
• Global events such as natural disasters or wars could literally “strand” the asset in an unreachable location. The cost of retrieving it could come close to, or even outweigh, any profit the business could make from it. 
• Governments could write new laws making the asset unsellable.

Stranded assets mean a company has focused on a goal that doesn’t translate to profit. 

Whether intentional through negligence or completely unforeseen, no board wants to have to explain this kind of situation to shareholders. It could mean a massive reduction in company value and an urgent need to restructure company strategy. 

Therefore, corporate leaders should always be aware of potential cases where their assets may become stranded.

Stranded assets are discussed extensively in conversations concerning ESG and climate adaptation. The simple reason is that many assets can quickly become stranded as the world decarbonises. 

Yes, there may be a long way to go in this area, but that sometimes masks the fact that a lot of change has taken place already, pulling the value of traditional assets, specifically energy-related assets, into question.

Primarily, this will affect assets with a large carbon footprint, like coal, oil, and gas. 

Until now, none of these energy sources has been in direct danger of becoming stranded, but that record may be tested in the 2020s as states make sincere moves towards the common goal of net zero by 2050. 

New regulations designed to phase out non-renewables, shifting consumer sentiment, cheaper renewable alternatives, and pressure from shareholders increase the threat of assets becoming stranded.

Analyse, take stock, and act if necessary. 

Stranded assets mean lost value for the company and a loss of shareholder returns. Boards should ensure they have the foresight and action plans to deal with this risk before it becomes a severe issue. 

The ramifications of doing nothing will start with shareholder anger, which could threaten directors’ positions and spark a company crisis. 

If you want an example of how things can go wrong, just look at the global oil giant Shell. Its directors are being sued in the UK by some of their own investors for not acting quickly enough on climate goals. 

Part of the lawsuit is motivated by the threat that Shell’s carbon-heavy portfolio may create a network of stranded assets far quicker than expected, so they are taking action now.