- Carbon/Climate Change
Stranded assets: which sovereign issuers matter the most?
In the context of growing investor awareness of the financial materiality of climate and energy factors, “stranded assets” is one of the areas that has received growing attention in recent years. The term aims to reflect the fact that some of the assets that are currently taken into account in financial and economic analysis – in assessing the financial value of a company, the viability of an infrastructure project or the economic and geopolitical position of a sovereign issuer –, may actually have less value (or present more risk) than usually thought. This is particularly relevant in the analysis of fossil fuel reserves based on the fact that, if we consumed all fossil fuel reserves in the current situation, this would lead us to global warming much above 2°C.
For investors, this can, for example, translate into the need for mapping of their assets, to enable them to identify those that are highly exposed to such risks and to fossil fuels overall. Unlike for other indicators, direct heavy exposure to stranded assets can be highly concentrated, whether in some sectors for corporate or infrastructure asset classes or in specific countries on the sovereign side. As described below based on our data services, just 10 countries account for between 80% and more than 90% of the total GHG emissions potential of coal (92%), oil (86%) or gas (81%) reserves worldwide.
The concentration level of potential GHG emissions, GDP, and population in the top 10 countries by potential GHG emissions of fossil fuel reserves:
In addition, there is no strong correlation between this share of global exposure and the country size in terms of GDP or population. For example, the 10 countries accounting for 86% of potential emissions embodied in global oil reserves represent less than 10% of the global population, with countries such as Venezuela or Saudi Arabia representing huge amounts of reserves. However, this concentration also highlights the risks associated with countries that have high fossil fuel reserves, and highly exposed countries also include developed countries such as the USA or Australia. Lastly, it can also be of interest to assess exposure in relative terms (for example to GDP or population in the case of countries) because here again concentration levels are quite discriminatory across assets. To conclude, it is well worth including “stranded assets” issues in climate analyses and this kind of analysis often involves several indicators (as no single existing indicator can capture all risks). There are several good ways to do so, whether through watch lists, portfolio assessments against benchmarks, or more specific in-depth analyses (for example to seize the specificities of non-conventional energy or discriminate across assets based on differences in terms of energy costs or exposure to carbon price impacts).
Guillaume Emin, Head of Client Solutions.
Sources: Beyond Ratings, Enerdata