The investment community is waking up to climate risk, including the risk of stranded assets.
Stranded assets are fossil fuel supply and generation resources that lose their value as a result of the transition to a low-carbon economy. Some of the risk factors include new regulations, falling costs for renewables, changing social mores, and litigation, according to the Stranded Assets Programme at the University of Oxford’s Smith School of Enterprise and the Environment.
Concerns about this risk were highlighted earlier this month by BlackRock CEO Larry Fink, who in his 2020 letter to clients said that by mid-2020, the firm will divest its actively managed funds from companies generating more than 25% of revenues from coal production.
As countries transition to cheaper, cleaner energy sources, underutilized coal fleets represent an enormous stranded asset risk to investors across the globe, says the Institute for Energy Economics and Financial Analysis. BlackRock is not the first financial institution to recognize this risk—more than 100 banks, insurers, and others plan to divest from coal.
While total coal power capacity continues to increase, net annual additions to the global fleet is declining. The US is retiring many coal-fired plants, and the units retired in 2018 were larger and younger than those retired in 2015. The Energy Information Administration has predicted that 2020 will see the lowest levels of coal production since 1978.
Globally, the coal pipeline shrank by roughly 70% between 2015 and 2018. In fact, most leading indicators of growth in coal power capacity declined in 2018, including construction starts and plant completions. Still, it appears unlikely we will meet the Paris Agreement goal of phasing out coal-generated power by 2050.
Oil and Gas
If governments begin making policy decisions to limit the planet’s warming to 1.5 to 2 degrees Celsius, the risk of stranded assets in the coal sector would increase sharply, as it would in the oil and gas sector as well.
In its World Energy Outlook 2019, the International Energy Agency lays out various energy scenarios for the next 40 years.
The scenario that represents policymakers’ current plans suggests that oil demand will start to level off by the 2030s, with an expected decline in passenger car use offset by growing use for freight, shipping, aviation, and chemicals. Under this scenario, global carbon dioxide emissions from energy would continue to rise, putting us on the path to 2.7 degrees Celsius of warming this century, a level scientists consider catastrophic.
If policymakers are compelled to bring about Fink’s “significant reallocation of capital” away from fossil fuels and toward energy efficiency and renewables, a second scenario suggests a 50% chance of limiting warming to 1.65 degrees Celsius.