The transition to a low-carbon economy presents both opportunities and risks, with asset stranding being a prominent concern for companies and insurers. Stranded assets, those devalued due to risk profile changes, have garnered increased attention due to climate change-related risks, including regulatory shifts and societal norms.
Major fossil fuel companies, like Shell and Exxon, have acknowledged the potential stranding of their assets as the world shifts towards a low-carbon future. However, the transition remains complex, as global economies still rely on fossil fuels despite slow progress toward carbon-intensive asset divestment.
A systematic transition, as suggested by the Organisation for Economic Co-operation and Development (OECD), would minimize value destruction and promote reinvestment in low-carbon infrastructure. But the risk of abrupt, disorderly shifts grows each year, possibly triggered by events like carbon taxes, litigation, or extreme weather.
The consequences of asset stranding extend beyond fossil fuel companies to encompass energy infrastructure, like pipelines, refineries, and transport, as well as other carbon-intensive industries, such as cement, steel, petrochemicals, and aviation.
Insurers face both physical and liability risks related to climate change. Shareholder derivative actions and claims may emerge if companies fail to protect assets threatened by climate change. Additionally, a disorderly transition could lead to social unrest, property damage, business interruptions, and pension fund losses, while mass unemployment might result from fossil fuel industry devaluation.
To address these challenges, insurers should continue to assess climate risk and transition scenarios. Participating in initiatives like the Net-Zero Insurance Alliance can help insurers build knowledge and rapport. Moreover, insurers can proactively report their own emission profiles, fostering transparency and demonstrating commitment to managing climate risk.
In conclusion, stranded assets pose significant risks to both companies and insurers in the transition to a low-carbon economy. While the path forward remains uncertain, insurers can play a crucial role in managing these risks by staying informed, engaging in industry initiatives, and enhancing transparency through emission reporting.
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