The UNFCCC Executive Secretary told participants that climate change could lead to productivity loss in the order of USD 2tn by 2030. We estimate that c USD 1.4tn in the energy sector alone have already been lost between 1997 and 2017, and that future loss of value from stranded assets could range from USD 0.3tn to 1.6tn. Coal assets alone could lose value in the order of USD 550bn to 2035. We expect wide spread impact across a number of sectors, first and foremost energy, thus our focus in this paper.
Beyond coal power plants as the first obvious casualty, risk affects upstream assets, infrastructure, components and equipment, contracts and services. We see an inflection point in relative returns, with ROCE (return on capital employed) of our low carbon basket exceeding that of the high carbon basket for the first time in 2017, by 2.3pp. Asset stranding amongst others is at the origin of some the major energy company splits.
Execution, regulation and counterparty risks call owners, investors and stakeholders for a selective and dynamic approach. First, new supply companies face greater risk related to volatile wholesale power prices. Second, regulated activities take a greater weight within group structures, and there have been material revisions to regulatory returns in networks and associated activities. Last, financial strength of exposed businesses has reduced, as a result of previous strandings. Further asset losses might put entire business lines into question. Balance sheet stability is at stake if large assets have to be written off and are no longer available as financing collateral.