The finite life of stranded assets

April 14, 2020

The finite life of stranded assets

“Looking beyond the immediate Covid-19-related crisis, one area that needs serious consideration by investors looking at the implications of climate change is stranded assets. These are now generally accepted to be fossil-fuel supply and generation resources which, at some point prior to the end of their economic life, become no longer able to earn an economic return, as a result of changes associated with the transition to a low-carbon economy.

The concept of stranded assets is fundamentally linked to technology evolution, and climate change is prompting a series of technological innovations that are creating a potential obsolescence threat to fossil fuels on account of their emissions.

There are many projections about the future growth and decline rate of fossil fuels. However, the world currently remains deeply reliant upon fossil fuels for reliable energy. We treat these long-term projections with caution though, as supply, demand and pricing are driven by many inter-related variables, which become increasingly difficult to predict the longer the time horizon. Additionally, technological disruption can occur quickly.

Renewables are, in some cases already cheaper than fossil fuels and this is driving their faster and broader adoption. As asset replacement cycles occur, replacing old fossil-fuel assets with a combination of renewable technologies is becoming the economically rational choice, which is good news for climate change.

Stranded assets are a useful concept for companies to consider, to help them ensure that they allocate capital in a sensible manner that takes into account long-term demand predictions. The use of the concept is helping to push fossil-fuel companies to become low-cost producers and find the cheapest method of extracting hydrocarbons. This will help ensure that as demand falters over the very long-term, it will be their supply that is bought, rather than the more expensive and harder-to- access and refined energy sources .”

Lloyd McAllister, responsible investment analyst, Newton Investment Management

All investments involve risk, including the possible loss of principal. Certain investments involve greater or unique risks that should be considered along with the objectives, fees, and expenses before investing.

"Newton" and/or the "Newton Investment Management" brand refers to Newton Investment Management Limited. Newton is incorporated in the United Kingdom (Registered in England no. 1371973) and is authorized and regulated by the Financial Conduct Authority in the conduct of investment business. Newton is a subsidiary of The Bank of New York Mellon Corporation. Newton is registered with the SEC in the United States of America as an investment adviser under the Investment Advisers Act of 1940. Newton's investment business is described in Form ADV, Part 1 and 2, which can be obtained from the website or obtained upon request.

BNY Mellon Investment Management is one of the world’s leading investment management organizations and one of the top U.S. wealth managers, encompassing BNY Mellon’s affiliated investment management firms, wealth management organization and global distribution companies. BNY Mellon is the corporate brand of The Bank of New York Mellon Corporation and may also be used as a generic term to reference the corporation as a whole or its various subsidiaries generally.

Views expressed are those of the manager stated and do not reflect views of the other managers or the firm overall. Views are current as of the date of this publication and subject to change. This information contains projections or other forward-looking statements regarding future events, targets or expectations, and is only current as of the date indicated. There is no assurance that such events or expectations will be achieved, and actual results may be significantly different from that shown here. The information is based on current market conditions, which will fluctuate and may be superseded by subsequent market events or for other reasons. Forecasts, estimates and certain information contained herein are based upon proprietary research and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Certain information contained herein has been obtained from sources believed to be reliable, but not guaranteed. Please consult a legal, tax or investment advisor in order to determine whether an investment product or service is appropriate for a particular situation. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission. BNY Mellon Investment Advisor, Inc., Newton and BNY Mellon Securities Corporation are subsidiaries of BNY Mellon.

Not FDIC-Insured | No Bank Guarantee | May Lose Value