It is a term that is slowly gaining credence in the investment community: stranded assets. Put simply, the expression refers to an asset that has become obsolete or has ceased to perform in your portfolio.
The University of Oxford’s Smith School of Enterprise and the Environment has applied the term specifically to assets as they pertain to global warming and the resulting efforts to curb the phenomenon – particularly carbon assets on the books of large oil and gas companies.
So-called stranded assets suffer from “unanticipated or premature write-downs, devaluations or conversion to liabilities”, says the school. The stranding of these assets throws up a variety of risks to the investor, which can stem from a number of sources such as capital degradation or exposure to increased government regulation – such as carbon pricing or emissions bans, falling clean technology costs and litigation. The assets, as they put it, have become ‘stranded’.
[...] And it is not just pension funds and mutuals that are looking to divest from companies that could be adversely affected by climate change. Martin Schoenberg, head of policy at Climate Change Capital, says family offices are also increasingly looking at reducing their exposure to carbon assets.
“The problem is that oil and gas companies don’t think governments will intervene to limit the burning of fossil fuels, and that therefore their carbon assets are secured. But these assets are overvalued,” says Schoenberg. “Companies essentially have more assets than can be burned but valuations are assuming all carbon assets will enter cash flows, even though governments will intervene. It would be much wiser for companies to return capital to their investors and work on new business models.”
[...] Schoenberg’s Climate Change Capital manages a €200m fund that predominantly invests in resource efficiency businesses across Europe, particularly later-stage companies that have both an economic and environmental value proposition in energy, industry and environment. It also works closely with the University of Oxford’s Smith School of Enterprise and the Environment to better understand the consequences of stranded assets. With HSBC and Aviva, the firm has backed a four-year research programme to help investors identify and classify stranded assets.
“Even for investors who do not specialize in this sector, there is a lot of low-hanging fruit, potentially with immediate payback,” says Schoenberg. “In renewable energy there may be substantial capital requirements at the beginning but also zero operational expenditure, almost like government bonds.”
In March, CCC’s fund exited from Orege, a French wastewater company. Orege’s patented technology breaks down complex pollutants in effluents produced by the oil and gas, chemical, and food and beverages industries to the extent they can put the waste back into rivers. CCC Private Equity made a gross IRR of 34% in less than three years for its investors, which included ultra-high net worth clients.