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Stranded Assets

 
It would be necessary to retain a significant amount of the world's current fossil fuel reserves underground in order to reduce the rise in global temperature to well below 2°C. In order to keep global warming to 1.5°C, the Paris Agreement target, an estimated 60% of oil and gas reserves and 90% of known coal stocks need stay untapped, according to a 2022 research published in the journal Nature. These "stranded assets"—fossil fuel resources that cannot be burnt and fossil fuel infrastructure, such as pipelines and power plants—that is no longer in use and may become a liability before the end of its expected economic lifetime—would be left behind in this scenario.

The shift to a low-carbon economy might have an impact on companies that extract coal, gas, and oil, but other industries are also at danger. Other industries, like the aviation industry, that rely on fossil fuels as manufacturing inputs or are otherwise energy- or carbon-intensive, may also be affected. All technologies and investments that cannot be converted to low-carbon and zero-emission modes may become stranded as the world moves away from high-carbon activities.

The value of businesses that extract, distribute, or substantially rely on fossil fuels may not completely account for the danger of stranded assets. A dramatic decline in value may happen if this risk were factored in, posing a risk to owners and investors.

With cascading effects on businesses that rely on fossil fuels, those who have invested in fossil fuel corporations, especially those who have bought their stocks or bonds, are most at danger. This encompasses a wide range of individuals and organisations, including, among others, small-scale investors, banks, insurance firms, pension funds, and academic institutions. As a result, the divestment movement urges people to discuss lowering their exposure to climate risk with their pension funds. 

According to a recent research published in Nature, people in affluent nations would be responsible for bearing the bulk of losses through their pensions and investments, notably in the UK and the US, where people own the majority of potentially stranded assets.

In addition to investors, the early phase-out of fossil fuel-based infrastructure might have an impact on employees and communities who depend on it for jobs and revenue, with the potential to worsen regional inequities. To prevent and control these disruptions, it is important to ensure that the transition to net zero is "fair," with people being the primary beneficiaries. 

Stranded assets might have a trillion dollar economic impact. However, it is challenging to predict the extent of prospective losses since it is dependent on several future possibilities and how they will impact the value of the underlying assets.

People who are worried about the risk of stranded assets may want to discuss with their pension funds or asset managers how to cut back on their exposure to carbon-intensive assets or invest more in low-carbon assets like renewable energy.

The fundamental objective of regulators and supervisory bodies that are in charge of keeping an eye on the whole financial system has been to promote more risk disclosure so that investors are more aware of it and can make better decisions. International organisations like the Financial Stability Board are doing this, and coalitions like the Network for Greening the Financial System (NGFS) are in favour of the financial system's reform.

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