In the heart of Chengdu, China, a team of researchers led by Jiasha Fu from the Research Institute of Economics and Management at Southwestern University of Finance and Economics has been delving into a topic that’s sending ripples through the energy sector: stranded assets. Their work, recently published in the journal *Environmental Research Letters* (translated from Chinese as “Letters on Environmental Research”), offers a stark look at the financial and political risks posed by climate change and the low-carbon transition.
Stranded assets, as Fu and her team explain, are more than just a buzzword. They represent a significant risk to socioeconomic development and financial stability. “The notion of stranded assets has evolved from a narrow focus on ‘impaired assets’ to a comprehensive framework,” Fu explains. This framework now includes stranded resources, stranded capital, and even stranded paper—financial instruments that lose value due to climate change impacts or the shift to a low-carbon economy.
The team’s research reveals that the scale of this issue is vast. They’ve found that stranded assets can inflict significant financial shocks on both upstream and downstream firms in the fossil fuel industry. But the ripple effects don’t stop there. “Risk is transmitted to the broader financial system via institutional investor exposures and systemic vulnerabilities,” Fu notes. This means that the impacts of stranded assets can spread far and wide, affecting not just the energy sector, but the entire financial system.
The political risks are also substantial. Uneven regional risk distribution, intergenerational equity concerns, and international implications can all trigger political instability. This is a complex web of risks that demands careful navigation.
So, what can be done? Fu and her team propose several mitigation strategies. These include portfolio optimization, accelerated deployment of renewable energy, enhanced climate risk disclosure, and the use of macroprudential policy tools. They also stress the need for future research to deepen the quantification of multiple asset types, conduct micro-level empirical analyses, implement short-term dynamic monitoring, and develop equitable distribution mechanisms.
The implications for the energy sector are profound. As the world transitions to a low-carbon economy, companies that fail to adapt risk being left with stranded assets. This could lead to significant financial losses and even political instability. However, those that proactively manage these risks could gain a competitive edge.
Fu’s research serves as a wake-up call for the energy sector. It’s a reminder that the transition to a low-carbon economy is not just an environmental issue, but a financial and political one as well. And as the world continues to grapple with climate change, the need for proactive risk management will only grow.