22nd August 2023
“Asset stranding is increasingly becoming a key commercial consequence of national and international climate action. Businesses should take steps now to assess their risk, and to mitigate any adverse economic impact.”
International and national climate commitments made by governments, and the legislation, guidance, policies and practices which flow from them, have inevitable economic consequences for corporates. As well as the direct costs associated with making changes to comply with the sustainability agenda, many businesses – and especially those operating within, or heavily reliant upon, the energy sector – will experience potentially significant indirect economic impact, in connection with stranded assets.
Stranded assets are assets which suffer devaluation as a result of unanticipated changes in their risk profile.
In a climate-focused future, they are assets which may no longer come up to scratch in terms of sustainability. They can lose significant value, or become unsaleable, worthless, obsolete, or even represent an expensive liability.
Stranded assets are likely to become an increasingly significant consequence of climate action. In this horizon-scanning article, Walker Morris’ Infrastructure & Energy and Commercial Dispute Resolution specialists Ben Sheppard and Nick McQueen highlight key legal and commercial considerations, and offer practical advice for businesses.
Some commentators have suggested that governments which enact climate legislation risk litigation, potentially worth trillions of dollars, being brought by businesses seeking compensation for fossil fuel-related lost revenue and stranded assets.
That might sound overly dramatic, but changes to the physical environment caused by climate change, and the international community’s response to those changes – including the speed of transition to green energy and the sustainability agenda more broadly – mean that significant asset stranding is already taking place in certain sectors.
A working paper published by the International Renewable Energy Agency  noted, back in 2017, that the buildings sector was already the most affected by energy transition-related stranded assets. That’s in large part because the low turnover rate of buildings means that the vast majority of stock doesn’t meet modern sustainability standards. Efforts and initiatives to upgrade and retrofit existing building stock from an energy efficiency perspective will not yet have reached sufficient levels to redress that situation. (The situation will not have been improved, in recent years, by the impact of Covid and international supply chain difficulties.) Other sectors already suffering significant climate-related stranded assets include upstream energy, power generation and industry/heavy industry. Indications  are that the agriculture, transport and finance sectors are also beginning to be affected.
Various climate-related factors can lead to assets becoming stranded, including legislation and regulations which limit the use of fossil fuels, changes in consumer demand, and even litigation and/or lobbying which results in changed corporate policies, practices and products.
Potential commercial risks associated with stranded assets are several-fold. Governments, regulatory bodies and/or corporates which implement climate-related legislation, regulation, policies or practices may face claims, and potentially litigation, from businesses whose assets become stranded as a result. Businesses whose assets become devalued and/or obsolete face financial and operational impact. Investors and insurers may face consequential losses and claims. Counterparties to affected businesses may have to source alternative energy solutions, products, practices or prices, and may seek to renegotiate or terminate contractual arrangements as a result. Professional negligence claims may ensue where stranded asset owners believe failings in due diligence resulted in overvaluations and over- or imprudent investment. In extreme cases, businesses may face insolvency and even entire industries or regions could become stranded, leading to wide scale impacts on investment strategies and liabilities.
It’s happening already. For example, in 2020, Exxon reportedly wrote off up to $20 billion in natural gas holdings and its subsidiary, Imperial Oil, shelved a gas exploration/development project worth some C$1.2 billion. A number of energy and exploration companies, including Germany’s RWE and Uniper and the UK’s Rockhopper, are suing 4 European governments over the stymying of coal, oil and gas projects. The claims, seeking compensation of around €4 billion, revolve around governments’ decisions to mandate the closure of coal power plants, prevent the development of specific projects, or require an environmental impact assessment. Another case, for an unknown sum, has been brought against Romania by Austria-based Petrochemical Holding over a petroleum development contract. In 2021, the International Institute for Sustainable Development reported that most of these types of claims are settled, for an average of $600 million, in favour of the energy company claimants.
The UN’s Global Climate Litigation Report 2023 Status Review, published on 27 July 2023, notes that climate litigation cases more than doubled from 884 in 2017 to 2,180 in 2022. Stranded asset-related claims (which that report refers to as ‘backlash cases’) represent a significant proportion of ongoing climate litigation. They’re one of the key types of climate claim that are expected to substantially increase in number in the short to medium horizon.
Businesses likely to have climate action-related stranded assets, or counterparties whose operations and/or supply chains are reliant upon those businesses, will be well-advised to start thinking about how they can mitigate any adverse economic impact.
Walker Morris is a multi-disciplinary commercial law firm, with specialist lawyers experienced in infrastructure and energy, environmental issues, commercial contracts, corporate- and climate- reporting, energy disputes, commercial dispute resolution and all aspects of the sustainability agenda. We can work with businesses at every step of their journey to create, implement and deliver an effective sustainability strategy. That includes advising on risks and mitigation strategies associated with climate action-related stranded assets.
 See, for example: this France 24 bulletin; this Lloyds of London and Smith School of Enterprise and the Environment at the University of Oxford report; this nature climate change research briefing
 Such as: FTSE4 Good Index Series, Nasdaq Green Equity Indexes Series