Stranded Assets - Beyond Hydrocarbons
Any rudimentary search on stranded assets will result in a mass of opinions and data relating to the future value of existing, proven deposits of as yet unused hydrocarbons. The concerns surrounding the devaluation of these assets and the potentially negative effect on corporate balance sheets, costs of capital and reductions in shareholder value are not without merit. However, it would be a mistake not to look beyond “in ground proven reserves” to identify additional assets that will become stranded, and hence have a potentially catastrophic effect on local, regional, national or global economies.
The Carbon Tracker Initiative describes stranded assets as follows:
“Stranded assets are fuel energy and generation resources which, at some time prior to the end of their economic life (as assumed at the investment decision point), are no longer able to earn an economic return (i.e. meet the company’s internal rate of return), as a result of changes in the market and regulatory environment associated with the transition to a low-carbon economy.”
Needless to say the above quote only relates to the energy industry, but even then it assumes that the reader can make the link between the devaluation in hydrocarbon assets and the demise of an entire economic ecosystem, resulting in the proliferation of additional stranded assets.
In 1913 Cardiff (the capital of Wales) had the largest coal export port in the world, but by 1986 there was hardly any mining left in Wales (nationalization, strikes etc., contributed to the demise). The closing of the mines reduced the velocity of capital in the mining regions to a crawl and resulted in the following:
Massive lay offs stranding tens of thousands of valuable human assets, i.e., people without jobs;
Home foreclosures at record rates resulting in banks and mortgage companies holding hundreds, if not thousands of stranded assets, i.e., homes that no one could afford or wanted to buy; and
Remaining in ground assets that were not economically viable to extract.
The list of stranded assets from the closure of the mines is extensive, but the above examples clearly show that even within the energy industry stranded assets are not just “in ground reserves”.
A somewhat broader description of stranded assets comes from the Smith School of Enterprise and The Environment at Oxford University:
“Stranded assets are assets that have suffered from unanticipated or premature write-downs, devaluations or conversion to liabilities, and they can be caused by a variety of risks. Increasingly risk factors related to the environment are stranding assets and this trend is accelerating, potentially representing a discontinuity able to profoundly alter asset values across a wide range of sectors.”
The quote quite rightly hints at the fact that environmental changes could be the largest contributor to the write down in value of “real assets” ever experienced, but I feel it falls short of directing our attention to other sectors that experience the phenomenon Andy Grove (retired CEO at Intel) called strategic inflection points.
Today’s Silicon Valley geniuses openly speak of developing technologies that if scalable will “massively disrupt” traditional industries and we don’t need to reach too far back in time to find examples of assets that became write downs for those who made or stocked them. For example:
GPS reduces sales of paper maps;
Email and scan technology reduces sales of fax machines; and
Tapes start to replace vinyl, CD’s start to replace tapes, MP3’s start to replace CD’s, and iTunes and other digital download sources start to replace MP3’s
I could go on but I think the message is clear.
The description offered by the Smith School uses the term “suffered from unanticipated or premature write-downs, devaluations or conversion to liabilities” and therein is the most important part for investors, businesses, environmental conservationists, social change architects and sustainability leaders. If you believe that progress continually strands assets, identifying which ones, where and how to avoid the reduction in the velocity of capital within the ecosystems that once leveraged those assets becomes the imperative.
Stranded assets are not new, however, the technology (see the work of NASA) and the ubiquity with which we can access the information required to identify those assets that will become stranded is new. Therefore, is it not incumbent upon us to use a whole systems approach to ensure the velocity of capital remains constant (or even increases) within the ecosystems that will be affected by the devaluation of the assets it once relied upon to exist?
There is a direct link between the velocity of capital and the assets used to generate it, which is why the imperative business, investment, humanitarian and environmental thesis of People, Planet, Prosperity is designed to maintain or increase the velocity of capital within an ecosystem through times of change.
Stranded assets go way beyond “in ground proven reserves” of hydrocarbons, which is why the future’s highest and most sustainable corporate Profits (and investment returns) will come from an embracement of the whole systems approach to People and Planet.