The environmental and ecological costs of failing to reach net zero are increasingly well-known. The need to rigorously reduce environmental pollution and the global carbon footprint is scientifically undisputed. How this switch occurs from a global society overly-dependent on fossil fuels and their by-products to one with renewable energy at its heart, which does more to remove carbon from the atmosphere than to pump it in, is the subject of global debate. The nature and timescale of these changes will affect how the world of the future looks in terms of the polar icecaps, the rainforests and low-lying coastal areas. But the method, speed and efficiency with which the switch away from fossil fuels is handled will also have a major impact on industries, economies and entire financial systems. Although transformative policies towards a sustainable green economy can bring economic co-benefits, there are trade-offs to be made with such transformations, and if they are not executed prudently, there will be difficulties and negative effects. One such trade-off is ‘asset stranding’, which is becoming an emerging concern in the climate change debate. In its broadest meaning, ‘stranded assets’ describes assets that suffer from unanticipated or premature writeoffs, downward revaluations, or which are converted instead to liabilities. Assets in fossil fuel industries are at risk of losing market value and becoming worthless prior to the end of their economic lifetime as global systems move towards zero-carbon trajectories, with nations around the world aiming to be carbon neutral in the next 30, 20, even 10 years. The stranded assets discussion in this sphere will often focus on fossil fuel industries themselves. But it is not just those companies extracting oil, gas, and coal that are put at risk by this transition. New climate legislation, technological advances, or a shift in demand could all affect other companies that use fossil fuels in their production processes, or are otherwise energy – or carbon – intensive. Transportation, manufacturing, power generation – fossil fuels have an input in almost everything at some point. If these industries are affected by stranded assets, it can have a cascading impact on financial sector stability. This, in turn, can also be particularly restraining for the economies of developed as well as developing countries, which are heavily reliant on this sector. Sovereign debt could be at risk for economies that are climatesensitive through overexposure to the fossil fuel sector – countries with large state-owned resources companies are going to be most at risk in this regard, such as those producing the majority of the world’s crude oil, gas and coal. A PRICE THAT MUST BE PAID In the grander scheme of things, nonadherence to climate change regulations will cause irreversible damage to the planet and, thus, the cost of writing off stranded assets could be seen as a small price to pay for the long-term future of Earth itself. To put things into perspective, it is important to see the direct and indirect costs associated with this transition risk. Rough estimates suggest that if national governments attempt to restrict the rise in global temperatures to 1.5C above pre-industrial levels for the rest of this century, then the direct cost of these stranded assets will be US$900 billion, which is approximately one-third of the current value of all big oil and gas companies worldwide. A loss in their total enterprise value means an equal loss, if not more, to all the financial institutions linked to those companies, and there are many. The banks that would have financed those companies, the insurers that underwrite them and the asset managers who invest in them – will all be affected. Such an impact on these financial institutions can be considered an indirect cost of this transition risk. This can have a cascading effect on other establishments and the overall economy as well, making the situation a double whammy. Feedback loops between the financial system and the macro-economy could further exacerbate these impacts and risks if the transition to net-zero is both slow and non-aggressive. On its own, the shock of the cost of stranded assets to financial institutions and the overall economy resulting from a quick adoption of climate and energy 22 | My colleagues and I considered the performance of emotional labour – that is, the requirement to manage our emotions as a tool of enacting our leadership roles – to explore just how feasible relational transparency might be as a component of authenticity in leadership. ʻʻ ʼʼ
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