policies or a breakthrough in lowcarbon technology is unlikely to be a source of systemic risk to the larger financial sector. In fact, the risk of stranded assets can be a springboard for better resource planning, diversification and a transition towards more sustainable development. On the other hand, delayed and disorderly mitigation strategies to tackle the transition to net-zero will lead to stranded assets and legal claims. Major technological breakthroughs in the renewable energy sector, which are both cost effective and sustainable, will make way for an increase in stranded assets. Similarly, abrupt policy changes by governments to severely limit cumulative carbon emissions can plunge the profitability of fossil-fuel companies, making it unfeasible for them to operate their assets, which will also result in write-downs. An increase in stranded assets due to legal claims could happen if a legal action is taken against the owners of carbon-emitting assets who are responsible for significant amounts of damage due to climate change. This is because the dangers and risks of global warming were known to the fossil-fuel industry since early 1960s, yet they continued to invest in large-scale fossil-fuel exploitation. A DOUBLE-EDGED SWORD Adopting clear and effective long-term climate and energy policies is crucial to reducing uncertainty for financial institutions. A credible climate change policy framework that provides the necessary long-term certainty to financial institutions will discourage investments in firms holding stranded assets and other high-carbon businesses. At the same time, it will boost investments in cleaner technology and energy saving. Implementing and following a clear-cut policy also helps in reducing uncertainty, which can prevent wasteful capital expenditures by fossil fuel firms, cutting losses for investors and creditors, while reducing market volatility and ensuring market liquidity with regard to high-carbon assets, thus avoiding unnecessary distrust among financial institutions. Finally, macro-prudential policies by central banks and other regulatory bodies can ensure that national financial sectors do not have an excessive exposure to transition risks, helping to prevent the emergence of negative feedback loops that could destabilise the financial system. This could involve reducing the impact of potential shocks to the asset management sector as a whole, for example, even if the risks for many individual investors do not seem excessive. Such prudent measures can be a double-edged sword in making a techno-economic paradigm shift towards the next green wave. FIFTY FOUR DEGREES | 33 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 32 | 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. ‘‘ ’’ Marwan Izzeldin is a Professor of Financial Econometrics in the Department of Economics, and the LUMS Associate Dean International. The article Stranded assets a double edge sword or a double whammy for countries dependent on Fossil Fuel? Was co-authored by Professor Marwan Izzeldin and Dr Momna Saeed, a Research Fellow for the Gulf One Lab for Computational and Economic Research (GOLCER). m.izzeldin@lancaster.ac.uk
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