Fossil fuel assets could be losing trillions of dollars in value thanks to increased use of alternative energy sources, climate-friendly policies, and sustainable tech advancements.
The rising interest in planet-friendly technology and practices, such as electric vehicles, recycled materials, and solar and wind power, is slowly leading to a future with a low-carbon economy. This is great for the environment, but it could have serious financial implications.
A new report from the U.K. Sustainable Investment and Finance Association (UKSIF) and Transition Risk Exeter (TREX) estimates that this could result in $2.3 trillion worth of global assets being "stranded" in the next 10 years.
"This analysis traces the complex web of financial ownership of fossil fuel assets and tracks the exposure of end beneficiaries — such as individual investors, pension funds and governments — to the risk of these assets becoming 'stranded'," UKSIF said.
"This refers to oil, gas and coal reserves, along with associated infrastructure and investments, that lose economic viability before their expected operational lifetimes as a result of climate policies, technological changes, or shifting market conditions."
The report says that the U.S., the U.K., China, and Russia have the highest risk of being exposed to these stranded fossil fuel assets. Oil and gas companies are assuming there will be enough demand to avoid these losses, but experts aren't so sure.
"Based on current green transition policies, mid-term action plans to cut emissions, and long-term net zero targets, the report finds that global economic exposure to fossil fuel asset stranding risk amounts to $2.28 trillion by 2040 — of which the U.K.'s exposure is calculated at $141 billion," UKSIF said.
The association said that this cost is a "much smaller loss" than the cost of not taking action against climate change. Some models estimate that "climate-intensified natural disasters" could be responsible for $12.5 trillion in economic losses by 2050.
As the world transitions away from fossil fuels and toward sustainable energy and a cleaner economy, it's clear that long-term investments in fossil fuel companies are becoming a liability. These predicted losses show that oil and gas companies are not performing as well compared to their clean energy counterparts.
Investors looking for reliable growth over time will likely be reluctant to consider them a viable option. Instead, the clean economy is likely to keep gaining steady momentum for companies and consumers willing to invest in a greener future.
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