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An inconvenient truth about stranded assets

An inconvenient truth about stranded assets

08-01-2018 | Insight

The world needs to wake up to the problem of trillions of dollars’ worth of stranded fossil fuel assets, says climate change campaigner Al Gore.

Speed read

  • World holds USD 28 trillion in fossil fuel assets that cannot be used
  • Move to renewables is challenging outdated business models
  • Fiduciary duty of investors is now to integrate sustainability

The former US Vice-President addressed investors at a screening of his new film, ‘An Inconvenient Sequel: Truth to Power’, in Amsterdam at an event that was co-sponsored by Robeco on 13 December. As its name suggests, the film is a sequel to Gore’s Oscar-winning 2007 movie ‘An Inconvenient Truth’, seen at the time as ground-breaking in challenging the ‘inconvenient’ nature of having to stop 150 years of fossil fuel use.

“The world now has USD 28 trillion of carbon assets marked to market on the books on multinationals and governments with a value that is based on the assumption that they will be put to their intended use and burnt – but they won’t,” Gore says.

“Numerous experts have calculated that no more than one-third and probably less of those assets can ever be burnt. So at what point does the realization set in that these are likely to become stranded assets?”

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Changing business models

“It set in a few weeks ago for the Norwegian sovereign wealth fund – a very well-managed fund whose assets came after all from gas and oil – who said they’re taking their investments in fossil fuels down to zero.”

“It set in for the coal industry some time ago that they had lost 90% of their market capitalization in the last decade. What will the fast-growing markets for electric vehicles do to the markets for liquid petroleum products? And what opportunities are opening up to fill these gaps and give returns because of the changing business models?”

Gore says the move away from using fossil fuels was already affecting major businesses not keeping up with events. “Moody’s has announced it will downgrade municipalities or governments that are not adapting to the new climate issues,” he says. “General Electric just laid off a big percentage of its workforce because the boilers it makes for fossil fuel-generated electricity are not selling any more. Siemens made a similar decision beforehand. All of these straws in the wind are coming at us every day now.”

Integrated sustainability

Gore is himself now a leading sustainability investor as the founder and chairman of Generation Investment Management, which has USD 17 billion under management. His fund fully integrates environmental, social and governance (ESG) factors into its investment decisions – as does Robeco for its fundamental equity, fixed income and quantitative strategies.

“The full integration of sustainability into the investment process has been the subject of widespread discussion for many years now,” he says. “As a risk management tool, the inclusion of ESG factors is extremely valuable, but what’s more important is a recognition of the opportunities that are now emerging.”

“The technological transition is sweeping and persuasive, and offers fantastic opportunities in solar, wind, batteries, electric vehicles, energy efficiency – new business models that can see where a new sustainable approach is going to disrupt the old ways of doing things. So it’s extremely important for investors who are focused on the long term to take stock of how quickly our world is changing and how numerous these opportunities are.”

It’s your fiduciary duty

Gore says sustainability has moved on to become so important in investing that to not use it has become a violation of an asset manager’s fiduciary duty to do what’s in the best interests of its clients, despite a myth that persists that it can hurt returns.

“Once in the investment business it was common for men and women to say that ‘I would like to use sustainability, but I have a fiduciary duty to make returns for clients’. Now all that’s changed,” he says. “Best practice now is that if you do not take those ESG factors into account, then you are violating your fiduciary duty, because at a time when the world is changing so profoundly and the risks are growing, why wouldn’t you use sustainability?”

“Good investors have always considered sustainability in the investment process, but doing it systematically with every investment should be the way forward.”

Two major developments

Gore says two major changes have occurred since his first film came out 10 years ago. “One is that unfortunately, extreme weather events are far more destructive and more common. We’ve seen that with hurricanes and floods. But the second-biggest change is that we have the solutions now, and they have come down in cost to the point where in many regions of the world, electricity coming from renewables is now cheaper than from burning fossil fuels.”

“I believe that the world is in the early stages of a sustainability revolution, one that has the magnitude of the original industrial revolution but with the speed of the modern digital revolution. This revolution is being jump-started by developed and developing countries simultaneously all around the world, powered by new digital tools. We can make this transition much faster than some people think.”

“No matter what we do, there will still be a considerable amount of sea level rise this century. But we still have the ability to control the pace of that sea level rise, and the maximum extent of it. The next few decades are going to be challenging for humanity.”

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