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Assessing the sources of stranded asset risk: a proposed framework

ABSTRACT Long-term investors, particularly bond investors, do not currently enjoy an efficient framework for assessing where stranded assets (SAs) might arise. Traditional risk categories currently embodied in credit research – Business Risk and Financial Risk – can capture a number of Environmental, Social and Governance (ESG) issues. However, there are some risks that are difficult to assess in this framework, primarily because many ESG categories themselves are not particularly efficient, or even meaningful, as analytical categories. We propose that a better analysis of these risks can be obtained by categorizing what are currently called ESG risks into three specific risk categories: (1) Operational or Management Risk; (2) Climate Risk, primarily related to climate mitigation and adaptation; and (3) Natural Capital Risks, a category intended to capture natural capital depletion, subsidy loss risks, and certain geopolitical risks – risks associated with water resources perhaps being the best example of a Natural Capital Risk. SAs can arise from all three sources, but those arising from Climate and Natural Capital Risk are more likely to be both significant and irreversible.