Stranded Assets: Why Sustainability Scenario Appraisals are now part of smart business practice

Two monthas ago I posted a Linked In article identifying how fighting natural disasters is increasingly becoming ‘business as normal’ for some industries faced with increasing climate change impacts. The case study concerned the Pacific Gas and Electricity Company (PG&E) and their mounting liability ($billions) arising from wildfires linked to network infrastructure.

It was with regret that I read that PG&E had filed for Chapter 11 bankruptcy protection in the US after being brought to its knees through mounting liabilities for wildfires and the deaths of over 100 people.

In August 2017, Hurricane Harvey hit southern Texas killing as many as 60 people, and caused damages as high as US$180 billion across government bodies, businesses and property owners. In addition, the hurricane shut down, damaged or destroyed Texas energy operations and related businesses. The final bill was estimated at up to 1% of US GDP.

The point in my original article was about how smart organisations, especially infrastructure asset management businesses, are starting to take real note of sustainability risks, notably Climate Change and Megatrends, and had started to incorporate them into thier Enterprise Risk Management portfolios, particularly via futurecasts (looking forward) across various anticipated scenarios. This approach integrates well with marketing and business planning activities where an open commercial mindset is applied. It tests future business strategy, assumptions and investment, but just as importantly it can uniquely identify redundant processes or future ‘stranded assets’.

Asset heavy state and private businesses, often effectively monopolies in terms of the business and customer base are most at risk of encountering this risk. Why? because thier comprative size, thier longevity, lack of real competition, and at times leadership complacency that significant competitive barriers to entry exist can lead to a false sense of security.

Stranded Assets

Stranded assets are assets that suffer from unanticipated or premature write-downs, devaluations or conversion from ‘asset’ to ‘liability’. Stranded assets can be caused by a variety of factors (climate change, policy transfer or societal concern) and are a phenomenon inherent when a company starts to focus internally rather than externally in its search for innovation, market intelligence and forgets to repeatedly ask itself ‘Why do I exist?’. Rapid technology or sociatal value changes in several technology sectors are evidence that it can happen across many market and service serctors. Leaving previously successful companies behind newer entrants, leaving them asset heavy and effectively market redundant in a previously regarded secure sector. Stranded assets can pose a significant risk to shareholders, organisations and the communities within which that business operates as it can effectively wipe out a business’s commercial viability as the balance sheet tips over towards liabilities and the investment call required to catch up with competitors becomes unsustainable as debt. Many coal based supply & generation resources, and other hydrocarbon-based indutries, now have the potential to become stranded through climate change as the world engages in a fossil fuel phase out.

For the financially minded it can be summarised quickly as a once valued asset that is not performing well in the marketplace but which must be kept on a financial statement in order to record a loss of profit!

A recent report by the NGO Climate Tracker outlined that the increasing competitiveness in renewable energy costs and the price drop in energy cost to consumers will leave $60 billion of coal burning plants in Indonesia, Vietnam and the Philippines ‘stranded’ within 10 years. In Indonesia alone it identified $34.7 billion of stranded assets if policies were brought in to meet the goal of the Paris climate agreement to restrict global warming to less than 2°C.

Sustainability Scenario Analysis

Sustainability Scenario analysis is a useful starting tool for forecasting the potential liabilities and implications of sustainability issues, megatrends and in particular climate change on a business’s asset management strategy, its future investment scenarios and operational practices as a business and as a leadership tool through which to stimulate longer term scenario and strategic thinking. At a leadership level it starts to prompt a movement away from the concept of the ‘effeciency of the existing process’ towards a more sustainable ‘effectiveness of the future outcome’.

This blog is part 1 of a longer discourse on sustainability strategy in business and scenario analysis

At Leading Green, our approach to sustainability in business consulting encourages our clients to look closely at their own internal leadership strengths and goals.  Helping them adopt an inquisitive state of mind and supporting them in how sustainability can support their long-term business strategy.

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