The UK is disproportionately exposed to the fossil fuel stranded asset risks that are likely to intensify in the coming decades, as the global renewable energy and clean tech boom continues to gather pace.
That is the conclusion of a major new report from the UK Sustainable Investment and Finance Association (UKSIF) and analysts Transition Risk Exeter (TREX) - Stranding: Modelling the UK's Exposure to At-Risk Fossil Fuel Assets - which calculates that global economic exposure to fossil fuel asset stranding risk amounts to $2.28trn (£1.77trn) by 2040, with the UK facing risks totalling $141bn.
Stranded fossil fuel asset risk refers to the risk that oil, gas, and coal assets and associated infrastructure fail to deliver projected returns and become economically unviable before the end of their expected operational lifetimes. Some analysts and investors have repeatedly warned trillions of dollars-worth of fossil fuel assets are at risk of stranding, as climate policies and the accelerated roll out of clean technologies such as renewables, electric vehicles, and heat pumps will destroy projected demand for coal, oil, and gas.
Many leading fossil fuel companies are continuing to invest in new assets that are based on projections for future demand that are out of step with both the scenarios required to deliver on global climate goals and projected demand for clean technologies from the International Energy Agency (IEA) and others.
The report shows that global fossil fuel stranding risk has almost doubled from $1.4trn to $2.28trn over the last five years, as energy giants and investors have continued to pump money into projects that are incompatible with global climate goals.
Today's report calculates the UK is storing up fossil fuel stranded asset risks totalling around £2,595 per working adult, while around £15.2bn of UK pension fund assets could be at risk of stranding by 2040.
It also warns that the UK financial system is disproportionately exposed to stranding, risk, with the country ranked ninth globally for losses per capita and more exposed than the US, Italy, and France.
"With asset stranding presenting a material risk to the long-term health of the UK economy, including the retirement savings of millions of people, it is clear that a carefully controlled transition away from fossil fuels is both an environmental and a financial imperative," said UKSIF chief executive James Alexander. "Too many oil and gas companies are betting on demand that will not materialise in a decarbonising world, and the public are at risk of paying the bill."
The study assesses projected fossil fuel production through to 2040 and projected demand based on current green transition policies, mid-term action plans to cut emissions, and long-term net zero targets.
It calculates that soaring demand for clean technologies will mean global economic exposure to fossil fuel asset stranding risk will amount to $2.28tr by 2040 - of which the UK's exposure is calculated at $141 billion.
It also warns that in comparison to the cost of climate inaction, this is still "a much smaller loss to bear", noting that under a warming scenario of between 2.5C and 2.9C this century, climate-intensified natural disasters are estimated to lead to $12.5tr in economic losses by 2050.
Significantly, the report highlights how even under a ‘laggard' scenario where governments fail to deliver the pace of decarbonisation required to meet climate goals set under the Paris Agreement the global economy would still face significant fossil fuel stranded asset risks. It warns that even under scenarios where the world remains on track for between 2.5C and 2.9C of warming, growing demand for clean technologies mean demand for fossil fuels is unlikely to keep pace with investors' expectations, leading to stranded asset risk.
The report also details how stranded fossil fuel assets could trigger systemic risk across the financial system, warning of a scenario where "the contagion potential of stranded asset risk within the UK financial system, with corporate, government and investment fund exposure ultimately threatens severe implications for individual savers across the country".
The UK's position as a major international financial hub also increases its exposure to stranded asset risks. "Accounting for around two per cent of global GDP, the UK holds one per cent of global stranding risk where only the physical fossil fuel resources and capital infrastructure are accounted for," the report states. "However, the UK's ultimate ownership of risk increases to six per cent of total global losses at the individual and government level - which considers shareholders or outright owners of companies and investors in funds, including pension funds."
The report calls on investors and policymakers to take urgent steps to address fossil fuel stranded asset risks, arguing the only way to minimise such risks is to bolster investment in growth industries that support the clean energy transition, develop effective industrial decarbonisation strategies, and require companies and investors to develop credible transition plans.
It also calls on asset owners and managers to enhance engagement with corporates and policymakers to ensure they are aware of and responding to stranded asset risks.
"The surest way to offset the risk of losses posed by stranded assets is to invest in industries that will thrive as fossil fuels decline," said Alexander. "The UK government must demonstrate global climate leadership by implementing ambitious decarbonisation policies and fostering investment in the growth industries of the future, like renewable energy. Together, the coordinated efforts of investors and policymakers can meaningfully mitigate stranded asset risk while also ensuring that the UK plays a leading role in the global green transition."
TREX co-chief executive Willemijn Verdegaal warned stranded assets "have the potential to cause significant disruption to the global financial system, and the UK faces particularly severe exposure".
"The risk of oil and gas companies' misalignment with global demand projections is not properly understood or priced in," he added. "At TREX, we are seeking to better inform professional investors on the ways in which this risk proliferates through complex ownership networks, even to ultimate owners. The sooner investor expectations realign with demand projections, the better for their risk exposure."
The Open University senior lecturer in earth systems science Dr Phil Holden said the global clean energy boom meant fossil fuel companies were now facing both environmental and financial risks.
"The scientific community has long warned that fossil fuels must be rapidly phased out to avoid the most drastic impacts of climate change," he said. "But the accelerating transition, powered by increasing economic advantages of renewables, is creating a new urgency - to rapidly divest from exposure to fossil fuels. This report finds that global fossil fuel stranding risk has almost doubled from $1.4tr to $2.28tr over the last five years. This problem is becoming worse by the week.
"Oil and gas exploration may appear attractive in the short run, but the longer extraction remains misaligned with the global decarbonisation trajectory, the more dramatic the economic realignment needed."
The report comes just a day after the UK government launched a consultation on its North Sea Transition Plan, which reiterated its commitment to not issuing new oil and gas drilling licenses in the UK. However, the plan leaves the door open for fossil fuel projects that have previously been granted licenses to proceed, sparking warnings from campaigners and some investors that the UK could further exacerbate the fossil fuel stranded asset risks it faces.
