Accounting for Sustainability: Stranded Assets
The fifth article in the Accounting for Sustainability series
Introduction
The emergence of climate-related stranded assets highlights the growing intersection between environmental challenges and financial accounting.
Impaired assets are a well-established accounting concept, referring to assets whose economic value falls below their recorded value on a company’s balance sheet. Stranded assets are a specific type of impaired assets which lose economic value before the end of their expected lifetime, driven by external factors such as climate change and changes in their cost structure (e.g. CO2 emission fees), physical damage (e.g. flooding) or regulatory changes (e.g. transition to a net-zero economy).
A company’s exposure to stranded assets depends on the sector and the regions in which it operates. Regional analysis shows that more stringent environmental policy regimes, such as in the EU, put greater pressure on companies to transition but regions with lower policy stringency and high technological lock-in, such as Australia, may face more disruptive asset value adjustments later. Chemical companies, oil refineries, carbon-intensive steel and power technologies face the highest stranded-asset risks in a low carbon economy, while sectors with mature low-carbon alternatives are less exposed and enjoy better transition options.
In addition, industrial stranding poses a significant economic risk in specific regions. Germany, Japan, and parts of Canada’s economy depend heavily on clusters of pollution-intensive industries. If these industries are forced to transition or close, the local job market could be significantly affected.1
This article addresses the critical challenge of stranded assets in the transition to a low-carbon world. It explores how resilient decarbonisation pathways can mitigate the physical and transition risks and proposes best practices for reporting on stranded assets transparently.
Industrial decarbonisation and stranded assets
Stranded assets are a major concern for companies navigating the transition to a low carbon economy and for those with high vulnerability to physical climate risks. Climate risk disclosure frameworks, including the Task Force on Climate-related Financial Disclosures (TCFD), require companies to disclose assets or business activities vulnerable to transition and physical risks so that stakeholders can assess potential asset impairments, effects on valuations, and changes in product or service demand2.
Understanding climate-driven stranded assets and building resilience
Multiple environmental, economic and technological events might trigger asset stranding. New regulations on carbon pricing and pollution controls impose increased compliance costs, while the lower costs of solar and wind energy make carbon-intensive assets less competitive.
Evolving social norms, reflected in divestment campaigns, reduce investors’ appetite for high emission assets. Additionally, companies face growing litigation risks as courts increasingly hold companies accountable for climate-related financial risks3, exposing them to legal obligations for inadequate climate risk management and disclosure.
Climate risks manifest across sectors in tangible ways. As governments worldwide commit to net zero by 2050, carbon-intensive assets such as fossil fuel reserves and coal-fired power plants face the risk of becoming obsolete or uneconomical. Agriculture and forestry face yield reduction and land degradation from shifting weather patterns; this leaves unproductive land stranded and provokes rural displacement. Tourism infrastructure can be made obsolete by climate-driven change – for example, Alpine ski resorts closing due to insufficient snow cover, and coral reefs bleached by elevated sea temperatures.
Asset stranding is accelerating as environmental degradation, technological disruption, and regulatory tightening render carbon-intensive assets economically unviable. Companies that fail to anticipate and disclose these risks face material financial exposure, reputational damage, and stakeholder loss of confidence. Transparent climate risk disclosure and proactive transition planning are therefore essential to remain resilient.
To effectively mitigate these risks companies must therefore integrate climate considerations into their strategic and operational planning. This involves assessing the vulnerability of assets to regulatory, market, and technological changes, and diversifying investments away from high-carbon assets toward sustainable alternatives, investing in clean technologies, and enhancing energy efficiency. Robust scenario analysis and stress testing help to identify vulnerabilities under different climate policy conditions. Furthermore, transparent reporting and stakeholder engagement on climate risks and transition plans build trust and support long-term resilience. By aligning business models with evolving regulatory frameworks and societal expectations, companies can reduce the likelihood of stranded assets and position themselves competitively in a low-carbon economy.
Accounting for stranded assets
Disclosure of the amount or extent of a company’s assets or activities vulnerable to climate-related risks is advisable and required by law in many jurisdictions. It allows intended users of the financial statement to better understand potential financial vulnerabilities from climate-related events such as asset impairments or stranding of assets, changes to the carrying amount of assets, and changes in liability and equity due to increases or decreases in assets and the costs of business interruptions.4
Stay tuned
Environmental regulations may lead to premature reduction in use of certain production lines and equipment due to for example emissions caps. This can undermine the economic viability of the asset because of ongoing maintenance costs without matching revenue recognition. The sixth article in the Accounting for Sustainability series will explore the accounting considerations that arise from pollution.
