An investment analyst assesses climate-related stranded asset risk for a portfolio of energy companies. The analyst develops a list of companies potentially exhibiting stranded asset risk. After a more granular examination, the analyst summarizes corporate activity in the following table:
The analyst identifies the company with the highest stranded asset exposure for possible divestment. Which company does the analyst recommend for divestment?
The company likely recommended for divestment is the Hydroelectric company. This company has shut down dam operations before the end of its useful life due to sustained droughts throughout a river basin, indicating a high level of stranded asset exposure. This demonstrates a substantial impact due to climate-related risks that have already materialized, making the assets effectively stranded.
Be careful on these questions, they shift the answers from time to time. I originally picked 'Oil and Gas' during my 1st attempt for a mock exam practice and they had the answer as Hydroelectric. Very misleading. My advice is take it with a pinch of salt and keep reading the context instead.
In my opinion C is the correct answer as for Oil and Gas the asset has now reduced value and surely carries the risk of stranded asset but Hydroelectric company asset has already become stranded due to Drought in the river basin and shutting down of dam operations.
I agree with the chosen answer i.e. B: (6.3.2. pg 124) The oil & gas sector is a good example of a sector that has been hit by the stranded asset transmission channel. His-torically, much of the value of such firms has been in their reserves and the expectation of their consistent or grow-ing revenues. The fact that many of these firms’ assets may become stranded and that oil demand is expected to fall means that these firms may become less creditworthy than they would in the absence of climate change.
C is an actual stranded asset. B is not.
C -More "stranded" that any other. Why invest in a "dead company"?
Declining oil reserves is little to do with climate related risks.
Believe answer is D, before useful life and written down due to climate hazard (physical). It doesn't say the asset is already stranded. Oil and gas assets at end of oil reserves means it IS at end of useful life, since it doesn't say that these are reserves that have become economically unfeasible due to market, regulatory, or other transition risks. For the technology company, it doesn't say the investments have been made, and for the first, it says nothing about cost curves for the current technology changing that would lead to stranding.
There is ambiguity in the answers. To opine on which strategy leads to the the highest stranded asset exposure the answers should have been accompanied by numbers. In C the asset has already gone stranded so this is the most probable answer compared to others.
The oil and gas example states that the write down is due to decline in the oil reserves, which is different from write down due to regulatory or policy reasons.
Poorly phrased answer. I suspect they meant write-off on oil reserves due to legal / reg changes (Transition risk materialized)
C should also be correct. Sustained draughts due to climate change = chronic physical risk = qualifies for stranding assets. Premature shut down = write off.