From Stranded Assets to Assets-at-Risk: Reframing the narrative for European private financial institutions
Chaudhary Natasha  1@  
1 : Institute for Climate Economics
Institute for Climate Economics

Private financial institutions must rethink their approach to managing stranded asset risks. The current narrative on quantifying fossil fuel sector exposures within a limited scope of financial portfolios (mostly loans) largely underestimates potential stranding losses. As the low-carbon transition impacts all economic sectors, private financial institutions (FIs) must consider material transition-driven stranding risks within their overall transition risk management framework using a ‘whole of economy' lens. Traditional risk management approaches are ill-suited to the methodological and quantification challenges of transition-driven stranding risks, so a flexible, dynamic, forward-looking approach is necessary. Strong, incentivising public policy coordinated with financial regulatory and supervisory impetus is necessary to preemptively identify, monitor and manage stranding losses on ‘assets-at-risk' (i.e., potential stranded assets). The European Central Bank (ECB) finds that 40% of the total loan portfolio of euro area banks is exposed to energy-intensive sectors 1 , making them vulnerable to transition risks, including stranding. It is time for an urgent reframing of the stranded asset narrative to avoid significant financial losses (endangering financial stability) and direct orderly transition finance flows to retire or transform assetsat-risk before they become fully stranded.


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