UK pension funds are potentially heading for a £15.2bn (€18bn) loss caused by stranded fossil fuel assets by 2040, according to a new report.
The report, published by the UK Sustainable Investment and Finance association (UKSIF) and Transition Risk Exeter (TREX) – Stranding: Modelling the UK’s exposure to at-risk fossil fuel assets – found that of the approximately £88bn in fossil fuel assets held by UK pension funds, around £15.2bn, or 17%, is at risk of stranding by 2040 if current policies and pledges are fulfilled.
As a proportion of the total £3trn UK pension pot, this amounts to a 0.5% stranding.
These stranded assets refer to fossil fuel reserves, along with associated infrastructure and investments, which lose economic viability before their expected operational lifetimes due to climate policies, technological changes, or shifting market conditions.
“Our pension fund members, as long-term investors, are leading the way in asset owner stewardship, but more remains to be done on systemic stewardship. Broader engagement with government, policymakers and regulators has emerged as a critical lever for pension funds to tackle the systemic risk posed by asset stranding,” said James Alexander, chief executive officer of UKSIF.
“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,” he said.
Alexander added: “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.”
Alexander has long urged for the UK government to enact clear policies to leverage the growth potential of low-carbon industries.
The report also found that the UK’s risk of fossil fuel stranding losses per capita puts it in 9th position globally, coming above the US, Italy, and France.
As such, the report estimates that the UK economy is facing a possible £113bn loss by 2040.
“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. 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,” Alexander added.
Willemijn Verdegaal, co-CEO at TREX, said: “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.”
Among several recommendations, the paper calls for a clear regulatory framework to support sustainable finance and transition finance, including robust transition planning.
One of the essential components of an orderly transition will be a clear and credible regulatory framework to support sustainable finance and transition finance, the paper stated.
This includes requirements for all large financial and non-financial companies to disclose – and subsequently implement through best efforts – climate-related transition plans in line with the framework set out by the Transition Plan Taskforce, alongside other measures UKSIF recommended in its response to the independent Transition Finance Market Review (TFMR).
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