Stranded Pension Schemes

For many years, one of the key barriers for trustees when considering ESG issues, particularly in relation to environmental concerns, has been the counter argument that financial considerations should outweigh environmental considerations. This issue is exacerbated by the dominance of oil, gas and mining stocks in the FTSE100 – if you are tracking any index then it is extremely difficult to avoid these stocks.

However, the news this morning that BP is writing down $17.5bn of assets to recognise that, post-COVID-19, there will be an accelerated move to a lower carbon economy surely calls into question the financial rationale for continuing to invest in fossil fuels.  Essentially, $17.5bn of shareholder value has been destroyed overnight as a result of a belated admission that the assets on the balance sheet are not worth as much as everyone believed. These assets are often known as “stranded assets”, reflecting the fact that they become stranded when the cost, or reputational damage, of extraction is higher than the value of the end product.

Research conservatively suggests that between $1tn and $4tn of value will be written down as a result of economies transitioning to lower carbon technologies, with some estimates suggesting a value of up to $25tn.

While we can only speculate on the pace of transition, and how the market will price this into share valuations, there is a clear trend that trustees cannot ignore. The combined impact of:

• the Paris Accord;
• the rapidly falling cost of alternative energy sources; and
• litigation from shareholder groups who feel misled

means that we will see more write-downs of this nature in the future. Trustees of both DB and DC schemes should be asking challenging questions of their investment managers and how they are managing their exposure to stranded asset risk.

For DC schemes in particular, trustees should be talking to members about these issues and being far more transparent about how members’ funds are being used. The recent launch of the “Make My Money Matter” campaign, will only increase focus on the ethical issues associated with pensions scheme investment.

As trustees, we are responsible for over £1tn of our members’ money and it is incumbent on all of us to look to the future and make we are proactively managing our exposure to such a material risk.