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Shining Light on The Risks of Stranded Assets

A new report from  Climate Advisers and Orbitas, a Climate Advisers initiative that explores the risks climate transitions pose for financiers, reveals how German financial institutions’ investments in supply chains connected to deforestation can create financial and reputational risks for investors. Here we connect these findings with some of the findings of our Lucida research to highlight the risks of “stranded assets.” 

Readers will perhaps be familiar with talk of stranded assets in connection with oil and gas companies, where the issue is that, as the world ramps up its response to climate change, it may no longer be profitable for companies to develop some of their reserves. When this happens, these reserves become “stranded.” The same thing is possible in the agricultural sector, but the assets in question are landholdings rather than reserves. Landholdings can become stranded when legal restrictions on deforestation or plantation development, or carbon pricing makes clearing land economically infeasible. The report  reveals that there is a real risk of asset stranding for  several large Indonesian palm oil companies. As in the oil and gas sector, stranded land assets can lead to losses for companies and investors.

Orbitas found that German institutions’ holdings in these companies are relatively small, meaning that any losses they suffer as a result of land-sector asset stranding are unlikely to be significant.

Nevertheless, two further points are worth adding to this analysis.

First, even when their holdings are small, investments in some of these companies can carry significant reputational risks for financiers, as Lucida research makes clear.

Consider, for example, Wilmar. In 2013, Wilmar became the first company in the industry to pledge to end deforestation in its supply chains. However, as Lucida research has shown, Wilmar is among the palm oil companies with the most RSPO allegations. In April of 2020, the company attracted media attention and drew criticism from advocates when it quit the steering group of the High Carbon Stock Approach (HCSA), an initiative that aims to help agribusiness identify high-carbon forest areas for protection. More recently, in December, it was accused of sourcing palm oil from high carbon stock and high conservation value areas in Papua. (Wilmar disputes the allegations.) 

Or again, consider Golden Agri Resources (GAR), the parent company of Sinar Mas. Sentinel satellite imagery obtained by Lucida’s partner show that in 2019 there were fires on a concession held by PT Agrolestari Mandiri, a GAR subsidiary, as shown below.

Starting Fire Spot Within the Concession Area (First week of September, 2019)

Smoke Begins to Appear In Concession Area (Second Week of September, 2019) 

Burn Area Inside The Concession (third week of September 2019)

Former Burn and Smoke Area In Concession (first week of October, 2019)

Former Burn Area In Concession (second week of November, 2019)

Even when their investments in companies like these are small, financiers can suffer reputational harm on account of events like these. For instance, in its coverage of a corruption scandal involving GAR subsidiaries, US NGO Friends of the Earth targeted some of GAR’s financiers, including Blackrock, Northern Trust, and Dimensional.

Second, some non-German investors and financial institutions have much larger exposure to these institutions.

These financiers are open not just to reputational risks but also to more direct losses due to asset stranding.

Financiers have already begun to take steps to reduce funding for deforestation. For instance, BNP Paribas recently announced that it “will not finance customers producing or buying beef or soybeans from land cleared or converted after 2008 in the Amazon.” However, as both the report and the figures above show, many financiers remain exposed to deforestation risk. Financiers would do well to take steps to mitigate those risks, beginning with the recommendations included in the report.

Josh McBee
Josh McBee is a Senior Policy and Research Associate at Climate Advisers, where he assists the Policy and Research team on international climate policy, diplomacy projects, domestic U.S. energy/environmental policy, and financial flows of deforestation.
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