New research warns that UK pension funds are exposed to up to $19 billion in potential losses by 2040 due to stranded assets, as the country’s economy faces a projected $141 billion hit from these risks. Stranded assets are investments that lose economic value prematurely, often as a result of changes in regulation, market demand, or technological shifts. This particular risk is tied to fossil fuel investments, which could become increasingly obsolete as global decarbonization efforts ramp up.
Key Findings
The report, produced by the UK Sustainable Investment and Finance Association (UKSIF) in collaboration with Transition Risk Exeter (TREX), shows that approximately £88 billion worth of fossil fuel assets are held by UK pension funds. Of this, £15.2 billion ($19 billion), or 17%, is at risk of being stranded by 2040, assuming current policies and commitments to decarbonization remain on track.
Despite representing just 0.5% of the total £3 trillion UK pension pot, the impact of these losses would account for 13% of the UK’s projected economic loss from stranded assets—around £113 billion ($141 billion).
Industry Reaction
James Alexander, CEO of UKSIF, emphasized the importance of shifting investments into sectors poised to benefit from the decline of fossil fuels, particularly renewables. “The surest way to offset the risk of stranded assets is to invest in industries that will thrive as fossil fuels decline,” Alexander said, calling for the UK government to lead the global transition by implementing stronger decarbonization policies.
Willemijn Verdegaal, co-CEO at TREX, expressed concern about the lack of corporate transition plans. “Stranded assets could cause significant disruption to the financial system, and the UK faces particular exposure,” she noted, stressing the need for investors to adjust their expectations to align with global demand projections for energy.
Government and Investor Response
In light of these findings, UKSIF has urged the government to support international investment in the energy transition and bolster industrial decarbonization efforts. The association also recommends that investors adopt climate-related transition plans in line with the Transition Plan Taskforce (TPT) framework and engage more actively with governments to create a policy environment conducive to net-zero goals.
The research follows the UK government’s recent decision not to issue further licenses for North Sea oil and gas exploration, a move that significantly impacts companies like Shell and BP, which had anticipated expanding production in the region.
Conclusion
As the global push for sustainability grows, UK pension funds face significant exposure to stranded assets. However, by shifting investments into future-focused industries and advocating for stronger climate policies, both investors and policymakers can mitigate the financial risks posed by fossil fuel investments.
Image by Gerd Altmann from Pixabay
