Home / ESG / Don’t get ‘stranded’ with fossil fuel stocks as transition gains pace: Australian Ethical

As Australia's energy transition ramps up, spurred by a greater government commitment, the ethical investment manager says investors risk getting saddled with "stranded assets" if they don't limit their exposure to fossil fuels.

The latest budget is set to accelerate Australia’s transition from fossil fuels by throwing greater federal weight behind it, according to Australian Ethical, which warns that investors in traditional energy companies risk being saddled with stranded assets – and many don’t even know they’re exposed.

The ethical investment manager points to two budget measures that would establish a new Net Zero Authority and make changes to the Petroleum Resource Rent Tax as supporting a speedier transition, which will likely shorten the lifespans of fossil fuel projects and hurt their long-term value. That makes it especially important for investors seeking to avoid these stranded assets and protect their portfolios against transition risk to know exactly what’s in their portfolios.

The government’s proposed Net Zero Authority, meant to help communities, industries and workers in mining regions transition away from fossil fuel-related employment, will “be essential for Australia’s net-zero transformation,” says Ludovic Theau, Australian Ethical’s chief investment officer. The changes to the Petroleum Resource Rent Tax will taper off concessions to fossil fuel industries, although Theau notes that the government currently has 26 proposals awaiting approval for new or expanded coal mines.

“What we believe can be reasonably inferred from these announcements is clear: the government is serious about decarbonisation and willing to use legislative and regulatory measures to achieve it,” he says. “We believe the government will move to resolve the apparent inconsistency between new fossil fuel projects in the pipeline and its other moves towards net zero over time.”

Buyer beware

All of this is likely to have major implications for fossil fuel companies, especially as many experts are now recommending divestment from fossil fuels as part of a broader strategy to address climate change, Theau says. “That might have a significant impact on investors, leaving them with resource equities that become stranded assets in their portfolios.”

And many Australians are invested in fossil fuel companies through their superannuation without being aware of it, he warns.

“Now, more than ever, we believe investors should… consider the potential investment risks associated with investing in fossil fuel companies, including the possibility of stranded assets.”

There are ways to avoid investing in companies that might end up with stranded assets, Theau says, beginning with diversification. “By switching the asset allocation in your funds, you may be able to reduce your exposure to any one particular asset or sector that may become stranded.”

Superannuation customers should note, though, that unless they specifically choose a low-carbon fund, they may have exposure to fossil fuel companies through funds benchmarked to key S&P/ASX indices unless the fund states otherwise, Theau says.

“You could also consider switching to a low-carbon ethical or responsible investment fund that screens out most fossil fuel companies and focus on investing in more future-oriented companies in sectors like health, technology and renewables, which we believe are less likely to become stranded as society – and governments globally – move towards net-zero targets.”

This story was first published on our sister site, The Inside Investor.