Stranded assets - divestment or engagement?

The global transition towards net zero will fundamentally change the dynamics of the world’s largest companies. Responsible investing strategies have created enormous shareholder pressure which is forcing markets and corporates to concentrate on those investments that may have a place in a carbon neutral world, and jettison assets which don’t fit that model (often referred to as “stranded assets”).

An FT article last week highlights the example of Anglo American. It owned South African thermal coal mines which are expected to close within a decade. Rather than running these projects down, it transferred them into a new company which was listed last week.

Divestments along these lines can have broader impact, including potentially in the following ways:

• As blue chip companies segregate and sell off their most polluting assets, responsible investors may find themselves better placed to diversify their portfolios to include major conglomerates in sectors such as mining which have historically been associated with poorer ESG outcomes. The mining of lithium, copper and other metals will be integral to progress toward a low carbon economy and it will be easier for responsible investors to justify investments in the sector and to put themselves in a position to influence best practices from a wider ESG perspective (for example on labour and indigenous rights and biodiversity impacts).
• The process of selling off polluting assets should be studied carefully. The FT pointed out that clean-up costs could arguably be greater, leading to concerns about who might bear those costs.
• New owners of divested assets may not be subject to the same pressure from regulators and responsible investors. An unintended result could be that the lifetimes of these polluting assets are extended. Careful consideration needs to be given on a case-by-case basis to ensure that selling off polluting assets does not result in greater long term environmental damage, at least until co-ordinated global regulatory and policy changes provide a safer framework.

As seen in the recent success of activist shareholders’ power to bring about strategic changes - see for example the discussion of board level changes at Exxon Mobil – engagement therefore remains an important tool alongside the threat of (or actual) divestment for investors who want their capital to contribute towards a sustainable future. But as the article points out, more radical modes of engagement may be needed for those assets that require responsible stewardship which accounts for the interests of all stakeholders (especially workers). For investors holding a fiduciary position, it will be particularly important to demonstrate which approach is being taken and to what intended ends.