Around a fifth (17 per cent) or £15.2bn of the approximately £88bn in fossil fuel assets held by UK pension funds are at risk of being stranded by 2040 if current policies and pledges are fulfilled, according to research from the UK Sustainable Investment and Finance Association (UKSIF).

The report, produced in collaboration with Transition Risk Exeter (TREX), looked at financial ownership of fossil fuel assets and how much financial risk they face if these assets become stranded.

This revealed that this loss would be equal to 0.5 per cent of the UK’s total of £3trn in pensions, although it represents 13 per cent of the country’s projected £113bn economic loss from stranded assets.

Given this, UKSIF and TREX warned that UK pension funds are particularly exposed to asset stranding risk, with some funds invested directly in fossil fuels and others exposed to the contagion of risk through knock-on impacts associated with stranding.

The UK more broadly also faces a disproportionately high exposure to stranded asset risk, relative to the country’s global GDP share and population size, according to the research.

Indeed, the research showed that, the UK is the fourth most exposed country to stranded asset risk for ultimate owners after the United States, Russia, and China.

Given as a proportion of the population, the UK is the ninth most exposed country globally – more exposed than both the United States and China – and the second most exposed country in the Organisation for Economic Co-operation and Development, after Norway.

This means that projected losses felt by individual savers – either as devaluation of savings or as distributed impacts on the UK economy – will be more severe per person than in other countries with less exposure.

Indeed, the analysis showed that, with the UK’s total stranded asset risk exposure calculated at £113bn by 2040, this equals to £2,595 per working adult.

To mitigate the risk of stranded assets while ensuring a controlled transition away from fossil fuels, UKSIF highlighted four areas where asset managers, asset owners, and policymakers need to collaborate.

The first area of collaboration is focused on attracting international investment, as the report suggested that the steps taken by policymakers, especially in tackling systemic barriers to investment, will play a crucial role in determining how much of the growing global transition investment the UK can leverage for its own benefit.

Another suggestion UKSIF made was for asset managers, asset owners, and policymakers to collaborate on long-term sector decarbonisation strategies, which it said can provide investors with clarity and allow the government to offer targeted support for industry segments in which the UK can excel.

In addition to this, the association stressed the importance of mandatory transition plans, suggesting that a clear and credible regulatory framework to support sustainable and transition finance would be “critical” for an orderly green transition.

The association also said asset managers, asset owners, and policymakers must collaborate on investment stewardship.

In particular, it suggested asset owners and managers should enhance not only their corporate engagement but also their engagement with wider actors, including governments, regulators, and international standard-setting bodies.

UKSIF said this could help create a more supportive policy environment for achieving net-zero goals.

It also said it thinks that, as detailed in its response to the Financial Reporting Council’s recent UK Stewardship Code consultation, maintaining a "robust" definition of stewardship and high-quality reporting requirements is critical to the long-term effectiveness of UK stewardship practices.

Commenting on the report, UKSIF chief executive, James Alexander, said: “With asset stranding presenting a material risk to the long-term health of the UK economy, including the retirement savings of millions of people, it is clear that a carefully controlled transition away from fossil fuels is both an environmental and a financial imperative.

“Too many oil and gas companies are betting on demand that will not materialise in a decarbonising world, and the public are at risk of paying the bill.

“The surest way to offset the risk of losses posed by stranded assets is to invest in industries that will thrive as fossil fuels decline.”

He emphasised that the UK government “must” demonstrate global climate leadership by implementing “ambitious” decarbonisation policies and fostering investment in the growth industries of the future, such as renewable energy.

“Together, the coordinated efforts of investors and policymakers can meaningfully mitigate stranded asset risk while also ensuring that the UK plays a leading role in the global green transition,” he said.

Adding to this, TREX CEO, Willemijn Verdegaal, commented: “Stranded assets have the potential to cause significant disruption to the global financial system, and the UK faces particularly severe exposure.

“The risk of oil and gas companies’ misalignment with global demand projections is not properly understood or priced in.

“The sooner investor expectations realign with demand projections, the better for their risk exposure.”

An asset becoming ‘stranded’ refers to fossil fuel reserves, infrastructure, and investments that lose their economic viability before the end of their expected operational life due to the global transition towards net zero.

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