Climate Risk and Stranded Assets

Climate change creates two categories of financial risk. Physical risk arises from the direct impacts of a changing climate, more frequent floods, heat stress, sea level rise, cyclones, which can damage assets, disrupt supply chains, and reduce productivity. Transition risk arises from the policy, technology, and market changes required to move to a low-carbon economy, carbon taxes, stranded assets, shifts in consumer demand.

A stranded asset is one that suffers an unanticipated write-down or early retirement due to external changes, typically policy changes, technological disruption, or shifts in market demand. In the climate context, coal mines, thermal power plants, and oil & gas reserves face stranding risk if the global economy transitions away from fossil fuels faster than current production plans assume.

For India, with its significant dependence on coal for power generation and a large fossil fuel-related industrial base, climate transition risk is a major financial and policy challenge. Simultaneously, India's renewable energy ambitions (500 GW by 2030) create opportunities for investors and companies.

TCFD risk categories:

Physical risks:

• Acute: Event-driven, extreme weather (floods, cyclones, droughts). Indian coastal assets exposed to cyclone intensification; agricultural supply chains exposed to monsoon variability
• Chronic: Long-term shifts, rising mean temperatures, sea level rise. Infrastructure in coastal cities (Mumbai, Chennai) faces long-run chronic risk

Transition risks:

• Policy: Carbon taxes, renewable portfolio standards, clean fuel standards
• Legal: Litigation against high-emitters; directors' liability for climate disclosure failure
• Technology: Cheaper solar/wind displacing thermal power; EV adoption reducing petrol demand
• Market: Shifting customer and investor preferences away from high-carbon products
• Reputation: Activist pressure, social licence to operate

Stranded asset analysis:

1. Identify asset's remaining productive life under business-as-usual
2. Model carbon price and policy scenarios (IEA Net Zero by 2050, IEA Stated Policies Scenario)
3. Calculate break-even carbon price at which asset becomes uneconomic
4. Assess probability and timing of scenario materialisation
5. Quantify potential impairment vs book value

India-specific: 56 GW of thermal coal power plants were built between 2010 and 2020. Under aggressive transition scenarios, plants built after 2015 with expected life of 30–40 years may face early retirement, representing potential balance sheet impairment for utilities and lenders.