On the exposure of capital markets to energy transition risks: unburnable carbon and environment-related stranded assets

This thesis focuses on assets that may lose their economic value in response to climate and environmental concerns, termed “environment-related stranded assets”. It begins with a systematic review of research on the environment-related stranded assets. After studying the origin and development of the field, it finds a disconnect between value destruction and value creation aspects of the energy transition which calls for further advanced empirical studies in the field. In this direction, the second analysis deploys a forward-looking method to extract the stock investors’ view of how collective climate action may impact the value of fossil fuel shares. The recovered market estimates show that investors believe in a modest decrease in the price of fossil fuel shares at 4% on average, limited to a maximum loss of USD 100 billion, which is smaller than widely expected. The third analysis further investigates this new finding and studies the investors’ perception of the impact of transition risks. It first finds that proven oil & gas reserves of the publicly traded companies account for only 5 percent of the global economically recoverable reserves. It then uses the obtained reserves quantities and conducts a value relevance analysis revealing that the positive value effect of reserves on the valuation of companies has decreased as climate concerns and carbon risks have increased over the past few years suggesting that the investors have considered transition risks in their valuations.