“The market can stay irrational longer than you can stay solvent.” John Maynard Keynes
Summary: We often read about transition risk and stranded assets, but what does this really mean, and how does it get reflected in the financial statements and value of companies? The short answer is - often much more slowly than you may think. And Thames Water illustrates this rather neatly.
Why this is important: Transition risk and the threat of stranded assets are often talked about as reasons why investors should 'avoid' certain assets or companies. But, if the impact on profits and share prices is slow, their effectiveness as a sustainability finance tool is much reduced.
The big theme: We know we need to mobilise vast amounts of private sector finance if the sustainability transitions are going to happen. One apparent lever is the risk that the transitions will lead to stranded assets, potentially leading to financial loss.
Summary of a story published in The FT:
The FT reported last week that shares in the French food retailer Casino fell as much as 37% after the company announced that they were planning to undertake a debt for equity swap. The plan is to convert up to E1.5bn of secured debt into equity, a move that would massively dilute shareholders. This comes on top of the E3.6bn of unsecured debt the company had already announced would be swapped for equity. As a result of the restructuring the previous parent company Rallye would no longer control Casino. The rating agency Moody's downgraded Casino debt in May last year, citing "weak liquidity and an unsustainable capital structure".