Stranded assets of the future: The impact of pricing negative environmental externalities on the profitability of Dutch economic sectors

Abstract

Environment-related risks are often poorly understood, regularly mispriced and can ultimately lead to the stranding of assets. This knowledge gap has already resulted in significant over-exposure to environmentally unsustainable assets throughout economic and financial systems. The emerging risks related to the environment represent a large discontinuity and should be compensated for by altering and reassessing values across a wide range of sectors. There is thus a need for new government regulations to counter them, but these government regulations can also itself be a driver of stranded assets. Therefore, this research conducted a scenario analysis into the implementation of monetarily pricing the respective output of externalities for all economic sectors of the Netherlands, followed by what kind of impact this will have on the profitability of these sectors. Monetarily quantifying the global supply-chain of the Dutch economy lead to the conclusion that this impact would be substantial, with large sectorial deviations. Some sectors will feel limited effects of such a regulation, while other will struggle to survive, possibly generating stranded assets along the way, making the sectors very susceptible to these future regulations. It is found that especially the electricity, gas and steam producing sector and the water supply, sewerage and waste processing sector would become sectors with a high percentage of total losses. It is also found that current economy of the Netherlands is unsustainable, creating physical environmental risks within many economic sectors. The research thus suggests that constructing a political climate that incentivizes companies to change towards more sustainable business practices is needed, and more research should be done into looking how this can be made practice in the future.