UK Pension Funds Face £15.2bn Stranded Asset Risk Amid Global Shift to Net Zero

As the world accelerates its transition to net-zero emissions, UK pension funds are facing a significant financial risk. According to research from the UK Sustainable Investment and Finance Association (UKSIF) and Transition Risk Exeter (TREX), approximately £15.2bn—or 17%—of the £88bn in fossil fuel assets held by UK pension funds could become stranded by 2040 if current policies and climate pledges are upheld.

Stranded Assets Pose a Major Threat to UK Pension Funds

The report highlights that this potential loss equates to 0.5% of the UK’s total £3trn pension market, yet it represents a staggering 13% of the country’s anticipated £113bn economic loss from stranded assets. This underscores the vulnerability of UK pension funds, which not only invest directly in fossil fuels but are also at risk due to the broader financial contagion linked to asset stranding.

UK’s High Exposure to Stranded Asset Risk

The UK is disproportionately exposed to stranded asset risk compared to its global GDP share and population size. The research ranks the UK as the fourth most exposed country, trailing only the United States, Russia, and China. When measured per capita, the UK ranks ninth globally, surpassing both the US and China in stranded asset exposure. Within the Organisation for Economic Co-operation and Development (OECD), the UK holds the second-highest exposure after Norway.

With the UK’s total stranded asset exposure projected at £113bn by 2040, this equates to an estimated financial impact of £2,595 per working adult. The report warns that this could lead to substantial pension devaluations and broader economic consequences for individual savers.

Four Key Strategies to Mitigate Stranded Asset Risk

To address the financial risks associated with stranded assets and ensure a controlled transition away from fossil fuels, UKSIF and TREX recommend four key areas of collaboration between asset managers, asset owners, and policymakers:

1. Attracting International Investment – Policymakers must take decisive action to remove systemic barriers to investment, enabling the UK to capitalize on the rising global transition finance market.
2. Developing Long-Term Decarbonisation Strategies – The creation of clear sector-specific roadmaps will provide investors with confidence and allow the government to direct support toward industries where the UK can excel.
3. Mandating Transition Plans – A well-defined regulatory framework for sustainable and transition finance is essential to ensuring a stable and effective green transition.
4. Enhancing Investment Stewardship – Asset managers and owners should strengthen engagement with corporations, regulators, and international bodies to foster policies that support net-zero objectives.

UK Must Lead in Global Decarbonisation Efforts

UKSIF Chief Executive James Alexander emphasized the urgency of addressing asset stranding risks, stating: “Stranded assets pose a serious threat to the long-term stability of the UK economy and the pension savings of millions. A well-planned transition away from fossil fuels is both a financial and environmental necessity.”

He warned that many oil and gas companies are overestimating future demand, which could lead to significant losses for investors. “The best way to hedge against these risks is to invest in industries that will thrive as fossil fuels decline,” he added. Alexander urged the UK government to adopt ambitious decarbonisation policies and drive investment into future-proof sectors such as renewable energy.

Global Financial Stability at Risk

TREX CEO Willemijn Verdegaal echoed these concerns, highlighting that the misalignment of oil and gas companies with global demand forecasts is not yet fully reflected in financial markets. “The sooner investors adjust their expectations to align with future energy demand trends, the better positioned they will be to mitigate risk,” she said.

With the UK’s financial sector facing a pivotal moment, proactive measures are crucial to safeguarding pension assets and ensuring economic resilience in the global shift toward sustainability.