Protecting Against Stranded Assets Due To Water Risk

The Stranded Assets Programme at the University of Oxford describes stranded assets as those that have “suffered from unanticipated or premature write-downs, devaluations or conversion to liabilities,” usually due to external forces such as environmental issues, changes to the market, social or cultural expectations, or government regulations.

In recent years, much of the debate around stranded assets has revolved around fossil fuels. Reduced demand for coal, gas, and oil – and the pressure to keep carbon in the ground – means that it may be very difficult for these assets to produce returns and may even accrue negative value. As Bloomberg Green explains:

“Some companies are even abandoning investments, leaving deposits worth billions of dollars in the ground to languish…. Fund managers, banks, and regulators worry that project financing could sour and collateral become worthless.”

Because water stress is expected to increase around the world in the coming decade, assets that depend on water – including farmland and other agricultural investments – are also at risk. This article will explore the link between stranded assets and water stress and how GIS data can help investors protect against these impacts.

Stranded Assets and Water Stress

According to GreenBiz, a stranded asset is one that “that once had value or produced income but no longer does.” The first part of the definition is key: a stranded asset isn’t simply a bad investment, but one that lost its value over time. The factors that cause stranded assets are typically unanticipated or arrive sooner than expected.

That’s why the Stranded Assets Programme warns that, in agriculture, it’s important to understand “the speed at which these risks materialise … with fast-moving risks being harder to manage than slow-moving ones.” Assets such as land and water, as well as crops, animals, and infrastructure, can all be impacted by environmental risks.

Both physical drivers (including water scarcity and climate change) and economic drivers (“the greening of the supply chain,” “increased competition for water rights,” and “land use regulations”) can cause assets that previously had value to become liabilities as the economic landscape changes.

Natural assets such as farmland may be at heightened risk, as rising water prices and pumping restrictions mean that some farmers are forced to let their fields go fallow. Without access to water, land that was once an asset can become a liability that’s impossible to sell.

Impacts On Ag Lenders and Investors

In light of today’s water security issues, stranded assets are a growing concern for ag lenders and investors. If multiple assets share the same risk profile, a single extreme weather event or an extended drought can put an entire portfolio at risk, reducing the longevity and overall profitability of farm loans and investments.

In times of severe water stress, borrowers are more likely to default on their loans due to low crop yields or falling prices. Farmers may have no choice but to let some of their fields go fallow. This could lead to additional financial risk, since “stranded asset risk in one part of the supply chain will have implications for others.”

As the Stranded Assets Programme notes, “The agricultural sector is also characterised by a high level of investment synergies between different types of assets. For example, physical assets such as roads, electrification, and storage facilities are intimately linked with the value of investments in on-farm production.”

In some cases, stranded assets can incur negative costs, especially if infrastructure or storage capacity needs to be maintained. When oil prices dropped in 2020, companies had to “pay a buyer to take oil off their hands and store it” because of a lack of storage capacity. Similar booms and busts can hit the agricultural sector, as changing weather patterns drive growers to experiment with risky or unproven crops.

Using GIS To Protect Against Stranded Assets

All of these examples suggest that farm investments are inherently risky, but they don’t have to be. The Stranded Assets Programme notes that if investments in farmland can be “associated with new knowledge or improved management expertise,” and paired with “robust farmland value data,” many of these risks can be mitigated.

It recommends distinguishing between water rights that can be transferred separately from the land and those based on “prior use patterns.” This ensures that in the case of water scarcity, the rights associated with the land are “likely to be even more valuable, instead of simply something that will be taken away without compensation.”

Ag lenders and investors can also use GIS data to identify and monitor water risk, stay up-to-date on regional pumping restrictions, and diversify their portfolios. By relying on granular data, ag professionals can perform due diligence on a parcel-by-parcel basis, have a greater understanding of the real situation, and avoid investing in farmland that’s likely to become a stranded asset.

Knowing where a parcel of farmland gets water – from a well, river, water district, or a smart water market – can help investors identify real-time, on-the-ground water risks. Many key water sources may not be available for much longer, and a lack of reliable water resources can lead to reduced yields, loan defaults, and poor ROI.

Using geospatial data to perform a water risk assessment can be especially useful for getting lenders, borrowers, and other stakeholders on the same page. Because of its shareable, customizable, verifiable nature, it can serve as a “single source of truth” that makes it easier for affected parties to work together to identify and mitigate water risk.

Learn more about GIS in Agriculture in the AQUAOSO Guide.

The Bottom Line

Stranded assets have become an increasing concern for the agricultural sector. Farmland that’s no longer profitable – due to increased water stress, changing weather patterns, and other external impacts – can quickly become a liability.

Ag professionals can take steps to protect their portfolios from stranded assets by using GIS tools and other water security data to review prospective loans and land deals. By performing due diligence in-house with GIS tools, lenders and investors can reduce the risk of water stress on their agricultural assets and bolster the longevity of their portfolios.

AQUAOSO’s Water Security Platform is specifically designed for identifying water risk in the agricultural sector. With its Research and Reporting tool, users can access real-time GIS data in an easy-to-use map-based format. The Portfolio Connect tool makes it easy to collect additional data directly from borrowers and share it with other stakeholders.

Contact AQUAOSO directly to schedule a phone call or demo, or browse the resources page to find out more about agricultural investment and water risk.

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