The Federal Government announced two net-zero measures in the lead-up to the Federal Budget: the establishment of a new Net Zero Authority and changes to the Petroleum Resource Rent Tax. Both will support the acceleration of the energy transition.

Last week, the new Net Zero Authority was announced to help workers, industries, and communities in mining regions transition away from fossil fuel-related employment. This will be essential for Australia's net-zero transformation. One of the Authority’s three stated aims is to help investors and companies to engage with net-zero transformation opportunities.

Separately, the Government’s changes to the Petroleum Resource Rent Tax (PRRT) will taper off concessions to the fossil fuel industry, even though the Federal Government has 26 proposals for new or expanded coal mines currently awaiting approval.

What we believe can be reasonably inferred from these announcements is clear: the Government is serious about decarbonisation and willing to use legislative and regulatory measures to achieve it. We believe the Government will move to resolve the apparent inconsistency between new fossil fuel projects in the pipeline in and its other moves towards net zero over time.

The transition to renewable energy and decarbonization efforts could result in shortened lifespans for new fossil fuel projects, and a reduction in their long-term value. And that might have a significant impact on investors, leaving them with resource equities that become stranded assets in their portfolios.

An asset becomes “stranded” when it suffers an unexpected decline in value or yield, usually because of changes in market conditions or regulatory/legislative shifts.

The possibility of stranded assets in the energy sector could impact many Aussie investors, who may not be aware that their superannuation could be invested in fossil fuel companies.

Globally, we have observed experts recommend divesting from fossil fuels or reducing exposure to these assets as part of a broader strategy to address climate change. And now, more than ever, we believe investors should also consider the potential investment risks associated with investing in fossil fuel companies, including the possibility of stranded assets.

For investors trying to avoid investing in companies whose assets may become stranded, we think there are a couple of options. Firstly, diversification. By switching the asset allocation in your funds, you may be able to reduce your exposure to any one particular asset or sector that may become stranded. For superannuation customers, however, unless you choose a low-carbon fund specifically you may still invest in fossil fuel companies, as funds benchmarked to key S&P/ASX indices may include exposure in these areas, unless otherwise specified.

You could also consider switching to a low carbon ethical or responsible investment fund that screen out most fossil fuel companies and focus on investing in more future-oriented companies in sectors like health, technology, and renewables, which we believe are less likely to become stranded as society – and governments globally – move towards net zero targets.