“Intangible stranded assets” can be a real impairment

– The value of intangible assets on the balance sheets of the S&P has grown from 17% in 1975 to 90% in 2020.
– “Intangible stranded assets” are impairments to intangible assets built on the continuation of unsustainable business practices and should be considered.

Here is a note from Nawar Alsaadi (also see this follow-up note):

There has been plenty of talk about intangible assets in the ESG space, with many having seen the attached chart from Ocean Tomo. But one thing you rarely hear about is intangible stranded assets. The transition to a sustainable economy (environmental and social) is going to undermine the value of a plethora of unsustainable intangible assets. For example, as digital privacy legislation becomes more widespread around the world, the intangible assets of a range of social media companies, which depends on mining personal data, will become increasingly impaired.

As water stresses become more frequent, technologies, IPs, and business processes with high dependency on water will become impaired. As biodiversity and ecosystem services protection gains in importance, brands overly dependent on the exploitation of nature such as beef, timber and soy production will be materially impacted.

Do note, I am not talking about the hit to revenues, cash flow or profit margins, I am talking about impairments to intangible assets built on the premise of the continuation of unsustainable business practices. As investors assess ESG risks, they need to incorporate such intangible assets impairment risks when evaluating potential investments.