Stranded Assets and the Financialization of Real Estate: Conceptualizing the Systemic Risk of Climate Inaction

The global real estate sector faces unprecedented exposure to climate-related stranded asset risks, yet the mechanisms through which environmental policy transitions translate into systemic financial instability remain inadequately theorized. Existing research has documented the potential magnitude of asset stranding in real estate, with estimates suggesting $16 trillion in residential and $5 trillion in commercial assets at risk, but limited attention has been given to how these risks propagate through financialized global capital markets. This conceptual paper addresses this gap by developing a comprehensive framework for understanding climate-related stranded assets in real estate as a source of systemic financial risk. The study employs a conceptual research methodology based on systematic review and theoretical synthesis, integrating path dependence theory, financialization research, and socio-technical system studies. The analysis reveals that traditional real estate valuation methodologies are locked into regressive practices that systematically ignore climate risks, while energy performance regulations have the potential to hardwire valuation risk into global capital markets. The financialization of real estate over recent decades has created deep integration between property markets and global financial systems, meaning that climate-related devaluation could trigger cascade effects through credit markets, insurance systems, and broader financial networks. The conceptual framework identifies transmission channels including credit rationing, insurance premium escalation, collateral devaluation, and fire sales that could amplify localized stranding into systemic crises (Bauer & Rudebusch, 2023). The study concludes that addressing stranded asset risk requires fundamental reforms to valuation methodologies, enhanced regulatory frameworks, and coordinated supervision across energy and financial sectors. This paper contributes to emerging scholarship on climate finance and systemic risk by providing theoretical foundations for understanding how climate inaction in real estate markets threatens global financial stability.