Global Investors Set Out Threats Facing Utilities & Expected Adaptation Pathways

A global network of more than 270 institutional investors, representing assets worth more than €20 trillion, has warned global utilities of the threat of climate change.

The Institutional Investors Group on Climate Change launched its new report, Investor Expectations of Electric Utility Companies: Looking down the line at carbon asset risk, this week, in which it provides a guide to investors to enable significant engagement with the Boards of utility companies so as to encourage more sustainable strategies that will mitigate the risks and threats facing utilities as a consequence of climate change.

“With so many countries now clearly committed to implementing the Paris Agreement, institutional investors are concerned that some electric utility companies are not sufficiently prepared for the transition to a lower carbon economy necessary to limit global warming to well below 2°C,” said Stephanie Pfeifer, CEO at the Institutional Investors Group on Climate Change. “Today the global investor community is setting out as clearly as possible their expectations for utility companies on actions required to address climate change risks.”

“Institutional investors recognize that climate change will impact their holdings, portfolios, and asset values in the short, medium and long term,” said the authors of the report, noting that electric utilities are of particular concern to investors due to their carbon intensive nature. This is of additional concern considering that these electric utilities form a “meaningful proportion of many indices”, and represent many hundreds of billions of dollars in market capitalization.

The stated aim of the report “is to stimulate and facilitate meaningful discussion of risks and opportunities related to climate change and appropriate strategies, in order to mitigate the long term risks to us as investors.” This includes “Six Investor Expectations of Electric Utility Companies”:

With a changing landscape for utility technology, policy, and demand, investors are keen to engage with electricity utilities to minimize future risks.

“During the 2016 proxy season investors are showing unequivocally through shareholder resolutions to companies such as AES that they expect electric power companies to address carbon asset risk by assessing the impact of a 2°C scenario on their future resilience,” said Dan Bakal, Director of the Electric Power Program at Ceres. “Going forward, asset owners and fund managers will need to know how power companies – and particularly the boards accountable for overseeing them – see the future impact of climate change on energy demand and pricing, as well as how they plan to align their business model with the GHG reductions required to deliver binding international agreements.”

The report also encourages investors to ask utilities about the management of legacy assets such as power generation plants that are no longer economical to use, primarily those fossil fuel generation plants which are going to end up unused, or excessively costly, in the near-future.

“These risks are not theoretical, they are today’s reality for utility companies and their investors across all markets,” added Emma Herd, CEO at IGCC Australia and New Zealand . “Climate change is already driving structural transformation in the energy sector. The risks and opportunities created by the transition to a net zero carbon global economy will continue to grow and the pace of change accelerate. It is vital that utility companies undertake comprehensive <2°C stress testing of their business activities and disclose to investors how their business model will fare in the face of climate change.”