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Assessing risks of any kind is at the core of all company’s financial disclosure activity. Yet, even if the contribution of human activities on C02 emissions has been well documented, major organizations may have timid until recently in reporting thoroughly on how climate change retroacts -and sometimes substantially- on their business.

The first part below is dedicated to the classification of these risks from a Utilities perspective while part two will give you an overview of existing recommendations and new rules governing such a disclosure.
 

The first "Climate-Change Bankruptcy"
 

Over the past years, listed companies have been under a growing pressure not only from civil society but also shareholders, urging them to report on global warming. To mention recent news, Chevron was compelled to announce one week before its upcoming annual general meeting that it will set greenhouse gas emissions targets -to which top executives pay will be linked to-[1] and at the same time ExxonMobil is facing a climate change resolution from its investors[2].

In addition to shareholder rebellion, firms have now a valid reason for dreading the outcome of lawsuits and even more since Pacific Gas and Electric Company -PG&E- went bankrupt few weeks ago.

No one has forgotten the ‘Camp Fire’ wildland inferno, which devastated almost 240 sq. miles in Northern California in November 2018 and wiped several towns out the map -among which Paradise[3]-, and killed above 80 people.

PG&E, one of the four regulated, investor-owned utilities in California, which provides natural gas and electricity to approximately 16 million people, has been indicted because of more than 750 legal actions that were taken against it. Problems on its transmission lines have allegedly sparked the deadly wildfire as well as the year before[4].

Climate change is increasing extreme weather events such as the cyclic drought that worsened the fire damages. For complainants, PG&E underestimated this impact and failed to adopt suitable measures in its strategy of infrastructure maintenance.

Today, the company has to file voluntary petitions under Chapter 11 and so prompted the Wall Street Journal to run as its January 18th headline ‘PG&E: The First Climate-Change Bankruptcy, Probably Not the Last.’[5]

The example of such a big Utility underlines how pressing it is for companies to thoroughly assess the vulnerability of their activities to climate risks.

 

List your transition, physical and litigation risks
 

Paul Simpson is the CEO and co-founder of CDP, formerly the Carbon Disclosure Project, an organization based in the United Kingdom that supports cities and companies to disclose the environmental impact of their activities. Interviewed by Euractiv[6], he lists four kinds of climate risks.

 

Policy and regulation. In order to drastically reduce greenhouse gas emissions and so limit the temperature increase to 1.5°C as committed during the Paris Agreement in 2015, public authorities must promulgate stringent laws and norms, like carbon pricing or coal-fired power plants shutdown as planned in the French multi-annual programming.

Thus, 80% of coal reserves, half of gas and a third of oil are potentially unburnable. These ‘stranded’ assets might have a huge impact on the companies’ market capitalization[7].

 

Technology. The shift towards a low-carbon economy is grounded on the deployment of new ‘clean’ technologies, which are competing with conventional solutions. The cost of production of renewable electricity, excluding public subsidies, has fallen close to parity grid, for instance[8].

The same technology shift may explain why oil majors are currently diversifying their portfolio, like Shell acquiring a Dutch car-charging operator[9] or Total investing a French battery maker[10] and even an electricity and gas retailer[11].

 

Consumer sentiment. According to the IPCC, this is one of the prerequisites for a 1,5°C scenario with technology innovations: a change in our consumption pattern and way of life[12].

The growing inclination of consumers to green gas and/or electricity contracts as underlined by the French regulation authority[13] has been noticed by power retailers while self-consumption and electric mobility are among the topics closely monitored by grid operators.

 

Physical risks. ‘Climate change impacts can disrupt supply, alter demand patterns and damage infrastructure’ to quote the International Energy Agency in a 2015 report[14].

  • In the aftermath of 2012 Hurricane Sandy, a massive power outage affected millions of households in New York. Along with fuel shortages and transportation system disruption, it resulted in an estimated USD 50 billion losses.
  • Reduced water availability and rise of rivers temperature may have an impact on electricity production such as hydropower plant or thermal power stations.
  • 45 percent of oil fields in the Artic would be at risk because of the degradation of near-surface permafrost, according to a study published in Nature Communications[15].
  • Unusual seasonal temperatures can require additional power capacity and load-shedding balance an unpredictable energy demand pattern.
     

Liability. In addition to the transition and physical risks mentioned above, Mark Carney list another said of litigation or liability, illustrated by PG&E example: ‘those suffering climate change losses sought compensation from those they held responsible’[16].

In this part, we have seen that there are numerous and significant incentives for companies, especially Utilities, to disclose climate-related risks and proposed a breakdown of these risks.

Besides being the Governor of the Bank of England, Mark Carney launched and chairs the Task Force on Climate-related Financial Disclosures -TCFD-, on which we will focus in PART II, along with international standards of climate disclosure reporting.

 

Sources :

1. https://www.businessgreen.com/bg/news/3070731/chevron-becomes-latest-oil-giant-to-bow-to-shareholder-pressure-on-climate
2. https://www.reuters.com/article/us-exxon-mobil-shareholders-climatechang/exxon-asks-u-s-regulator-to-block-climate-change-resolution-investors-idUSKCN1QD0X1
3. https://www.cbsnews.com/pictures/wildfires-tear-through-northern-southern-california/61/
4. https://www.pressdemocrat.com/news/8413929-181/cal-fire-pge-equipment-caused
5. https://www.wsj.com/articles/pg-e-wildfires-and-the-first-climate-change-bankruptcy-11547820006
6. https://www.euractiv.com/section/energy-environment/interview/cdp-boss-companies-or-sectors-may-face-liability-risks-on-climate-change/
7. https://www.theguardian.com/environment/2015/jan/07/much-worlds-fossil-fuel-reserve-must-stay-buried-prevent-climate-change-study-says
8. https://www.pv-tech.org/news/pv-poised-for-global-parity-tipping-point-by-2030
9. https://qz.com/1542499/oil-companies-and-utilities-are-buying-up-all-the-electric-car-charging-startups/
10. https://lexpansion.lexpress.fr/entreprises/pourquoi-total-mise-gros-sur-saft_1831916.html
11. https://www.capital.fr/entreprises-marches/total-detient-plus-de-95-du-capital-de-direct-energie-1307715
12. http://www.indiaenvironmentportal.org.in/files/file/sr15_spm_final.pdf
13. https://www.cre.fr/content/download/20532/file/190403_CP_etat_des_lieux_2017.pdf 
14. https://www.iea.org/publications/freepublications/publication/COP21_Resilience_Brochure.pdf
15. https://www.nature.com/articles/s41467-018-07557-4
16. https://www.theguardian.com/environment/2015/sep/29/carney-warns-of-risks-from-climate-change-tragedy-of-the-horizon

Authors :

Naïc Marcangeli, Consultant
Anthony Dos Reis, Manager