A global network of more than 270 institutional investors has published a guide setting out the threats facing the utilities sector and their expectations for companies to meet future sustainability and profitability targets. Investors are concerned that some companies – particularly electric utilities – are not sufficiently prepared for the transition to a low-carbon economy.
Investor Expectations of Electric Utility Companies: Looking down the line at carbon asset risk comes a week after more than 170 countries signed the Paris Agreement and investors voted on a shareholder climate risk resolution at the AGM of US utility AES Corporation.
The guide addresses six key areas of concern. They are: governance, operational efficiency, strategy implementation, preparedness for the physical impacts of climate change, public policy and, transparency and disclosure.
Stephanie Pfeifer, CEO at the Institutional Investors Group on Climate Change, said: “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.
“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.”
The main aim of the guide is to stimulate and facilitate meaningful discussion of risks and opportunities related to climate change and offer suitable strategies in order to lessen the long term risks to investors.
Matthias Narr, Engagement Specialist at Robeco and lead author of the guide, said: “Investors need to understand whether utility companies are prepared for the changing market dynamics that are likely to arise from the policies and actions put in place to limit global warming.
“Business strategy and capital allocation decisions made now and over the coming years will determine the future sustainability and profitability of electric utilities for decades ahead.
“Investors therefore have a clear need to establish that capital allocation decisions made by the boards of these utilities give due weight to the low carbon transition in ways that will protect both future sustainability and corporate profitability of the sector.”
Dan Bakal, Director of the Electric Power Program at Ceres, added: “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 greenhouse gas reductions required to deliver binding international agreements.”
As well as highlighting questions about policy, technology and demanding changes, the guide also encourages investors to ask utility companies about the management of legacy assets. That includes power generation plants that are no longer economical to use, either due to a shift away from fossil fuels or as a consequence of increased water scarcity.
Emma Herd, CEO at IGCC Australia and New Zealand, said: “These risks are not theoretical, they are today’s reality for utility companies and their investors across all markets.
“Climate change is already driving structural transformation in the energy sector. It is vital that utility companies undertake comprehensive ‘less than 2°C’ stress testing of their business activities and disclose to investors how their business model will fare in the face of climate change.”