ORIGINAL REPORTING: Big money to utilities: Face climate risks or lose market value

BlackRock, Morgan Stanley to utilities: Tackle climate-related risks or lose market value; Analyst research shows utilities that address climate-related physical and transition risks earn higher valuations from investors.

Herman K. Trabish | April 6, 2020 (Utility Dive)

Editor’s note: The newest surveys suggest investors now see sustainability as a necessary investment, not an indulgence.

Financial market data shows utilities that address risks associated with the changing climate see significant benefits, and utilities that do not lose market value.

Analyses from BlackRock, Morgan Stanley and others reflect what the world is learning in the COVID-19 fight: Aggressive action proactively addressing systemic risk produces better outcomes than pretending there is little risk. For utilities, the data shows that addressing climate-related risks with system hardening and emissions reductions attracts investors and shifts stock valuations, while relying on business as usual discourages investors and increases stock price volatility.

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"The evidence on climate risk is compelling investors to reassess core assumptions about modern finance" because they see that "climate risk is investment risk," CEO Larry Fink of BlackRock, the world's biggest asset manager, wrote in January. Companies that do not respond to climate change will face "growing skepticism from the markets" and "a higher cost of capital," but companies that respond will attract "higher-quality, more patient capital."

Many analysts say utilities that have set climate risk-related goals also remain dangerously invested in fossil assets. Studies show market valuations increase when utilities strengthen their physical systems and begin transitioning to renewables. The cost-effectiveness of addressing climate risk remains uncertain because the climate is changing so much and so fast that historical weather data does not necessarily reflect new realities. But investors are making their concerns clear.

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As a result of a "profound reassessment of risk and asset values" in a changing climate, "there will be a significant reallocation of capital by investors," Fink wrote in his annual letter to CEOs in January. Climate's "physical risk" was detailed in an April 2019 BlackRock-Rhodium Group white paper of impacts on the infrastructure of 269 investor-owned utilities (IOUs) from 233 extreme weather events since 1980 that each caused more than $1 billion in damages.

Electric utilities with "exposure to extreme weather events" typically suffer temporary, as much as 6%, stock price volatility shocks "in the wake of natural disasters," the white paper concluded. The "transition risks" from climate change come from a myriad of factors associated with transitioning to clean energy, a separate April 2019 Rhodium Group paper reported. Physical risks come from chronic or sudden extreme weather events that impact infrastructure. But today's models of physical risk "significantly underestimate actual risk," it added… click here for more

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