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How do investors expect utilities to deal with COP21?

10-08-2016 | Insight | Matthias Narr

A group of over 270 institutional investors representing more than EUR 20 trillion in assets recently published a guide for the electric utilities sector. In this guide, they explain how they expect utilities to align their strategies with the low carbon economy required to keep global warming below 2°C. Engagement Specialist Matthias Narr is the lead author.

Speed read:
  • Investors explain how they expect utilities to adapt to the lower-carbon economy
  • Utilities need to do a comprehensive 2°C stress testing of their business
  • Investors need to know how power companies see the future impact of climate change on energy demand and pricing

The guide, titled ‘Investor Expectations of Electric Utilities Companies - Looking Down the Line at Carbon Asset risk’ , was published by the Institutional Investors Group on Climate Change (IIGCC). In this document, we as investors outline the threats and opportunities for utilities, and explain how we expect them to adapt their business strategies. With over 170 countries now clearly committed to the implementation of the Paris Agreement, institutional investors are concerned that some electric utility companies may not be adequately prepared for the transition to a lower-carbon economy.

The guide is a good example of how we leverage our engagement expertise and bring it onto a global collaboration platform to magnify our impact. With this document we want to shape a constructive dialogue between investors and electric utilities about the long-term risks and opportunities these companies face from climate change.

Investors need to know 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 sustainability and profitability of electric utilities for decades to come. 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 order to protect the sector’s sustainability and profitability.

The impact of a 2°C scenario

During the 2016 proxy season, investors clearly showed, for example in resolutions at the Annual General Meetings of shareholders of AES and Entergy, that they expect electric power companies to address carbon asset risk by assessing the impact of a 2°C scenario on their future resilience. Asset owners and fund managers need to know how power companies see the future impact of climate change on energy demand and pricing, and how they plan to align their business models with the required greenhouse gas reductions.

In addition to questions about policy, technology and demand changes, the guide encourages investors to ask electric utility companies about the management of legacy assets, such as power generation plants that are no longer economical to use, either due to a shift away from thermal coal, or as a consequence of increased water scarcity.

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 essential for utility companies to undertake comprehensive 2°C stress testing of their business activities and to disclose to investors how their business model will fare in the face of climate change.

The guide can be downloaded from www.iigcc.org

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