Lenders are looking more closely at the financial and credit risks for utilities from climate change and related industry transformations, and utility leadership teams may need to conduct more climate risk analyses of their own.
"Banks have already started to look at the potential risks associated with climate change and will continue to in the future," Alban Pyanet, a principal in consulting group Oliver Wyman's finance and risk practice, said during a recent interview. "[Energy utilities] should expect a little more scrutiny on this front."
Oliver Wyman, along with 16 banks, developed scenario analysis models for lenders to assess how the companies they lend to may fare under a range of climate scenarios. Commissioned by the United Nations Environment Finance Initiative, Oliver Wyman aimed to give banks methodologies to explore how different scenarios could affect the credit risk to the institutions.
Power and gas utilities — many with exposure to greenhouse-gas-limiting regulations, shifting demand patterns and the potential for infrastructure damage from a changing climate — may need to be produce more data and details on climate preparedness, Pyanet said.
S&P Global Ratings analyst Miroslav Petkov agreed that utilities should expect their lenders to look more closely at companies' climate-related risks, especially as climate change's effects become more pronounced over time. "Our expectation is that banks and institutions should consider climate change risks in their lending decisions ... and should consider that as part of their risk management," the London-based Petkov said. "This is likely to lead to more engagement with their clients to understand how they position themselves to that risk, what it means to the bank's balance sheet and what it means to the decision-making in terms of lending decisions."
The Oliver Wyman analysis model, released in April, was based on recommendations from the Task Force on Climate-Related Financial Disclosures, or TCFD, which arose from the international Financial Stability Board. TCFD has a mandate to devise voluntary risk disclosure recommendations with an eye to the physical, liability and transition risks associated with climate change.
Oliver Wyman and its partners looked at the impacts of climate risk under 1.5-, 2- and 4-degree C increases in global average temperature by the end of the century. The goal was give banks a way to test different ways of reaching the same temperature targets, clarifying the range of possible impacts on any given sector and its credit ratings. Once lenders identify the most important drivers, the financial institutions can then begin monitoring these factors over time, the report said.
"I think one of the novelties or new elements that I think this approach is bringing is that it's using some financial techniques, but it's merging those with these kinds of climate and economic models," Ilya Khaykin, a partner in Oliver Wyman's finance and risk practice, said in an interview. "I think there's much more to do on that front."
Utility leadership is increasingly focused on tackling more detailed and holistic climate risk analysis, said Gerry Yurkevicz, a partner in Oliver Wyman's energy practice. "I just see it becoming more and more important on the agendas of senior management teams, especially ... [since] their lenders are now thinking about this," Yurkevicz said. "That's always one driver of a good management team."
Petkov sees the process of expanding climate risk analysis as a gradual evolution. "From our perspective, we wouldn't expect to see complete full-disclosure TCFD immediately. It's going to take time," Petkov said. "This ... analysis is complex, and it's going to take time."
S&P Global Ratings and S&P Global Market Intelligence are owned by S&P Global Inc.
