When analyzing climate change-related risks and opportunities, U.S. electric utilities should look across all of their business units and take a much deeper dive into the ramifications of potential future physical challenges such as extreme temperatures, water availability, sea-level rise, wildfires and hurricanes, according to a report by M.J. Bradley & Associates for environmental group Ceres.
"The existing climate reports generally give limited attention to the direct assessment of future physical impacts associated with climate change," the report said. But "investors will increasingly be interested in how companies evaluate physical risks and build business cases for addressing them."
Ceres is one of the groups coordinating the Climate Action 100+ initiative backed by a large consortium of institutional investors with more than $33 trillion in assets under management. Those investors are pressing more than 160 companies around the world to disclose their climate risks in line with the Task Force on Climate-related Financial Disclosures, or TCFD, which recommends that companies perform deep-level scenario analyses of physical and transition-related climate risks.
Scientists have projected that extreme weather events, flooding, droughts and changes in rain, snow and wind patterns likely will be exacerbated by global warming, and investors generally want to make sure the companies in their portfolios are aware of those risks and moving to address them.
M.J. Bradley & Associates examined the climate reports of 12 utilities to get a general sense of how far along the sector is on aligning its analyses and disclosures with the recommendations of the TCFD and the evolving demands of investors. The paper looked at the reports of AES Corp., American Electric Power Co. Inc., Ameren Corp., CMS Energy Corp., Dominion Energy Inc., Duke Energy Corp., Entergy Corp., FirstEnergy Corp., PPL Corp., Southern Co., WEC Energy Group Inc. and Xcel Energy Inc.
Most companies focused on the impact of an energy transition on generation assets, particularly coal-fired assets, the report said. Exceptions include AES, which stress-tested its entire business portfolio against a climate scenario of well-below 2 degrees of warming, and FirstEnergy, which assessed all phases of its business including generation, transmission and distribution.
But companies are less consistent in how they integrate scenario analyses into their assessments, the report said. Some companies used or adopted publicly available third-party scenarios, while others relied on in-house modeling or other modeling conducted specifically for the assessment. The most commonly referenced independent sources of scenarios are the International Energy Agency and the Intergovernmental Panel on Climate Change, the report said.
With respect to opportunities, many companies identify energy efficiency and a shift toward electrification of the U.S. economy, including in the transportation sector, as key options. But the report suggested that utilities in the analysis should "further explore the scale of these opportunities and how they relate to policy and commercial opportunities."