By Will Bugler
Last year the Intergovernmental Panel on Climate Change (IPCC) issued a report that outlined the potential impacts of climate change should temperatures rise to 1.5˚C above pre-industrial levels. The report surprised some by highlighting many serious risks even if the world meets this highly ambitious target. Last month, the World Economic Forum’s 2019 Global Risk Report listed the two most severe risks to global economic stability as extreme weather events, and the failure of climate change mitigation and adaptation.
If these warnings were too abstract for governments, corporations and investors to take note, then it did not take long for a real-world case-study to emerge. Just days after the Global Risk Report was released, Pacific Gas and Electric (P.G. & E.) announced that it was filing for bankruptcy protection. The California-based utility company faced huge liabilities resulting from two successive seasons of devastating wildfires that burned large swathes of the state in 2017 and 2018.
The utility company said that it is facing as much as US$ 30 billion in liabilities as its equipment is said to have been the cause of over one thousand separate wildfires across the state. The fires, of course, were exacerbated by the extreme heat and tinder-dry conditions made more likely due to climate change.
However, the company’s protestations about its role in the fires is unlikely to get them off the hook for the damage. During a hearing in January, federal judge William Alsup, pointed to the scale of the damage saying “in two years, three per cent of California burned up” and adding “P.G. & E. is not the only source of these fires, but it is a source, and to most of us it’s unthinkable that a public utility is causing that type of damage.”
Alsup also pointed out that P.G. & E. had failed to take sufficient action to prevent its equipment causing fires, despite paying US$4.5 billion in dividends to shareholders in the last five years. The clear implication of this is that the risks posed by climate change are reasonably foreseeable, and therefore companies have a duty to act.
The implications of this are wide ranging. Public utilities are put in a very difficult position, as they have a high level of exposure to climate risks and have legal duties to supply homes in remote areas, where risks are highest. The ratings agency Standard & Poor’s said that a second electric utility in California could well face a devastating wildfire this year and therefore it could lower the credit ratings of the other two major investor-owned utilities in the state, Southern California Edison and San Diego Gas & Electric.
For investors, investments in regulated utility companies suddenly don’t look as rock solid as they once did. Traditionally thought of as ‘perpetual investments’ that need little scrutiny climate change is now challenging the thinking. As climate impacts intensify, they pose an existential threat to such companies, who will not be able to cope with the mounting legal liabilities unaided.
The scale of the threat is likely to require governments to step in. In California, state officials are considering creating an insurance fund that will help cover the cost of such events, lifting some of the burden from corporations. However, governments will certainly want to avoid creating perverse incentives that lead to inaction on the part of private companies. Therefore, if public money is going to be used in this way, it is highly likely the governments will also demand that companies do far more to increase the climate resilience of their operations.