Getting to grips with climate and environmental risk in utilities

In recent years we have seen the rapid rise of climate risk as a major focus for companies across the economy, with sustainability and wider environmental risks such as those around biodiversity increasingly treated as growing and even existential concerns for investors

– from outgoing Bank of England Governor Mark Carney's warning that companies must agree rules for climate risk reporting within two years to BlackRock CEO Larry Fink's insistence that 'climate risk is investment risk'.

Sustainability First through our Fair for the Future project has sought to map this changing risk landscape for UK energy and water sectors – sectors where climate and environmental concerns are clearly fundamental. In addition to developing a 'Sustainable Licence to Operate' for utilities, we have also published a series of working notes and discussion papers both on how companies and investors currently see risk and how this needs to change in the context of what we are calling the 'disrupted world' – where risk factors are volatile, dynamic, and unpredictable, none more so than climate change, adaptation, and resilience, and where public expectations are rapidly changing.

In addition to working notes on how risks in energy and water are shaped and mediated by civil society, the media, and the consumer lived experience, our most recent working note explicitly focuses on the role of climate and the environment.

In this paper, we look at how climate and environmental risks play out in different ways across UK utilities, noting that the risk picture is not homogenous and depends on the specific sector, where a company sits in the value chain, geography, and a company's own risks and resources. This is a complex and highly broad landscape, but we are clear that utility companies need to play a key role in informing, influencing, and enabling others to take action as we move towards a decarbonised economy. This will take the form of responding to key climate and environmental risks in a systematic way, through real and embedded changes to culture and strategy, rather than a reactive one.

In particular, we distinguish between the respective 'vertical' and 'horizontal' risks utility companies face: the former issues such as business carbon footprint (BCF), water pollution from wastewater treatment, and adapting to climate change; the latter those like business culture and governance, a lack of join-up across businesses, and disconnects or gaps between regulators.

In addition to identifying some of the key components of the risk landscape for UK utilities, the paper also sets out how environmental and climate risks may be mitigated in the sectors. In particular, we highlight the importance of:

  • Understanding and addressing the totality of environmental risks – and where the company sits in the wider environmental ecosystem.
  • Forming collaborations and partnerships with third parties to share skills and expertise and to develop more 'joined-up' solutions to these problems.
  • Using company expertise to help to shape policy and regulatory frameworks and approaches so that they are firmly focused on future climate and environmental challenges.
  • Innovation to develop new business models and approaches to reduce climate and environmental impacts and to enable and facilitate others to reduce theirs (e.g. steps to facilitate flexibility in the electricity system, demand-side measures in water and moves to develop more integrated and circular models of service delivery, etc.).
  • Improved use of data and telemetry (through predictive analytics, remote sensors and controls, etc.) to more proactively identify and manage environmental risks.
  • Transparent reporting to identify risks and opportunities and priority areas for attention and to demonstrate what is being done to protect environmental interests. This is also important for companies to be able to 'lead by example' (e.g. leakage reduction), helping all sides to better value services and encourage energy and water saving and efficiency. As well as reporting at a company level, environmental reports need to be joined-up, sector-wide and analysed. This is particularly important on carbon.
  • Scenario and adaptive planning (against a range of scenarios) to help clarify interdependencies, critical paths, new opportunities, etc.
  • Proactive communications and deeper cultural change to unlock the significant potential benefits from being at the forefront of addressing climate and environmental challenges, for example through third party endorsement. This can also create the positive headroom for when problems occur (e.g. outages from storms) and the permissive environment to develop new environmental services.

Taking in turn each of the vertical and horizontal risks identified as being central to water and energy companies' approaches to climate and the environment, we explore how organisations can go about meeting the challenges these risks carry for their day-to-day operations, also highlighting good practice in the sectors where it already exists.

The role of climate and the environment in terms of political and regulatory uncertainty and risk in the energy and water sectorsis available to read in full on the Sustainability First website, where you can also read our other Fair for the Future project publications on risk mapping and developing a Sustainable Licence to Operate.