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Sector
Utilities
Size
Large Cap
Market Cap £4.22bn
Enterprise Value £30.19bn
Revenue £13.51bn
Position in Universe th / 6855

Mounting climate change fears push U.S. investors to assess geographical risks

Tue 4th June, 2019 6:00am
By David Randall
    NEW YORK, June 4 (Reuters) - With an above-average
percentage of its power generated from renewable sources and one
of the largest battery storage operations in the United States,
utility Sempra Energy  SRE.N  seemed to check all the boxes for
portfolio manager Todd Ahlsten, who manages more than $18
billion for Parnassus Investments based on each company's
environmental, social and governance attributes.  
    But he sold his shares in the San Diego-based company
earlier this year because of his conviction that its location in
California will put it in the crosshairs of increasingly severe
weather patterns, no matter how environmentally responsible it
may be. 
    "They were doing all the right things, but the risks were
too high on the physical side so we exited the position,"
Ahlsten said. 
    Ahlsten's decision to factor in the geographical risks of
climate change is becoming increasingly familiar in the
fast-growing world of so-called ESG investing, which has long
focused more on avoiding companies with poor environmental track
records than assessing which face the greatest risk of physical
damage or business disruptions from more volatile climate. 
    The bankruptcy of California utility company Pacific Gas and
Electric in January following devastating wildfires caused in
part by climate change is prompting investors to recognize what
had been one of the biggest blind spots of environmentally
driven investing: the reality that even companies that pledge to
combat climate change could be negatively affected by it.
    As a result, ESG investors are increasingly judging
companies based on what sort of physical risks they will face as
global temperatures continue to rise and storms become more
severe. 
    Firms including Parnassus, Hermes Investment Management and
Eaton Vance's Calvert Research and Management are avoiding
companies ranging from retailers with large footprints in
Florida to utilities in Southern California to barge shipping
companies that may have to deal with more frequent Midwestern
floods.
    PG&E faces liabilities that it estimates at over $30 billion
in the aftermath of November's Camp Fire, which killed more than
85 people and destroyed more than 14,600 homes, making it the
most destructive wildfire in California history. 
    
    VOLATILE WEATHER PATTERNS
    The risks of physical damage, liabilities or business
disruptions from climate change do not currently factor into
ESG-ratings by index-providers, which often shape the investable
universe for fund managers or exchange-traded funds. 
    "The industry is turning more to try to understand and embed
and measure the physical risks associated with climate change,
but that's still an evolving area," said Tony Campos, head of
ESG, Americas, at FTSE Russell. 
    More accurate analytics and modeling programs that help
predict the specific impacts of different weather scenarios on
individual companies are prompting more fund managers to take
the impact of climate change into consideration, said Louise
Dudley, portfolio manager of the Federated Hermes Global Equity
fund in London. 
    "In terms of physical risk up, until now we've looked at the
type of companies that are the most exposed. But now with more
data we're able to get more specific, more accurate insights and
therefore more useful outputs," she said. 
    Over the last year, Hermes has spent more time on modeling
the likely outcomes for each company it evaluates based on
global temperatures rising by 2, 4, or 6 degrees Celsius, she
said. Global temperatures are on course to rise between 3 and 5
degrees Celsius (5.4 to 9 degrees Fahrenheit) by the end of this
century, according to a 2018 estimate by the U.N. World
Meteorological Organization.
    Brian Ellis, portfolio manager of the Calvert Bond fund and
the Calvert Green Bond fund, said his fund is increasingly
focusing on the geographical footprint of companies, ranging
from retailers to hotel operators to real estate investment
trusts that may be concentrated in areas that could get hit by
severe storms or high temperatures. 
    That focus on recognizing which companies may be more likely
to bear the physical brunt of climate change is relatively new,
he said, and is a step up from crediting companies that had been
investing in renewable energy or decreasing their carbon
emissions. 
    "I think people are recognizing more so that you can do all
that but you can still have very large impacts to your
infrastructure" due to more volatile weather patterns, Ellis
said. 
    As a result, he is increasingly demanding more enticing
potential returns to compensate for the risks of physical damage
from climate change, he said.

 (Reporting by David Randall; Editing by Dan Grebler)
 ((David.Randall@thomsonreuters.com; 646-223-6607; Reuters
Messaging: david.randall.thomsonreuters.com@reuters.net))
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