It’s Not Just Utilities Feeling the Heat From California Wildfires

Utilities are often considered defensive stocks because of their stability, but increased risk from wildfires is creating worries among investors that are only worsening as climate change makes fire seasons longer and more intense.

Worse fire seasons are also having ramifications for other industries as well, and all of this comes against a backdrop of the national debate surrounding how much companies should have to disclose about their climate-related risks.

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“Industries that rely on stable natural resources, such as agriculture, water management and tourism in disaster-prone areas, could face significant challenges,” says Mordechai Breier, managing partner at Insurance Litigation Group. “As climate change affects weather patterns, resources and ecosystems, these sectors may also see increasing difficulties.”

Here’s what you need to know about the sectors and industries exposed to risk from wildfires and other repercussions of climate change, and what’s happening with the debate over climate-risk disclosure requirements:

— Risks for electric and water utilities.

— Risks for insurance and reinsurance companies.

— The debate over ESG disclosures.

— Requirements beyond SEC action.

Risks for Electric and Water Utilities

Shares of utilities with California holdings, including Edison International (ticker: EIX), PG&E Corp. (PCG) and Sempra (SRE), have declined on concerns over several Southern California wildfires, says Tim Winter, portfolio manager of Gabelli Utilities Fund (GABUX).

Despite California’s wildfire legislation that created a fund to protect utilities from bankruptcy, Winter says, the scale and potential damage of the Southern California wildfires raise alarm that the protections may not be enough.

“Several large wildfire claims could drain the fund and create uncertainty for the state’s other utilities with wildfire exposure,” he says.

“Utility companies in California may be on the hook for large financial losses because they are often held responsible for starting wildfires, whether due to downed power lines, equipment malfunctions or inadequate maintenance,” says Kristin Hull, chief investment officer of Nia Impact Capital.

It’s not just electric utilities that face risks. Hull notes that water utilities’ costs go up if they have to buy fossil fuels for generators when the power is out but they still have to pump water. Meanwhile, droughts exacerbated by climate change decrease the water supply, she says.

Utilities don’t just face threats from lawsuits and paying damages if they are found negligent. “Wildfires significantly impact power companies by damaging critical infrastructure such as power lines, substations and transformers, with repair costs especially high in remote areas,” says Thais Lopez Vogel, co-founder of VoLo Foundation, a nonprofit promoting education and science to combat climate change.

Utilities also face rising expenses to protect their infrastructure against wildfires, such as by burying power lines, Lopez Vogel says.

Risks for Insurance and Reinsurance Companies

In addition to utilities, insurance companies, such as Allstate Corp. (ALL) and Chubb Ltd. (CB), face risks from insurance claims. AccuWeather estimates the total damage and economic loss of the fires at between $250 billion and $275 billion.

“Insurance companies operating in California, particularly those covering homes in high-risk wildfire zones, are the most exposed,” Breier says. “Insurers who have stayed in California are facing significant financial strain due to the increasing frequency and severity of wildfires.”

In addition to surging claims and inflated premiums with insurance companies, reinsurers also face escalating costs, Lopez Vogel says. Reinsurers are companies that provide insurance to insurance companies.

“In addition to insurance and utilities, climate change impacts several industries, including agriculture, forestry, timber, construction and tourism, as they face challenges from droughts, fires and resource depletion,” Lopez Vogel says. “Real estate and energy production are also affected by emerging risks in high-fire-prone zones and water shortages. The transportation and manufacturing industries face disruptions and constraints, underscoring the widespread effects of longer, more intense fire seasons.”

The Debate Over ESG Disclosures

Expanding climate-related risks for a broad swath of companies and industries comes at a time when environmental, social and governance, or ESG, risk reporting has become a point of political contention.

There has been a push for publicly traded companies to be required to disclose climate change-related risks as part of ESG criteria. The Securities and Exchange Commission recently mandated climate reporting, but the rules are in limbo pending litigation.

ESG supporters say the metric is an indispensable way investors can quantify risk before plowing money into stocks. Opponents, including the incoming administration of President-elect Donald Trump, view it as an encroachment from “woke” politicians that will hinder profit.

As Trump seeks lower domestic energy prices, industry lawyers expect he will seek to undo the SEC rules.

“If companies are no longer required to disclose climate risks due to the removal of ESG rules, investors would have less transparency, making it harder for them to assess long-term risks associated with climate change,” Breier says. “Investors may need to rely more on independent research or other disclosure mechanisms to understand and evaluate climate-related risks.”

Requirements Beyond SEC Action

For proponents of ESG disclosure, the good news is that there may already be enough of a groundswell beyond the SEC requiring disclosures that investors will still have a window into individual companies’ climate risk.

“As an investor, disclosure of climate risks is essential for us,” Hull says. “While I call on the SEC to provide strong guidance on and requirements for disclosures for companies operating in the U.S., I count on states like California and the European Union to continue to hold companies accountable, requiring transparency in their climate reporting.”

Because many companies are global, they often do business in California or the European Union, or both, which means they have to follow the rules of the state and the trading bloc, Hull points out.

“Many companies will need to still disclose climate risks to their investors,” says Sydney House, ESG product lead with Certa, noting California and New York disclosure laws. “Also, many companies disclose climate risks as part of voluntary global frameworks or will be eventually required to under regulations.”

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It’s Not Just Utilities Feeling the Heat From California Wildfires originally appeared on usnews.com

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