Why a PG&E Bankruptcy Could Change Climate Calculus
The plan by PG&E Corp., owner of California’s largest electric utility, to file for bankruptcy protection won’t be felt just by its ratepayers, employees and suppliers. It will have an effect on whether residents of areas devastated by wildfires will receive the compensation they’re expecting, and whether California can live up to its ambitious goals on climate change. But the decision also represents a shock to investors who just two months ago were paying above par for PG&E’s bonds. Most broadly, it points to the danger that global warming could pose for many companies. Those risks aren’t always obvious, and assessments of them are often buried deep within securities disclosure. Is it time for them to move from the fine print to become an active market concern?
1. Why were investors caught off guard?
In PG&E’s case, they shouldn’t have been. Ever since the 2017 wildfires in northern California’s wine country, the company has repeatedly warned that climate change is raising the risk of catastrophic fires in the state, as frequent drought and invasive, warm-weather pests decimate the state’s forests. The company’s ex-CEO Geisha Williams, who stepped down, called it the new normal and said that utility companies were bearing the costs of climate-fed fires. The company’s critics dismissed those warnings as a scare tactic intended to pressure Sacramento into changing California’s wildfire liability rules, something the legislature refused to do.
2. Have climate risks been overlooked at other companies?
Almost certainly. Or, just as likely, they may be treating them as difficult-to-pinpoint long-term risks, even as that future begins to arrive. The warnings scientists have issued for over 30 years of threats to businesses and economies and increasingly being connected to specific disruptive events, whether hurricanes or droughts or the spread of pests. Businesses are increasingly disclosing awareness of locally relevant threats and many are building climate challenges into their long-range plans. Coastal property owners are more and more attentive to sea-level rise, just as agricultural companies are to northward growing zones and utilities, such as it is, to more devastating fires. But costs can be hard to quantify, and there are limits to how much even large companies that regard themselves as forward-thinking have done to prepare for a systemic global problem.
3. Isn’t the market supposed to price in risk?
Yes, through tools like insurance and credit-default swaps, as well as demanding higher premia for greater risk in lending. But markets don’t always price some kinds of risk correctly, and economic research suggests that climate pollution falls in that category. Since 2008, many people, including former Treasury Secretary Hank Paulson, have likened the under-priced risks that exploded during the financial crisis to the swelling systemic pressures of climate change. There is also a timing-mismatch between climate threats and conventional insurance practice. As Warren Buffett has said, insurance policies are rewritten every year, and it’s hard to know on that time frame how decades-long threats shake out in pricing.