PG&E may be the first company bankrupted by climate change, but it’s unlikely to be the last. Acting in its own self-interest, the state of California recently began to try to keep bankrupt Pacific Gas & Electric as a going concern, so this story continues to play out.
Today, many leading institutional investors, such as GMO founder Jeremy Grantham, think that many compelling investment opportunities are going to surface in the next two decades thanks to climate change. But there are likely to be lots of losers as well as winners.
PG&E’s failure underscores some of the perplexing problems facing the emerging ESG investing universe. Like fellow environmental bad boy BP, PG&E received high marks from a number of ESG ratings services and showed up in the portfolios of many funds that used ESG screens to select their portfolio holdings.
With numerous ratings agencies and data providers scoring companies based on their ESG merits, the PG&E experience illustrates how challenging the task of evaluating companies by these metrics can be. PG&E had major investments in solar, wind and other renewables. However, when one looked under the hood, a different picture emerged, according to Lori Keith, portfolio manager of the Parnassus Mid-Cap fund.
For years, the warning signs on PG&E were right beneath the purportedly clean, green surface, she said. "We had significant safety concerns,” Keith said. The giant utility had a long track record of fires, a pipeline explosion, lawsuits with contractors and poor employee relations. Virtually no long-term incentives for senior management were tied to customer satisfaction or employee safety.
A growing number of investment managers are starting to view climate change and decarbonization as huge opportunities over the next two decades. Take Todd Hedtke, chief investment officer of Allianz North America, who oversees $20 billion in assets, the majority of which is invested to meet long-term liabilities arising from annuities and life insurance policies.
Allianz also sells property and casualty insurance (with shorter term liabilities), but the financial giant’s property and casualty business is much bigger in Europe than in America. Nowhere are weather and environmental issues a bigger problem than in this business.
For insurers, climate change is THE ISSUE in the P&C and reinsurance worlds. The bill from the recent wave of wildfires, hurricanes, floods and droughts that have mushroomed in recent years is adding up. And no one knows what the ultimate bill will be.
Allianz recently conducted a survey that found most Americans wanted to invest in companies with sound environmental (73 percent) and governance (69 percent) practices. However, as many as 85 percent worried that placing their values first could hurt returns.
This surprised Hedtke. The idea that “quality in workplace and environmental issues won’t help determine winners and losers over the long-term is mistaken,” he said.