Climate change has been getting a lot of airtime lately, especially in the wake of President Obama's sweeping speech on the subject last month. Many companies have been increasingly engaged on the topic, talking more about the risks and opportunities their businesses face from the effects of a warming planet.
I've been talking a lot about climate change, too, specifically advocating for the notion that investors need to take it into account in their overall stock analyses. Judging from readers' comments questioning my intelligence and parentage, some people strongly disagree with this position!
So what if we change the discourse? What if, instead of talking about climate change, we talk about operational resilience? About business continuity? About efficiency? Because that's exactly how I heard three utilities addressing the subject today, and it was compelling.
Weathering the storm
I attended the Center for Climate and Energy Solutions' launch event for its new report, "Weathering the Storm: Building Business Resilience to Climate Change". Representatives from American Water Works (NYSE:AWK), Entergy (NYSE:ETR), and National Grid (NYSE:NGG) were among the speakers. All of them talked about significant financial losses from recent extreme weather events, service disruption, weakening infrastructure, and the need for their industry to transform if it is to be effective in the decades to come.
Climate models predict the increasing frequency and severity of extreme weather events. That means more hurricanes that pack a bigger wallop, for instance. Perhaps you're not convinced about the link between the two, so why don't we just leave that aside. Each utility acknowledged the simple fact that they've been getting crushed by nasty weather in a way that they've not in the past.
Thomas B. King, executive director and president of National Grid US, explained, "Ten years ago we didn't have to worry about major storms in our service area. The magnitude has shot way up in the last 5 to 8 years."
Jeff Sterba, president and CEO of American Water, discussed the recent flood-drought-flood cycle in the Midwest that has been altering soil and damaging underground pipe infrastructure.
Jeff Williams, Entergy's director of climate consulting, said that his company lost 1.1 million customers after Hurricane Katrina.
It would be hard to posit some left-wing conspiracy on the part of these utilities. They're just observing their operating conditions, and trying to figure out how to surmount the challenges they face.
So, as investors, what do we want them to do? Should they go about business as usual, in the face of mounting threats to their operations? Or should they develop a strategy to keep business roaring no matter what the next shock is to their systems? Personally, I like the latter option.
American Water is increasing redundancy in its fuel supply and communications equipment. The company conducts detailed planning studies that analyze facility-level water risks, which guide decisions to enhance operational and energy resilience and efficiency. After Hurricane Floyd in 1999, American Water installed a flood wall at a major plant in New Jersey. Twelve years later, that proved to be a good call when flooding from Hurricane Irene came within an inch of cresting the flood wall, which protected a critical water supply facility serving a large population. American Water is adopting a more integrated management approach to water resources that will expand available water supply options by various mechanisms, including more efficient water use and reuse technologies.
National Grid has undertaken targeted risk assessments in the U.S., including, for example, a yearlong assessment of potential flood risks to all of its Rhode Island electricity substations following damage in 2010 from major river floods. Based on the findings, National Grid plans to invest nearly $23 million over the next five years to rebuild or elevate parts of substations in flood-susceptible areas. The company's gas utility service is conducting similar assessments, and to relocate critical assets out of vulnerable floodplains and storm-harden facilities that cannot easily be moved to higher ground.
Entergy teamed up with insurer Swiss Re (OTC:SSREY) to do scenario modeling. Swiss Re looked at three hazards -- wind, flooding, and storm surges -- and modeled the average annual losses that Entergy could expect to sustain. The company is using this information to guide its resilience strategy going forward.
Perhaps we do ourselves a disservice by getting too mired in the climate change debate. Let's instead focus on the fact that these companies have taken note of serious risks to their bottom lines, and they're stepping up to do something robust about it. That has got to appeal to investors at a fundamental level.