Emission critical

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Connecting carbon and value strategies in utilities

Investors and financial institutions across the globe are becoming increasingly alert to climate change risk. Utility companies, as leading emitters of greenhouse gases, are in the frontline. In Europe the Emissions Trading Directive will create the world’s largest emissions trading regime, generating new assets and liabilities worth tens of billions of euros, and presenting new and unique challenges for utility company leaders.

Views on the impact of the European Union Emissions Trading Scheme (EU-ETS) vary widely, not least because of uncertainties about the allocation rules and the future trends of prices for both carbon and electricity. But one thing is clear: climate change will be a key driver of corporate value. The effectiveness of a company’s carbon strategy will become a key metric in investor decisionmaking. Already carbon risks are a focus of analysts and credit rating agencies. Early strategic planning, market leadership and effective management are vital. Companies that do not rise to this challenge place their shareholder value and, potentially, their independence at risk.

Companies should already be a long way down the road of running scenario analyses and implementing the necessary internal reforms. These need to span the full range of activities within the organisation: from operations and trading to merger and acquisitions strategy and investment planning; from legal and environmental compliance to tax and accounting. Yet our research shows that only a minority of European utility companies have a strategy for climate change in place and fully operational, and many utilities have no climate change strategy at all.

Utility companies need to demonstrate that they have clear plans in place to exploit the shareholder value opportunities of the emissions trading schemes, as well as showing that they are able to manage the compliance aspects. To thrive in this new world, companies must ensure they have a strong connection between emissions trading and their value strategy.