Shares in Pacific Gas & Electric took a beating this week as investors reacted to its potential financial exposure to wildfires in California. It is risk the company has openly identified, but investors seemed caught by surprise. The episode could mark the end of investor complacency about climate risk.

 

Earlier this week, the big California utility said in a regulatory filing that it had exhausted its credit lines and warned that its potential liability from wildfires could exceed its insurance coverage.  Its market value was nearly halved before a statement by regulators downplaying the chances of bankruptcy gave a boost to the shares.

Investors shouldn’t have been surprised by PG&E’s announcement. It has been open about its risk exposure arising from wildfires and other effects from climate change.  In her 2017 letter to shareholders, CEO Geisha J. Williams put it plainly. Referring to the wildfires that ravaged the state earlier that year, she said:

The causes of these fires have not yet been determined. However, under existing state law, PG&E could face substantial liability if company assets are found to be involved – even if all of our practices and processes met the applicable requirements.

That statement should have triggered investor caution when it was published this spring, and then again this fall as weather conditions made new wildfires likely.

The sharp losses in PG&E’s shares should be a wake-up call for investment managers, signaling they need to pay closer attention to climate risks across many industries.

While many investment firms have called for more disclosure by companies of the risks they face from climate change, their own actions appear lacking. It is far from clear if these firms are taking climate risk into account in their investment decisions.  Their corporate governance and ESG teams are taking it seriously, but are the portfolio managers?

It’s also a potent reminder that the consequences of climate change are being felt now. They’re not in a far-away future. That’s likely to increase investor pressure on companies to disclose material financial risks from climate change, something that has been lagging despite the urgings of the Task Force on Climate-related Financial Disclosures.

If the destruction of the wildfires helps to change investor behavior, perhaps something good will have come from the tragedy.