Climate Risk in the US Electric Utility Sector: A Case Study

Abstract

We investigate the impacts of climate change on equity investments in US Electric Utilities by evaluating market reactions around extreme weather events. We hypothesize that investment risk from climate change is already present in the market and that extreme weather events evidence this risk through price and risk dislocations. From the geolocation of power plants, we build up the exposure of parent company securities to hurricanes, wildfires, floods, droughts and temperatures to arrive at a combined climate change exposure score. We find price reactions of up to 1.5% and rise in volatility of 6% in the 30-day period after a hurricane make landfall. We then determine the extreme weather exposure for each power plant location and aggregate these exposures to the publicly traded parent company for a climate risk exposure score.