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14 | 6TH - 12TH OCTOBER 2017 | UTILITY WEEK Finance & Investment H ad German utility RWE reconsidered political risk, its financial perfor- mance in 2016/17 might have been stronger. The company's shares fell in Sep- tember aer news that the Green party could form part of a new German government coalition. In addition, earlier in 2017 it announced that it had made a loss of €5.7 billion in 2016 and scrapped its dividend for the second year in a row. These actions resulted partly from changing trends in the German market which allowed more wind and solar power on to the system. In short, Energiewende (energy transfor- mation) – the German government policy underlying the switch to renewable genera- tion – has hit RWE's profitability hard. In 2016 it even prompted the company to sepa- rate its conventional generation from its renewables business, Innogy. Luke Fletcher, utility analyst at non-profit campaigning organisation CDP, describes RWE's restructuring as a "drastic action" and a clear example of how bold climate policy like Energiewende can "have a huge impact on shareholders". As a result of its financial performance and the carbon intensity of its portfolio, RWE comes last in an international ranking of electricity utilities (see table, below) which measures readiness for a low-carbon transi- tion, including its assessment of physical, regulatory and reputational risks. CDP compiled the ranking in support of the Task Force on Climate-Related Financial Disclosures (TCFD), a group calling for sys- tematic climate-related risk assessments to be included in companies' annual reports. The TCFD was set up by the Financial Sta- bility Board, an international organisation established as a result of the 2008 financial crash. Commenting on the league table and associated analysis, Fletcher observes that RWE in particular is struggling with the low- carbon transition. But the German energy giant is by no means the only European util- ity grappling with the challenges that decar- bonisation is piling on to business models hewn in the age of coal. A more considered approach to climate risk across the sector as a whole is needed in order to allow new business models to flour- ish, argues Fletcher. Pricing risk Classifying assets, liabilities and acquisitions under the lens of climate-related risk would, according to CPD and the TCFD, facilitate the more appropriate pricing of risks and allocation of capital in the context of cli- mate change. This would work as a volun- tary initiative, helping speed the transition to a low-carbon economy, and would shi the corporate perspective beyond immediate concerns. However, most industries are not reporting in-depth on this values-based assumption. Improvements have been made over the past decade and utilities have responded to government and activist demands for data on their current or historic greenhouse gas emissions. But now the pressure, as expressed by the TCFD, is aimed at getting them to disclose climate-risk assumptions robustly and con- sistently in financial filings, and to look fur- ther into the future. TCFD's recommendations do not require any innovative accounting, but more in- depth information. "It would change what the directors are telling us in the strate- gic report but wouldn't change [the struc- ture of] the balance sheet and profit and loss account," explains Russell Picot, spe- cial adviser to the TCFD and former chief accounting officer at HSBC. Leaders have already emerged in this space, but the wider picture is very mixed. At the European scale, CDP finds Austrian power company Verbund the best per- Accounting for carbon Pressure groups are calling for European utilities to consistently disclose key data on their carbon intensity as part of their financial reporting. Lis Jeffries explains why. Analysis League 2015 league Company Country Market cap European market League Managing Managing Transition Climate governance table rank table rank 2016 (€bn) share in 2015 (i) table score transition risks physical risks opportunities & strategy 1 3 Verbund Austria 5 1.0% 3.78 A A A B 2 1 Iberdrola Spain 40 2.4% 5.35 B E A A 3 7 Fortum Finland 13 1.5% 6.45 B B B D 4 4 Enel (ii) Italy 37 3.9% 6.48 C E A B 5 11 SSE UK 20 0.9% 6.51 C B C C 6 2 Centrica UK 15 0.6% 6.65 B C D C 7 6 EDF France 23 18.4% 6.68 B C E B 8 5 EDP Portugal 11 1.4% 6.72 D D A B 9 9 Eon (ii) Germany 17 2.7% 7.13 C C B C 10 8 Engie France 34 4.0% 7.98 C C D C 11 12 EnBW Germany 6 1.7% 8.22 E C C C 12 10 Endesa Spain 20 2.4% 8.66 D D C D 13 - CEZ Czech Republic 9 1.9% 9.44 D D D E 14 13 RWE (ii) Germany 7 6.5% 10.89 E C E E Weighting 35% 10% 30% 25% Source: CDP (i) Relative to total gross electricity generation (GWh) for EU. (ii) Eon analysis included 46.65% share of Uniper, RWE analysis included 76.8% share of Innogy, Enel analysis included 70.14% share of Endesa