Risks & Resilience: Considering the Integration of Climate Readiness into Financial Analyses of Drinking Water & Wastewater Utilities

“Risks & Resilience: Considering the Integration of Climate Readiness into Financial Analyses of Drinking Water & Wastewater Utilities”, published by the Environmental Protection Agency, examines the risks posed by climate change facing drinking water and wastewater utilities.  This paper relates risks to both water utilities and investors who purchase utilities debt obligations.

The paper explains the Risks & Resilience Stakeholder Process: a series of discussions between water sector utilities, water associations, and financial institutions. These discussions address possible ways to manage climate risk within the water and financial sectors. The paper includes a summary of findings from the process, and proposes future courses of action within each sector. Recurring themes from this summary are:

  • Climate change has the potential to exacerbate traditional risks that water sector utilities confront
  • Current market and investor decisions are driven by immediate economic and political circumstances instead of by longer term factors such as climate change
  • The water and financial sectors can work together to prevent miscalculations in climate risk assessment. (For a complete list of summary findings, refer to page 5)

The paper finds that utility managers are used to integrating a wide-rage of uncertainty into their long-range planning, including projected population change, water supply and demand, and rate adjustments. The same tools they use to plan for these uncertainties could be applied to climate change. Investors are primarily concerned with the probability of default, and credit rating agencies are only likely to consider climate risk if those risks have a material effect on a utility’s probability of default. The paper also finds that credit rating agencies currently assess information that could help utilities plan more strategically for climate change, enhancing overall confidence for creditors. The paper recommends that both sectors find ways to share qualitative information and clarify how climate change impacts could influence credit ratings.   

This paper strives to help the water utility sector and financial sector better account for and manage risk by demonstrating the advantages of cross-sector collaboration.The paper documents large interest from both sectors in working together, and lists possible venues for facilitating further partnership.

 

Publication Date: September 2014

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