By Bloomberg
January 16, 2019

PG&E told investors repeatedly that weather-related disasters were a risk, but many didn’t pay enough attention until the company was on the brink of bankruptcy.

The company included warnings in its regulatory filings and offering prospectuses citing how disasters like wildfires, droughts and floods, could weigh on its results or disrupt its operations. But until mid-November, the company’s bonds were trading above face value, even those due decades from now, implying that money managers thought those risks were manageable.

Now investors are paying attention. PG&E’s stock market value has plunged to about $3.5 billion from almost $24 billion at the end of September. Most of its bonds are trading around 70 to 80 cents on the dollar. The sudden drops underscore how difficult it is for investors to analyze risks linked to disasters and potentially even climate change, rather than regular business difficulties.

“A lot of people think climate change risk is so far in the future that it’s not going to affect the bonds, but then you have something like this,” said Jens Peers, U.S. chief investment officer of Natixis Investment Managers’ Mirova sustainable investing division, which oversees about $10.7 billion in assets. Mirova was already steering clear of PG&E in part because of the 2010 San Bruno gas pipeline explosion, where it was found guilty of safety violations.

The California electric and gas utility said it will file for bankruptcy this month after 2017 and 2018 wildfires left it with potential liabilities of $30 billion or more. Current market prices for bonds imply that investors expect to take some kind of hit on the securities. A spokesman for the company declined to comment.

PG&E (pcg) fell as much as 13% before the start of regular trading in New York. Shares are down more than 85% since the Camp Fire, the deadliest blaze in state history, broke out Nov. 8.

PG&E hasn’t hidden its vulnerability to the effects of climate change. Geisha Williams, who left the chief executive officer role over the weekend, had consistently argued that California’s concerns from fires went well beyond PG&E, describing the blazes as “climate driven extreme weather” in an earnings call last summer. In a prospectus for a bond exchange in April, the company’s Pacific Gas and Electric Co. utility unit cautioned that climate change and natural disasters could hurt it.

The company planned for more investment in safety over the last few years, and made it a key element of its board director searches in late 2017. Around the same time, the company formed its Community Wildfire Safety Program and has since enhanced the program to expand its network of weather stations and conduct inspections of electric infrastructure in high fire-threat areas.

Disclosures about exposure to disasters are common among U.S. utilities. But money managers and analysts that focus on environment, social, and governance issues have been concerned about PG&E in particular for awhile. Research and analytics firm MSCI Inc. first flagged wildfires as a significant risk to PG&E investors in 2016, after the company’s equipment was found to have sparked the 2015 Butte wildfire. More recently, environmental, social and government research firm Sustainalytics described wildfires and other environmental risks to the company as “severe.”

Of the about 1,200 green and sustainable equity funds tracked by Bloomberg, just 34 held shares of PG&E as of their latest filings. But many conventional money managers were paying less attention to environmental risks.

“People get comfortable with risks that have never been a problem before, then all of a sudden it is,” said Henry Peabody, who helps manage $460 billion in fixed income assets for Eaton Vance. “Risk creeps into places you least expect it to.”

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