Management report, climate change, TCFD disclosures, CDP

National Grid plc – Annual report – 31 March 2021

Industry: utility

Strategic Report (extract)

Task Force on Climate-related Financial Disclosures (TCFD)

National Grid has committed to implementing the recommendations of the TCFD in full, and this is our fourth disclosure. We are committed to developing a business model that is consistent with the objectives of the Paris Agreement, and therefore set a commitment in November 2019 to reduce our Scope 1 and 2 emissions to net zero by 2050. The details of the interim targets that we have set to achieve this are included in our Responsible Business Charter (RBC) that we published in October 2020. This year, alongside the Annual Report and Accounts (ARA), we are publishing our first Responsible Business Report (RBR) which details our progress against the commitments set out in our RBC.

This year we have continued to make strong progress on full compliance with the recommendations of the TCFD. In last year’s disclosure, we outlined actions that we planned to progress during 2020/21. To address those actions, we have progressed our scenario analysis of the physical risks to our assets using updated climate scenarios, developed our RBR and updated our Company strategy to incorporate our net zero commitments. For the fifth consecutive year we received the prestigious climate change ‘A’ score from CDP Climate Change.

Governance of climate-related risks and opportunities

The Board’s oversight The Board of Directors is responsible for the oversight of climate-related risks and opportunities impacting the Group. They in turn delegate some elements of their responsibility to their various sub-committees, as set out in the diagram below:

A TCFD steering group comprised of representatives from Group Financial Reporting, Safety, Health and Sustainability, Corporate Strategy and Investor Relations oversees progress against the TCFD recommendations and the publication of our annual disclosure, and reports to the Chief Financial Officer. In addition, a new Responsible Business steering group, chaired by the Interim Group Corporate Affairs Director, has been set up to provide oversight of the integration of responsible business into National Grid, including the development of ESG targets and future ESG strategy. The steering group also provides oversight over ESG-related external reporting, including TCFD disclosures and is comprised of the Interim Group Corporate Affairs Director, Chief Financial Officer, Group General Counsel & Company Secretary and the Chief People and Culture Officer. Standing attendees include the Head of Responsible Business, Head of Safety, Sustainability, Health and Environment and the Group Financial Controller.

A Green Financing Committee chaired by the Group Treasurer, provides governance over our Green Financing Programme. In December 2020, the Green Financing Committee approved the publication of our first Green Financing Report, which provided an analysis of how we utilised the proceeds from our portfolio of Green Bonds and their environmental impact.

Management’s role Management is responsible for managing on a day-to-day basis the climate-related risks and opportunities faced by the Group and for delivering the roadmaps to achieve the net zero strategy set by the Board.

Our role in the energy transition continues to be an area of increasing focus at all levels of the organisation, from Company-wide calls led by the Chief Executive on the commitments published in our RBC, to bespoke sessions run locally to develop and communicate the roadmaps for each business’ contribution to achieving net zero. Previous training has been delivered in the US about how our role is changing on the pathway to 80% reduction by 2030. More formal training programmes in the UK which were paused due to the ongoing pandemic are currently being designed for roll-out throughout the business next year. Bespoke training has been delivered to specific roles where they need knowledge and skills to deliver against our targets.

Our strategy for responding to climate change

Overview of our climate-related risks and opportunities

The scale of ambition and speed of change required to meet net zero emission targets, along with the changes in temperature and weather patterns present both risks and opportunities to our business. These risks and opportunities, along with a summary of the work we are doing to address them, are presented in the table below. Short-, medium- and long-term timeframes are defined in our risk methodology as one year or less, one to three years and three or more years respectively, and this is reflected in the table below.

Impact of the climate-related risks and opportunities on our strategy

Climate change is the defining challenge of this generation and in our role at the heart of the energy system we understand the critical role we need to play. The markets in which we operate have announced ambitious carbon reduction targets and further legislative actions are anticipated. In response, in March 2021 we announced a strategic portfolio repositioning, announcing the acquisition of WPD, the largest electricity distribution network operator in the UK, the sale of NECO in the US and our intention to sell a majority stake in our UK Gas Transmission business. The acquisition of WPD provides a one-off opportunity to gain a scale position in the UK electricity distribution market, enabling National Grid to play a pivotal role in enabling the growing role of electricity in the energy landscape in the UK. Upon successful completion of the announced transactions, the contribution of electricity to National Grid’s portfolio will be around 70% of the Group.

Across all of our businesses we aim to play a leading role in enabling and accelerating the transition to a clean energy system, balancing decarbonisation, affordability and reliability of supply. Working closely with governments and other stakeholders and partners around the world and through our work for COP26, we focus on the technical and commercial solutions that will help achieve net zero for the energy sector. While the biggest impact we can have is in enabling the economy-wide clean energy transition, we must also reduce our own direct impact on the environment and strengthen our resiliency to risks that we have less control over. To accomplish this, our RBC commitments to reduce Scope 1 (direct emissions from our operational activities), Scope 2 (indirect emissions from our purchase and use of gas and electricity) and Scope 3 (other indirect emissions from activities and sources outside of our ownership or control) emissions align with the requirements of the Paris Agreement and Science Based Targets initiative (SBTi). These commitments, along with our overall suite of environmental sustainability initiatives, are reviewed in accordance with our quarterly business reviews and reported accordingly to the Group Executive Committee and Board.

Our climate change scenario analysis

Transition Risk Analysis

To further understand the risk that climate change could have on our business, we undertook a high-level scenario analysis, where we considered scenarios out to 2030. We used two scenarios:

  • The first assumed that the global response to the threat of climate change is enough to limit global average temperature increases to no more than 1.5ºC above pre-industrial levels (as set out in the Paris Agreement) by 2100 (the 1.5ºC scenario). In this scenario, rapid changes are made to progress decarbonisation goals: coordinated policy, regulation and customer behaviour favours bans on polluting technologies, and support for low-carbon solutions. We have assumed that transition impacts in this scenario would be focused around technological shifts to support decarbonisation, with the main impacts being a trend towards more large-scale renewables in the generation mix, a trend towards electrification and public pressure against the use of gas.
  • The second scenario assumed that the 1.5ºC target is missed by some margin, comparable to a 4ºC global average temperature increase (the 4ºC scenario). In this scenario, changes are less rapid and less comprehensive, and emissions remain high, so that the physical ramifications of climate change are more apparent by 2030. In rationalising this slower global progress, our 4ºC scenario assumed fragmented and ad hoc policy (within the Group’s operating territories and globally). The main impacts of this scenario were increased weather events of escalating severity and frequency, which could increase disruption to our assets and our customers, less coordinated policy and regulation in pursuit of decarbonisation, resulting in an increase in overall system costs and reduced visibility over the network and inequality of access where some decarbonisation activities have the potential to leave some sectors of society behind.

Our analysis showed that, without action, both scenarios presented risks to us. However, while these would need to be managed, some of these changes represent material opportunities. Our next refresh of our scenario analysis will reflect the developments in our strategy as well as advancements in technology and in the wider market.

Physical Risk Scenario Analysis

To further understand the risk that climate change could have on our business, we are undertaking a high-level assessment of the physical climate change risks to assets across our UK and US business under a 2°C and 4°C scenario at future time periods of the 2030s, 2040s, 2050s and 2070s. This is important in order to mirror the longevity of our assets, even if the levels of uncertainty can increase the further ahead in time you look. The exercise is not yet complete (the project start date was delayed due to the COVID-19 pandemic), and therefore only initial results and the approach are shared in this year’s disclosure.

Our approach

Our analysis on physical climate risks is aligned with recognised climate scenarios, specifically the Intergovernmental Panel on Climate Change’s (IPCC) Representative Concentration Pathway (RCP) scenarios which provide a uniform framework for exploring potential climate changes and related impacts. RCPs are used globally for climate modelling and give access to a wide range of peer-reviewed and accepted climate datasets, as well as allowing consistency across our UK and US territories. We prioritised climate data sources according to confidence and readiness for use to support a consistent risk assessment across our UK and US territories. We relied on the most up-to-date and robust data from recognised national or local sources such as UKCP18 and NCA4.

We have considered the full portfolio of assets across our businesses, grouped into 12 asset types to assess vulnerability to these hazards. An assessment of risk, along with indication of confidence, will be provided by the combination of climate hazard, asset vulnerability and asset exposure for each hazard (Figure 1). The hazard assessment is drawn from geospatial analysis of climate model data, which will be co-located with our assets within the full risk assessment during 2021.

Initial insights from the modelling

We identified eight priority climate hazards expected to have a material impact on our business, and so have focused on these hazards for this scenario analysis. Table 1 shows the climate indicators we use to represent each of the eight hazards, together with a high-level indication of the overall direction of change across the US and UK under a 4°C scenario.

Alongside the hazard assessment, our asset vulnerability assessment shows that:

  • coastal and inland flooding remain the hazards which have potential to impact the widest range of asset types, depending on location.
  • temperature-related hazards (very hot or very cold days, and rapid changes) can have significant impacts, but on a smaller range of asset types.
  • generation assets have high vulnerability to both flood-related hazards and high temperatures.
  • underground assets are protected from the direct impacts of some climate hazards (such as high winds, storms, lightning) but may experience indirect impacts such as erosion and ground movement.

Vulnerability to hazards does not mean that risks will be realised. Whether vulnerability translates into risk depends on the exposure (location) of individual assets relative to projected changes in climate hazards, as well as any site-specific resilience measures in place. The full quantified hazard and risk assessment is due later in 2021 and will provide insights through comparison of scenarios, timeframes and aggregation of results by asset type, territory or business. We are developing an interactive visualisation to allow each business to make more tailored use of the scenario analysis.

A key feature of our approach to scenario analysis is ongoing engagement across the Group, with representatives of each National Grid business involved in prioritisation of hazards and vulnerability assessment. In turn, every business has a stake in the outcome and is identifying how the assessment will be used in strategic planning and investment choices. This is supported by an action on our principal climate change risks to develop a climate change adaptation strategy/action plan.

Risk management of climate-related risks

Process for identifying and managing climate-related risks

In autumn 2019, a Group-level climate change principal risk was developed and added to our Group risk register. The climate change principal risk is underpinned by our enterprise risk management process which is the framework through which the Group identifies, assesses, prioritises, manages, monitors and reports risks. This process, which is described on page 24 of the ARA, includes the identification of a series of Group-wide controls and actions to mitigate the climate change principal risk (this is further described on page 26).

The controls for our climate change principal risk have evolved in line with our strategy and regulatory frameworks and all are in progress. They include controls on governance (for example, Board and Group Executive Committee sign-off on strategy and oversight of delivery against net zero action plans), investment plans (bringing to scale new technologies), leadership and climate adaptation. Controls related to the climate change risk are also reflected throughout other relevant risks, for example disruptive forces, regulatory outcomes, political and societal expectations. Progress has continued against specific UK and US business risks on climate change as well as US risks embedded in climate change threats that support the Group risks. The Secretary of State in the UK requires our UK Electricity Transmission and UK Gas Transmission businesses to report on what we are doing to adapt to climate change. Our most up‑to‑date report will be published in 2021. This covers a much wider qualitative assessment of potential risks.

Metrics and targets

We have metrics and targets that allow us to measure our impact on the environment, demonstrate our commitment and monitor our performance. These were published in October 2020 within our RBC and, on an annual basis, our RBR will report our progress against those targets. As previously discussed, the cornerstone of our suite of metrics is our commitment to reducing our impact by achieving net zero for our Scope 1 and 2 emissions by 2050, with interim targets of an 80% reduction by 2030 and a 90% reduction by 2040. Numerous underlying metrics support and complement this goal as part of our broader sustainability ambition, including reducing the carbon footprint of our operating facilities, enhancing the natural value of our properties, recycling and/or reusing our recovered assets and reducing our office waste. These are discussed in more detail on pages 56 – 58 and in our RBR. The metrics are comprised of several business unit level metrics that are then tracked and monitored by business unit, and presented to senior management on a quarterly basis, with accountability at the local level.

We continually review our metrics and targets, as needed, to ensure that the data we are measuring is meaningful, aligns with our strategy, and is providing the information the business and our stakeholders need to effectively monitor our performance and demonstrate our progress. In 2021/22, we will be laying out our pathway to achieve our net zero by 2050 emission reductions. Our GHG emissions reduction targets have been approved by the SBTi criteria, including a more ambitious Scope 3 emissions reduction target of a 37.5% reduction by FY 2034 from a FY 2019 baseline year.

We have also included enhanced disclosures in the financial statements prepared under IFRS to explain how we have considered the financial impacts of climate change, in particular evaluating the impact of new net zero commitments in our territories, and the effect this has had on judgements and estimates such as the useful economic life of our gas assets. See notes 1 and 13 to the financial statements for details. This remains a recurring area of focus for the Audit Committee.

Internal control and risk management (extract page 26)

Strategic and regulatory risks (extract)