National Grid plc – Annual report – 31 March 2023
Industry: utility
Strategic Report (extract)
Task Force on Climate-related
Financial Disclosures (TCFD)
At National Grid, we recognise that addressing climate change as a result of GHG emissions is the defining challenge of the 21st century. Our networks and operations play a central role in the transition of the energy system in the jurisdictions we operate in. We are supportive of the 2016 Paris Agreement’s long-term goal to keep the rise in global average temperature by 2100 to well below 2ºC above pre-industrial levels, and to pursue efforts to limit the increase to 1.5ºC.
We have supported the recommendations of the TCFD since its initial publication. By helping us to understand the impacts of climate change on our business, the framework has benefitted us directly by: shaping our governance structure to effectively oversee risks and opportunities; aligning our business strategy to identify and seize transitional opportunities; developing values of sustainability in our corporate culture; and embedding climate change into our risk management framework, which has engaged our lines of defence to manage the associated risks.
In this year’s disclosure we have fully complied with the Financial Conduct Authority (FCA) Listing Rule 9.8.6R(b). Our climate-related financial disclosures are considered to be consistent with the TCFD’s four recommendations and 11 recommended disclosures, as illustrated in the index to the right. In addition, we have taken steps this year to enhance our disclosure by adopting the TCFD’s additional implementation guidance and energy sector-specific guidance.
In the following sections, we set out our response to the TCFD’s four core recommendations – governance, strategy,
risk management, and metrics and targets – in line with the recommendations and guidance described above. We have also included a summary of our Climate Transition Plan (CTP), which sets out the strategic action plans and mechanisms we have in place to realise our net zero commitments.
TCFD index
The following index navigates between our disclosures and the TCFD’s recommendations and recommended disclosures:
1. Governance
The Board of Directors sets and leads the Company’s climate-related strategy and goals and has oversight of climate-related risks and opportunities impacting the Group.
The Board delegates elements of its responsibility to its various Committees as described on the right. Members of the Board bring a variety of skills and experience, including expertise in driving sustainability and climate change matters. Several members of the Board have specific experience of this, including Martha Wyrsch, who joined the Board in September 2021. Martha brings extensive knowledge and experience around climate related issues through her experience as CEO of a major international gas transmission business as well as leading the growth and development of Vestas’ renewable energy business in the US. See pages 70 – 71 for information on the individual experience of Board members and page 80 for the specific skills attributed to the Board, including sustainability and climate change.
The Chair of the Safety & Sustainability Committee provided updates to the Board throughout the year on matters discussed at the Committee meetings, including updates on progress against goals and targets for addressing climate-related issues. The Board receives a CEO report at each meeting which includes tracking of climate change metrics. Following recommendation by the Safety & Sustainability Committee and the Audit & Risk Committee, the Board approved the 2022/23 RBR at their May 2023 meeting.
In addition, following Audit & Risk Committee review and recommendation, the Board also approved the following 2022/23 sustainability publications:
- This TCFD report
- The EU Taxonomy report
- The Global Reporting Initiative (GRI) index
- The Sustainability Accounting Standards Board (SASB) report
Throughout the year, the Board undertook strategy deep dives through which consideration was given to the energy transition and climate change, and the impact of these on the Group’s strategy.
The remit of the Board and its Committees under our governance framework, as well as the number of times they meet, are set out on pages 69 – 71 of the Corporate Governance Report. Terms of Reference for the Board and its Committees are available at nationalgrid.com/about-us/corporateinformation/corporate-governance
Refer to the table on the right for the climate related issues that were discussed through the year.
Management’s role
The Board delegates to management responsibility for asset investment and maintenance planning, implementation of the net zero strategy and overseeing the development and achievement of RBC commitments and targets. Management is also responsible on a day-to-day basis for the management of climate-related risks and opportunities faced by the Group and for delivering the roadmaps to achieve the net zero strategy set by the Board.
Sustainability-focused roles have been embedded across the Group to ensure that in addition to the top-down focus, there is also a bottom-up approach to addressing climate-related issues.
Our Chief Sustainability Officer heads a team of subject matter experts who lead the implementation of the RBC across the Group by working closely with business units to ensure their strategy and operations align with our decarbonisation and climate resilience targets. The Sustainability team sets the Group sustainability strategy, modelling potential climate scenarios, working with the Science Based Targets initiative team. In addition, they have developed the Group’s CTP, and continue to monitor the developments from the UK’s Transition Plan Taskforce (TPT) to ensure it adheres to future disclosure standards and meets the needs of our stakeholders.
To address physical risks, the Chief Engineer’s Office leads the development of climate adaptation frameworks across the Group to ensure there is a consistent approach to assess the vulnerability of our energy assets and to guide strategic investment planning. Further delegation is given to our core operational businesses including business unit Presidents who are accountable for delivering the net zero roadmaps for their businesses. Corporate Affairs; Group Finance; Sustainability; Safety & Health; and People teams support the businesses in achieving their net zero pathways.
The Group Finance function continues to build out its sustainability capabilities through its ESG Centre of Excellence, Investor Relations, Group Treasury and Procurement teams. These teams are responsible for setting the Group sustainability voluntary and mandatory reporting strategy and ensuring credible and reliable internal and external reporting of sustainability data. This is achieved via implementing robust systems, processes, controls and assurance; attracting green investment and engaging with debt and equity investors on how to enhance messaging around climate-related issues; and engaging with, and supporting, suppliers on their decarbonisation journey.
How management is informed about climate-related issues
Climate-related issues are flagged via the Enterprise Risk Management (ERM) process described in the next section. We also have a monthly business review process whereby more granular targets are embedded in business unit performance contracts. In addition, we engage in regular discussions with regulators, policymakers and other key stakeholders, which helps inform management on key horizon risks.
Other relevant forums
TCFD working group, led by the Group Finance ESG Centre of Excellence, comprises representatives from Sustainability, Corporate Strategy, Group Risk and Company Secretariat. This group oversees progress against the TCFD recommendations and the publication of our annual disclosure.
The Responsible Business steering group, chaired by the Chief Sustainability Officer, provides oversight of the integration of responsible business into National Grid, including the development of ESG targets and future ESG strategy.
Business Unit Green Financing
Committees chaired by the Group Treasurer, provide governance over our Green Financing Programme and approve the publication of our Green Financing Report, which provides an analysis of how we utilised the proceeds from our portfolio of green bonds and their environmental impact.
Climate management committees
Below, we outline the key management committees responsible for monitoring and driving our sustainability performance and managing climate‑specific risks and opportunities:
2. Strategy
The work we have done to better understand our climate-related risks and opportunities have helped inform the strategic decisions we have made in recent years.
These include the strategic pivot towards electricity that was announced in March 2021, for example:
- acquisition of UK ED (previously WPD) in June 2021;
- the sale of our Rhode Island electricity and gas business in May 2022; and
- the sale of a majority equity interest in the UK Gas Transmission and Metering business in January 2023.
This has shifted our portfolio of Group assets from c.60% electricity in 2021 to c.70% electricity on completion of all three transactions. In addition, the Group has continued to grow its investment in our NGV business, which includes our interconnectors business in the UK and National Grid Renewables and fossil fuel generation business in the US. This further enhances our role in delivering the energy transition, whilst helping to ensure energy security and sustainable affordability in the jurisdictions we operate in.
Scenario analysis
Scenario analysis to 2050 and beyond guides our strategic and financial planning with respect to climate change. Scenarios consider the potential physical impacts to the Group of average global temperature increases of 2°C and 4°C by 2100 from pre-industrial levels.
We also consider potential transitional impacts of scenarios of average global temperature increases of 1.5°C in keeping with the Paris Agreement.
Our most recent analysis executed in 2021/22 modelled three scenarios: slow progress, orderly transition and acceleration. They are stretching and plausible futures for our society built using different assumptions across variables, as demonstrated by the graphic below. We tested the resilience of our business strategy against these different transition scenarios, focusing our transition risks on the scenarios associated with lower temperature rises, and our physical risks on the scenarios with higher temperature rises.
Our scenarios are updated every two to three years, with the next update due in 2023/24.
Transition scenario modelling
Our transition scenarios are developed using driving forces which we monitor regularly as part of our risk management process and annually in our strategic horizon scan. In our analysis, we do not make a judgement on the likelihood of any one scenario relative to others; and by design, the analysed scenarios do not encompass all possible future pathways and their associated risks. There are limitations within the scope of our modelling, for example available data across other sectors, but to minimise this impact we have utilised a wide range of resources and compared our results with external scenarios.
Transition insights
Whilst current global climate policies and actions suggest a lower than 4°C scenario, a 4°C scenario was still modelled in line with our approach to scenario modelling outlined below. The transition impact to the Group is most significant in scenarios resulting in a lower degree of warming given the increased action required. The following five transition insights are therefore most relevant to a 2°C (or lower) scenario:
1. Urgent collective action required across society
To reach net zero requires new policies and technology development. Action is required by a wide range of stakeholders in the industry as a result of the public expectations on climate change; there is a push for new policies, action and government and state targets in the regions we operate. Our ability to meet our own net zero commitments rely on these and is covered in more detail in the risk and opportunities section.
2. Retaining consumer buy-in will be key
To reach net zero, consumers can drive domestic heating and transport decarbonisation by switching to low-carbon alternatives such as EVs and heat pumps. EVs are expected to represent 90% of the global fleet by 2050, and increased consumer demand such as this will drive additional growth and investment in our electric network businesses.
3. Electricity use and share of final demand will increase
Grids are expected to grow to deliver an increase of 50 – 160% of current demand by 2050 due to fuel switching, with both heating and road transport sectors decarbonising. This will drive additional growth and investment in our electric network whilst resulting in lower demand for our gas network.
4. Energy supply structure will shift
There will be a shift to power generation from renewable sources, most notably wind and solar. Offshore wind is expected to triple in output from 2030 to 2050 and connecting this could drive significant growth opportunities for our businesses.
5. Pathways will adapt to global and local realities
For example, the US Northeast region is expected to import hydrogen to support decarbonisation, but in the UK, blue hydrogen and carbon capture, utilisation and storage (CCUS) may develop due to policy and geology. It is important that our businesses monitor and adapt to these differing pathways in their respective geographies.
None of the transition scenarios tested threaten the resilience of the Group and we are in a strong position to adapt our portfolio to maximise the opportunities of the energy transition.
Further detail on the transition risks and opportunities identified in our scenario analysis, including estimated qualitative and quantitative impacts where applicable, can be found on pages 47 – 50.
For physical risks, the climate hazards from our 4°C scenario analysis are summarised above. The climate hazard data is sourced from the relevant national climate assessments (NCA4 in the US and UKCP18 in the UK). The scenario data are modelled using the IPCC’s Representative Concentration Pathway (RCP) scenarios of RCP8.5 (4°C) and RCP4.5 (2°C). The modelling covers decade timeframes; 2030s, 2040s, 2050s and 2070s, with comparison to a baseline of 1981 – 2010 in the UK and 1976 – 2005 in the US.
Physical insights
Most hazards are projected to increase in frequency in the future, with high temperatures and coastal flooding of particular concern across consistent areas of our operations. In most cases the level of risk is greater in a 4°C scenario than a 2°C scenario.
We are continuing to progress our physical risk analysis and asset vulnerability to inform our strategic planning and investment choices. By developing our Climate Change Risk Tool (CCRT) in-house with a dedicated geospatial capability we can create bespoke physical risk assessments for each business based on the specific asset and hazard data that is material to their operations, while still retaining a Group strategic view of our overall business.
Our current risk assessment shows the risk to our existing asset portfolio, but we are now aligning this with data relating to our new infrastructure investments so that our cumulative picture of risk will begin to change.
The next version of our risk assessment in 2023/24 will incorporate UK ED and National Grid Renewables.
3. Risk management
Climate Change and ERM
Climate change is considered as part of our ERM process and is one of our GPRs.
For details of our ERM framework and process, see page 18.
Since December 2021, the ERCC split the climate change GPR risk into two distinct elements:
1. Climate Change (mitigation GPR):
The standalone mitigation risk is aligned to our strategic objective ‘Enable the energy transition for all’, with a focus on delivering clean, decarbonised energy to meet our net zero goals.
- GPR description: We fail to identify and/or deliver upon actions necessary to address the transitional impacts (from a changing energy system) of climate change on our business, because of poor management of threats and opportunities associated with climate change, leading to a reputational impact of not enabling the Group to meet its own net zero commitments: ensure our business model and strategy is aligned to the Paris Agreement on climate change; deliver greenhouse gas emission reductions for our business and enable economy-wide net zero transition; and demonstrate climate change leadership within the energy sector.
2. Significant Disruption of Energy (adaptation GPR): The adaptation or physical risk activity, absorbed within the control framework associated with the ‘Significant Disruption of Energy’ risk, has helped ensure we continue to deliver energy reliably for our customers, with a focus on resilience.
- GPR description: We fail to predict and respond to a significant disruption of energy supply because of climate change, asset failure (including third-party assets), storms, attacks, market failure or other emergency events leading to significant customer harm, lasting reputational damage with customers, regulators and politicians, material financial losses, loss of franchise and damage to investor confidence.
This has generated greater oversight, focus and adoption of two distinct and proportionate control frameworks in line with the new Group risk appetite – mitigating downside risk, and maximising opportunities, where applicable.
Further details of the Group’s exposure to climate change are described on pages 21 and 23.
We have further developed our risk and opportunity horizon scanning to assess critical trends to the energy transition. With our senior stakeholders and supported by external risk experts, we identified key indicators and metrics which are measured on a monthly basis against thresholds. These are analysed against our current strategy and business plans for their potential impact and plausibility.
Emerging risks are managed under our risk management framework with results reviewed by senior leadership (detailed further on page 19).
Integration of the climate risk management process into our overall risk management framework
Consistent with the Group’s overall approach to risk management and internal control, climate change risk management activities take place through all levels of our organisation. Our risk governance model drives an effective ‘top-down, bottom-up’ approach (see below) which is described further on page 18.
Group’s Risk Taxonomy
The Group’s Risk Taxonomy supports all levels of the business to categorise any climate change risk into one of our four taxonomy groups: strategic, operational, financial and compliance. Sub-categories beneath these four groups allow the business to select a more granular taxonomy grouping with an assigned risk appetite. The individual business unit or Group function Risk Committees oversee,
discuss and challenge new and existing climate change risks using the ERM framework, taxonomy and scoring methodology to ensure each risk has an appropriate inherent, current and target score for likelihood, financial and reputational impact. Where current risk levels are outside of agreed target scores and our risk appetite (based on the taxonomy), the business area implements actions and internal controls to close the gap.
Despite external risk pressures, our risk exposure specific to our climate-related risks is largely unchanged with the majority of our risks operating within risk appetite.
The table below illustrates a comprehensive and evolving set of risk categories that is used for organising and communicating risk across the organisation. It is an important component of the risk management process as it provides a complete set of risk categories across different levels and enables risk owners and the risk community within an organisation to consider climate-related risks that could affect achieving its objectives. The climate-related risks aligns directly with two primary risk
categories – strategic and operational. Specifically, these risks directly focus on ‘Environmental, social and governance’ (ESG) and ‘Production and service disruption’, but are also indirectly incorporated into many other risks across the framework.
Further, once a risk is identified and described, the threat (or the exposure) it represents to National Grid is quantified with the use of risk scales so that a proper mitigation plan is defined and implemented.
Setting consistent and organisation-wide definitions for quantifying risk, with impact, likelihood and velocity adopted as the minimum assessment, this approach enables a robust and meaningful quantification of risk to inform the risk response (see table on page 46).
How we manage our climate-related risks
As part of our risk management process, we have assigned key controls to manage both our climate change mitigation and adaptation risks.
The controls for our climate change mitigation GPR are in line with our strategy and regulatory
frameworks and are also reflected throughout other relevant risks, for example: regulatory outcomes; political and societal expectations; and significant disruption of energy. The key overarching mitigation controls involve tracking progress against targets, identifying changes that could trigger additional transition risks and implementing procedures and proposed solutions to overcome them.
Our key climate change adaptation controls include the following:
- Fit for Future of Electricity Strategy:
A corporate strategy that considers the steps to ensure our business remains resilient in the future, such as enhancing design standards, and investments on asset hardening and flood protection.
- Engineers Governance forums:
Group Chief Engineer and Engineering Duty Holders sharing guidance and data on key topics such as resilience.
- Resilience and Asset Management
Business Management Standard (BMS):
Sets out minimum requirements and a framework for resilience capability and managing asset risk to ensure each business unit is prepared for the next disruptive event.
- Establishment of the Business Resilience and Crisis Management organisation:
Reporting to the Group Chief Engineer and Group General Counsel & Company Secretary, this team is focused on building resilience to all threats and hazards. This includes the development of crisis management and business continuity plans, training, and exercises to help align and coordinate our response to severe weather and other crisis events; but is also leveraging innovative technologies to improve our intelligence, looking strategically at evolving risks associated with climate change.
We are also expanding our network of external stakeholders to identify and leverage industry thought leadership and play an active role in shaping new policies and regulations.
More information on our stakeholders can be found on pages 36 and 37
Risks and opportunities
Guided by our scenario modelling, strategic planning and risk management approaches articulated above, the climate-related risks and opportunities that pose a financially material impact to the Group are detailed below, along with our basis of measuring and responding strategically to each. To assess the relative materiality, we established scope of impact, timeframe and likelihood for each risk and opportunity using internal analysis, market data and input from subject matter experts. We have only reported risks and opportunities financially material to the Group per the risk assessment scoring table on page 46.
Accounts examples 