Climate risk pricing

American Electric Power: a just transition case study

Written by Prahalad Prasad & Josephine Richardson

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Just transition – the principle that the shift to a low-carbon economy should be fair, inclusive, and avoid social harm – can have meaningful implications for a company’s creditworthiness, depending on how well it is upheld.

In this AFII case study, we examine American Electric Power (AEP), one of the largest investor-owned utilities in the US, to show how the social dimensions of the energy transition could be factored into investment decision making.

AEP’s heavy exposure to coal generation, particularly in Appalachia and the eastern US, makes it a valuable test case for investors thinking about just transition risk. We show how this risk could manifest in AEP’s own workforce, and in the communities in which it operates, and how it could potentially derail the company’s transition away from coal.

While AEP has ambitious decarbonisation and grid investment plans, its recent public disclosures suggest declining attention to just transition issues. For bondholders, this raises an important question on whether the company can execute on its transition plan successfully – or see it become disrupted by workforce issues, litigation, and reputational damage.

Our analysis shows a difference in curve steepness between bonds from AEP subsidiaries with high coal exposure and those with low exposure, implying a greater risk premium is assigned to the former. 

About the authors

Prahalad Prasad

Prahalad Prasad

Associate Director, Research

Based in London, Praha covers topics including but not limited to the just transition, sustainability-linked bonds and deforestation. He previously spent seven years in Lloyds Bank’s Debt Capital Markets team.

Josephine Richardson

Josephine Richardson

Managing Director, Head of Research

Based in London, Jo leads AFII’s research and a global team supporting fixed income investors as they align their portfolios with climate and sustainability goals. She joined AFII after 18 years in fixed income markets at JPMorgan.

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