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What does Environmental, Social, and Governance (ESG) mean for Electric Utilities?

5 mins

Social and environmental activists have placed utilities under scrutiny, particularly with the increased urgency over climate change. And institutional investors have gotten on the bandwagon as addressing greenhouse gas emissions is increasingly seen as a business risk that could affect levels of financial risk and, eventually, stock prices and access to capital. “This is a rising tide,” said Southern Company Chief Legal Officer Jim Kerr. “I don’t know what time high tide is, but it is an inevitable tide.”

Wall Street Evolution

Kerr and the other panelists chalked the increase in the prominence of ESG-based investors on a significant shift that has taken place in the strategic make-up of the large-scale holders of utility stocks. Jeffrey Kotkin, vice president of Investor Relations at Eversource Energy, told the audience at the well-attended session that the bulk of utility shares had shifted from a “widows-and-orphans” stock held by individuals and sharp-eyed brokers seeking safe, reliable returns, to one held by large institutional investors who manage 401Ks and other similar “passive” indexed funds.

Such funds are considered less likely to dump their shares of utility stocks since they also rely on the steady returns and relatively low risk to their own investors; however, they are also seen as more likely to favor companies that are aggressively tackling sustainability and risk associated with climate change, and if they are generally good corporate citizens of their respective communities. 

To back up their conclusions, investors have turned to a growing niche industry of analysts requesting often-large packages of company data on everything from carbon emissions to workplace diversity in order to better “grade” a utility on its overall ESG status. “They really want to know that you have a competent board that has recognized these risks and is spending time on it,” said Kerr. “These investors want that data, and they are the investors that we want.”

It can be a lot of work for a utility to come up with such information. Kerr quipped that Southern Company could field “an army of people just responding to data requests.”

A Welcome Template

The industry has been taking steps to wrangle the higher volumes of “big data” that are employed by analysts to grade individual utilities. This summer, the Edison Electric Institute (EEI) and the American Gas Association released a 2.0 version of its 2018 template for ESG/sustainability reporting, which standardizes the reporting process, making it simpler for utilities to compile and easier for investors to digest.

The changes, which will be adopted by most of EEI’s and AGA’s member companies by the end of the year, provide more uniform and consistent methodology to the statistics along with more-pertinent types of information. 

“They wanted more forward-looking information,” said Devin James, manager of Investor Relations and ESG at the Edison Electric Institute. “Brevity was definitely a need. They tend to not like 70-page documents.”

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