Aiming to align our corporate sustainability efforts with what’s most material to our stakeholders
The Electric Utility sector has historically been regarded as a formidable foe to the environmental, social and governance (ESG) movement. This is primarily due to the sector’s hallmark coal-backed power plants and the resulting high levels of greenhouse gas (GHG) emissions. The recent California wildfires illustrated how utility companies face significant environmental and reputational risks, but the sector’s stability can be crucial to a community (see Municipal Implications of the California Wildfires).
As Figure 1 shows, the sector generated nearly a third of all emissions in 2016. Additionally, electric utility plants produced air pollutants such as nitrogen oxide, sulfur oxide, volatile organic compounds and particulate matter that can impact the health of communities. These emissions, largely caused by coal-fired power plants, will continue to decline as coal power plants are replaced by natural gas-fired power plants and renewables such as solar and wind.
However, as we discussed in Sizing Up Carbon Emissions Goals, the utility sector plans to dramatically reduce its GHG and other air emissions, among other efforts to improve ESG performance. In this piece, we discuss a new template that utility industry executives are creating to measure and track their performance on a variety of ESG risk factors. Ultimately, we believe this template will enable equity and debt investors to better uncover ESG risks and direct capital toward those companies with stronger ESG profiles, further incentivizing electric utilities to focus on ESG risks.
The Edison Electric Institute (EEI), the company-led industry association for the Electric Utility sector, is creating the template.1 Through the EEI, industry leaders are stepping up to create this template themselves, illustrating that they are aware of investors’ demands for transparency on ESG performance and for progress on ESG risks in the utilities space (see SASB and ESG Reporting Standards). This template is the first ESG industry-specific framework created by an industry for itself, with the aim of providing investors with decision-useful and comparable ESG data.
The EEI template includes qualitative and quantitative performance data such as:
- The amount of power generated by fuel source. This metric may show which utilities are at risk for higher compliance and regulatory costs, as well as which utilities can more easily invest in renewables.
- GHG and other air emissions. High emissions could imply higher compliance costs in the future.
- A qualitative description of the management and oversight of ESG risks.
By reporting with this template, electric utilities will substantially improve the comparability of ESG data across the sector. The template will also outline companies’ ESG performance goals and allow investors to better predict the future trajectory of ESG risks.
When finalized, the EEI template will reflect feedback from investors, investment banks, credit rating agencies and ESG ratings services. It will also consider feedback from ESG reporting organizations, such as the Task Force on Climate-related Financial Disclosures (TCFD) and the Sustainability Accounting Standards Board (SASB). As a result, the template will focus on the specific risks that are important to investors and analysts, facilitating capital allocation decisions and ratings assessments.
A pilot program for the template began in December 2017, with more than 20 utilities completing a preliminary version of the template. Duke Energy Corp., The Southern Company, Xcel Energy and Eversource Energy were some of the first to report. EEI officially launched Version One in August, and Version Two is expected to be released in 2019. Version Two will include additional metrics aimed at natural gas utilities and eventually upstream and midstream natural gas companies.
The template will help utility companies track and share their progress on ESG efforts such as replacing coal-fired power plants with natural gas power plants and renewable energy production, reducing GHG and other air emissions, and implementing energy efficiency initiatives.
Utilities Driven to Act
Utilities’ efforts to become “cleaner” are primarily driven by the improved cost competitiveness of renewables and battery storage compared to coal, nuclear and natural gas-fired power plants, as well as customer demand for clean energy. In addition, state regulators are requiring utility companies to increase the percentage of energy generated from renewables such as solar and wind (listen to our podcast California’s New Clean Energy Target).
The Electric Utility sector must continue to focus on reducing GHG emissions, other air emissions and other toxic waste to mitigate ESG risks. However, the sector has made significant strides on these fronts, and these efforts could help to improve their overall perception in ESG over time. The EEI template shows the sector’s commitment to managing ESG risks, and it will allow investors to better assess how companies are managing their ESG risks and allocate capital more efficiently.
 The Edison Electric Institute (EEI) is the association that represents all U.S. investor-owned electric companies, per the organization website. The association does not represent public electric utilities.
DISCLAIMER: The opinions and views expressed are those of Breckinridge Capital Advisors, Inc. They are current as of the date(s) indicated but are subject to change without notice. Any estimates, targets, and projections are based on Breckinridge research, analysis and assumptions. No assurances can be made that any such estimate, target or projection will be accurate; actual results may differ substantially.
Nothing contained herein should be construed or relied upon as financial, legal or tax advice. All investments involve risks, including the loss of principal. An investor should consult with their financial professional before making any investment decisions.
Some information has been taken directly from unaffiliated third party sources. Breckinridge believes such information is reliable, but does not guarantee its accuracy or completeness.
Any specific securities mentioned are for illustrative and example only. They do not necessarily represent actual investments in any client portfolio.
BLOOMBERG® is a trademark and service mark of Bloomberg Finance L.P. and its affiliates (collectively “Bloomberg”). BARCLAYS® is a trademark and service mark of Barclays Bank Plc (collectively with its affiliates, “Barclays”), used under license. Bloomberg or Bloomberg’s licensors, including Barclays, own all proprietary rights in the Bloomberg Barclays Indices.
Neither Bloomberg nor Barclays approves or endorses this material, or guarantees the accuracy or completeness of any information herein, or makes any warranty, express or implied, as to the results to be obtained therefrom and, to the maximum extent allowed by law, neither shall have any liability or responsibility for injury or damages arising in connection therewith.