Electric utilities embrace investor-driven ESG reporting
SAN ANTONIO – Investors are looking into more than just the bottom line when it comes to adding electric utilities to their portfolios, and these high-profile public companies can benefit by engaging with them on sustainability and corporate-culture issues rather than trying to keep them at arm’s length.
A panel discussion at the National Association of Regulatory Utility Commissioners Annual Meeting in San Antonio on Monday concluded that the phenomenon of ESG (environmental, social, governance) reporting practices were here to stay and was a useful means of keeping not only the community on the same page as the company, but Wall Street as well.
“If any industry should be focused on this, it’s ours,” said Melissa Lavinson, senior vice president of Governmental & External Affairs for Pepco Holdings.
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.”
Utilities are becoming more comfortable with ESG reporting and, in some cases, are reaching out to the prominent analysts to ensure that they have a correct picture of what individual companies are doing to address environmental, social, and corporate governance issues that are important to society.
Kerr and his fellow panelists encouraged their colleagues to embrace the change. “This is a great topic for us,” he said. “It puts a focus on us to tell our story more aggressively, and it’s a good story to tell.”
